Directors' Duties And The Increasing Requirement For D&O Insurance In The UAE

In the aftermath of the global economic recession awareness of, and the requirement for, good corporate governance is high on the legislative agenda of many countries; the UAE is no exception. In light of this, the UAE is in the process of enacting a new company law, which will represent an overhaul of the existing legislation, first enacted 28 years ago pursuant to Federal Law No. (8) of 1984 ("Commercial Companies Law').

As directors of local companies begin to realise the potential liabilities for breaching their duties are now just as real as in many more established jurisdictions, Insurers will wish to know what effects the proposed legislation will have on the developing D&O market in the UAE.

The duties

Crucially, the draft commercial companies law (the "Draft Law") contains an express statement of directors' duties. This is in stark contrast to the current regime where directors' duties are scattered around various sources and, in some cases, exist by little more than implication.

Article 21 of the Draft Law attempts to codify the basic duties that are owed by the directors of all types of company incorporated in the UAE:

"A person authorised to manage the company shall preserve its rights and work for the benefit of the company honestly and faithfully. Such person shall do all such acts in agreement with the objective of the company and the powers granted to such a person under authorisation issued by the company in this respect."

Three separate duties can thus be derived from Article 21:

1. Duty to preserve the company's rights

   This places a positive duty on directors to protect the legal rights of the company. Ordinarily preservation of such rights will align with acting in the company's best interests, though not always. A divergence could occur, for example, in the litigation context where a commercial settlement is being negotiated.

2. Duty to work honestly and faithfully

   In addition to the prima facie duty for directors to conduct themselves in an honest and faithful manner, this requirement also implies a duty not to compete with the company and to avoid conflicts of interest. Arguably this is simply a restatement of duties that already exist, as under the current Commercial Companies Law, a director is under an obligation to disclose any personal conflicts of interest to the board for deliberation and approval. Similarly, under the existing Commercial Companies Law, a director may not conduct their own business in a way that...