Dubai Court of Cassation, Commercial Appeal No. 516 of 2024, judgment of 29 October 2024
A creditor of a limited liability company may seek its bankruptcy if it has stopped paying a due commercial debt because its finances are disturbed. Refusal to pay without a legitimate reason is evidence against the debtor, but there is no cessation if the debtor relies on a temporary excuse while able to pay or on a genuine dispute about the debt; characterising cessation is a question of law. Offering a plot of land as security does not disprove financial distress, because proceedings serve all creditors. The bankruptcy of an LLC does not extend to its partners, and, the bankruptcy action being procedural, the court opening proceedings examines only their conditions and cannot decide whether managers are personally liable for the company's debts.
In 2007 a developer sold three floors of an off-plan project. The buyer said the project was fictitious and never built, and obtained final judgments, in cases filed in 2010, rescinding the sales and ordering repayment; enforcement since 2011 found no assets. The buyer applied for the developer's bankruptcy and for an order that its board and manager pay the company's debts of about AED 16.2 million; a second judgment creditor intervened. The Dubai court, with the Public Prosecution's opinion, opened bankruptcy proceedings in November 2023 under the 2016 Bankruptcy Law, and the appeal court affirmed in March 2024, adding that the two owner-managers were personally liable because they had not deposited buyers' reservation money in the project escrow account or a company account.
The Court first held the appeal admissible: the 2023 Bankruptcy Law, which took effect on 1 May 2024, did not govern an appeal judgment given before that date. On the merits, it rejected the company's challenge. A creditor may seek an LLC's bankruptcy where it has stopped paying a due commercial debt because of financial disturbance; a genuine dispute or temporary excuse negates cessation; and characterising cessation is a question of law. The debts rested on final judgments and could not be disputed, no funds were shown in the escrow account, and allocating a plot as security, even if proved, did not negate distress, since the proceedings protect all creditors, whose claims might exceed the plot's value.
The managers' challenge succeeded. An LLC has assets separate from its partners, so its bankruptcy does not extend to them. Bankruptcy proceedings establish a status rather than decide a dispute, and at the opening stage the court examines only the existence of a creditor and a due, liquidated, undisputed commercial debt. The appeal court had nonetheless treated the managers as personally liable, without addressing an earlier final judgment rejecting a personal claim against one of them. That part was quashed and remitted to a differently constituted circuit.
Creditors with unpaid judgments against developers or other LLCs can use bankruptcy proceedings to bring the debtor's affairs under court control, and offers of partial security will not stop them. But the judgment keeps the question of managers' and owners' personal liability out of the opening stage of bankruptcy: it must be established separately and is subject to earlier judgments on the point.
| Federal Decree-Law No. 9 of 2016 on Bankruptcy (law applied to the proceedings; provisions on opening proceedings applied without citing article numbers) Decided under this law; it has been replaced by Bankruptcy Law. |
| Articles 7 and 263 of Federal Decree-Law No. 51 of 2023 on Financial Restructuring and Bankruptcy (entry into force and finality, held inapplicable to this appeal) — text of articles 7, 263 |
“إشهار إفلاس الشركات ذات المسئولية المحدودة لا يستتبع إشهار إفلاس الشركاء فيها لاستقلال ذمتها المالية عن ذمم هؤلاء الشركاء”Short quotation from the judgment as published by the court. The full judgment is on the court’s official service.
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