Partners in a bankrupt free-zone company are not traders and cannot be declared bankrupt with it

The principle

Under Articles 4(2) and 142 of the Bankruptcy Law (Federal Decree-Law No. 9 of 2016), bankruptcy applies only to traders in the legal sense, persons who carry on commercial business in their own name as a profession, and to partners who are jointly and severally liable in a company that trades professionally, whose bankruptcy follows the company's. Trading as a profession is not presumed; whoever alleges it must prove it. Partners in a free-zone company with its own legal personality and assets, whose liability is limited to their shares, are not traders merely because they founded the company or received its profits, even if they personally guaranteed some of its debts.

The case and the decision

A free-zone company formed in November 2001 to desalinate seawater, treat sewage, generate solar power and provide environmental consultancy had many projects and performed well until late 2012, when a severe crisis forced it to sell assets to meet external debts and pay fines imposed in criminal judgments. It stopped trading and faced a stream of lawsuits against it and its two partners, with outstanding liabilities of AED 20,861,292. The judgment under appeal declared the company bankrupt, finding that it carried on commercial business and had stopped paying its commercial debts in a disturbed financial position, but refused to declare its two partners bankrupt because the conditions of Article 142 of the 2016 Bankruptcy Law were not met. The partners appealed in cassation, arguing that the conditions for bankruptcy were satisfied in their case too. The Federal Supreme Court held that the law applies only to traders, that trader status requires carrying on commerce as a profession, which must be proved by whoever alleges it, and that a company's bankruptcy extends only to partners jointly liable for its debts. The company was a free-zone company with its own legal personality and assets separate from those of its partners, each of whom was liable only to the extent of his share, so the partners were not traders. Forming the company and taking its profits were not commercial acts on their part, and a partner who guarantees company debts is liable only within the terms of the guarantee. The Federal Supreme Court may complete the reasoning of a judgment whose result is correct, and there was no contradiction in relying on the expert's findings for the company but not for the partners. The Court declined to admit the appeal.

Laws applied

In the court’s words

“طالما أن الطاعنين ليسا شريكين متضامنين ومسؤولين عن ديون الشركة في أموالهم الخاصة، فإنه لا يصدق عليهما صفة تاجرين”

Short quotation from the judgment as published by the court. The full judgment is on the court’s official service.

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