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The Company Law Background

 

Prior to the promulgation and implementation of the Company Law in l984, companies were established in accordance with local laws and practices generally implemented by the Municipal and other local authorities in the different Emirates, These laws, rules and practices provided that any person or entity intending to conduct business activities in the UAE had to register in the "Commercial Register" organised by the "Competent Authority" which was usually the Municipality of the Emirate. Such a person was required in the first place to acquire the requisite trade licence issued by the Municipality Department in the particular Emirate where the business was to be carried out. Therefore, with the exception of companies exempted by the Ruler of an Emirate or operating by means of a special concession, it was imperative for foreign individuals or business entities wishing to establish a presence in the UAE to acquire a trade licence issued by the relevant Municipality.

Foreign companies could acquire only one trade licence, while UAE nationals could obtain as many trade licences as their business might require. With the exception of certain professions, having a UAE national sponsor or partner was mandatory for acquiring the requisite trade licence and for establishing such a presence by a foreign business entity in the UAE. A national sponsor merely provided the legal requirement to establish a presence, but did not need to participate in the capital of the branch or office of the foreign company nor was he responsible for management, and therefore did not share in any of the liabilities for its debts. A sponsor usually received a consideration calculated as a percentage of the contracts concluded, the net profits of trading or an agreed lump sum depending on the type of business activity performed by the company sponsored. Obviously joint venture partnerships were different, where partners shared in the capital and management of the partnership and consequently its profits and liabilities.

A few public joint stock companies and limited liability companies, which could only be incorporated by Emiri Decrees (sometimes referred to as "Decree/Charter Companies"), were therefore not easily available, were generally reserved for the establishment of companies that conducted important business activities such as operating an oil concession, banking, insurance or serving a public interest or utility. The majority of companies operating in the UAE were either individual establishments, partnerships or sponsored branches of foreign companies. The liability of the foreign company operating a branch office, or entering a partnership was unlimited.

Some such joint ventures were true partnerships where the parties participated in providing the capital required and in the management of the company to varying degrees as well as sharing its profits. However, whereas companies established with 51% of their capital owned by UAE nationals qualified to enjoy the privileges granted to national companies, some fictitious partnerships were formally concluded which were in fact disguised sponsorship agreements. To discourage this practice the Chambers of Commerce required the presentation of bank statements certifying that the company capital was deposited. Another safeguard was that the Notary Public would not notarise any side agreements. The Emirate of Dubai issued instructions to the effect that Public Notaries should not notarise documents having a clear or implicit reference, declaration or confirmation that another document or a part thereof was not genuine, or was contrary to the provisions of the Company Law. This is understood as a reference to side agreements declaring that the conclusion of a partnership agreement was merely for formal official purposes. In the unique environment of the UAE, where the majority of businesses are either owned, managed, or operated by foreigners in accordance with agreements concluded with nationals, the Authorities and the Courts wished to discourage the formation of fictitious ventures by requiring partners in a joint venture to share in its profits and losses. In the absence of these conditions it was decided that such joint venture companies would be null and void.

The Company Law was published in the UAE Official Gazette on 1st April, 1984. Initially, it was intended to become effective three months from the date of its publication. All companies operating in the UAE were allowed a grace period of one year from the effective date to conform to the provisions of the Law. The Company Law, which may be considered a relatively advanced legislative instrument, was based mainly on the practice and experience of neighbouring Arab countries which have used the French legal system of companies classification. Its provisions classify companies into seven types, with incorporation requirements specified for each type. A special chapter of the Law provides for the registration of foreign companies in the UAE. The Ministry of Economy and Commerce ("the Ministry") was charged with the task of implementing the Law.

The promulgation of the Law led to extensive discussions concerning the consequences of its enforcement. The Chambers of Commerce in the Emirates made extensive representations that further time was required to analyse and consider the practical effects of the Law. Consequently, the effective date of the Law was extended at first to the end of 1984, and later until the end of 1986. However, at the end of the extended period for compliance with the provisions of the Company Law which was 31 December 1986, it was not implemented and applied.

Committees were formed to co-ordinate the positions and views of the various federal and local Municipal Authorities and business interests. These activities culminated in the promulgation of Law No. (13) of 1988 ("Law No. (13)"), amending the Company Law, which was published in the Official Gazette on 8th January, 1989, and made effective from the date of its publication. The aforementioned grace period, during which companies already operating in the UAE had to conform to the provisions of the Law, was extended to two years from the effective date of Law No. (13), therefore ending on 7th January, 1991. This period may further be extended for a third year by a decision of the Minister of Economy and Commerce ("the Minister") In 1992 the grace period for the application of the Company Law was extended for one year as from 8th January 1992, which could be extended by a decision of the Council of Ministers for another year. The Company Law as amended, provided that the Minister with the co-operation of the Competent Authorities in the Emirates should issue the By-Laws necessary for the application of the Law.

The Ministerial Decisions for the implementation of the Company Law ("the By-Laws") were published in the Official Gazette on 30th September, 1989, and made effective from the date of publication.

The time gap between the expiry of the initial period for compliance at the end of 1986 and the issue of the new law in 1988 has led to arguments concerning the legal status of companies registered and operating in the UAE during this period. This argument is somewhat diminished by the application of the generally accepted concept in Arab countries of the defacto companies (companies in fact).

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For further information on UAE Company Law and Practice, it is recommended that the full text be referred to. Click on the link to obtain a copy. For specific legal advise, please contact Sabah M A mahmoud or other reputable Law Firm.

 

 
UAE Company Law Background

 

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