The Principle of Lifting the Corporate Veil Is Developing Hardly and Slowly in the UAE

The Limited Liability Company Definition in the UAE

UAE Federal Law No. 2 of 2015 On Commercial Companies defines a Limited Liability Company as a company with at least two partners and no more than fifty, each liable only to the extent of their share in the capital.

The rationale for allowing shareholders no liability beyond their share is to enable them to undertake business activities while remaining protected from personal liability for the company's obligations.

Meaning of Lifting the Corporate Veil

UAE courts have received requests to “lift the corporate veil” — that is, to hold shareholders liable for the actions of their companies in certain circumstances. Lifting the corporate veil enables courts to look behind the company's separate legal personality to make shareholders liable where they ordinarily would not be.

The Dubai Courts' Approach in 2010

The Dubai Court of Cassation held in 2010 that shareholders in a Limited Liability Company are not responsible for its debts except to the extent of their share capital, and creditors have no recourse beyond the company itself — except where fraud and trickery (cheating) by the shareholders is evident, claimed, and proven, in which case shareholders become personally liable for the company's debts.

Because the court framed this as an exception, the general UAE legal principle applies that “exceptions may not be used by analogy, nor may their interpretations be extended.”

Three Difficult Conditions to Apply the 2010 Exception

The case of fraud. Federal Law No. 19 of 2016 on combating commercial fraud defines commercial fraud as deceiving a customer by any means — altering goods, their amount, nature, price, description, origin, or fitness, or presenting untrue or misleading trading information.

The case of trickery (cheating). Federal Law No. 3 of 1987 on the Penal Code defines this as seizing movable property, or obtaining a document, signature, cancellation, destruction, or amendment, by fraudulent means or by assuming a false name or capacity, leading to deception of a victim.

Fraud and trickery must both be claimed and proven. The 2010 judgment required both elements together, and in practice it is difficult for a third party to establish this before the court, given limited access to company records and financial statements.

Abuse of the Limited Liability Principle

The principle of limited liability is important for its positive effect on economies, but it has also led to the loss of many legitimate claims, as some shareholders have used it to avoid paying third-party debts through means that fall short of proven fraud or trickery — for example, funnelling company funds to another entity under a fictitious contract while remaining its ultimate beneficial owner.

The Courts' Approach Improved Slightly in 2013

In 2013, the Dubai Court of Cassation held that the principle of limited liability would not apply where a shareholder exploited it as a means to hide conduct that violated the company's memorandum of association and harmed other shareholders or creditors, including fraud, trickery, or gross error — in which case the shareholder becomes personally liable.

The Difference Between the 2010 and 2013 Approaches

In 2010, fraud and trickery were required together; by 2013, either was sufficient, and the court added gross error as a further basis for lifting the veil. While this improved the position slightly, the exception should arguably extend further — for example, to cases involving an agency relationship between the shareholder and the company, or a sham arrangement.

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