Federal Supreme Court Ruling on Partner Liability and Piercing Corporate Veil in an LLC (Commercial Appeal No. 291 of 2025)

UNITED ARAB EMIRATES
THE FEDERAL SUPREME COURT

Hearing on Tuesday, 3 June 2025

Presided over by Judge / Shehab Abdul Rahman Al Hammadi, "Court President"
And the membership of Judges: Al Hassan bin Al Arabi Faydi, and Abdullah Bou Bakr Al Seiri.

Commercial Appeal No. 291 of 2025 Commercial

Legal Principles:

• (1-3) Companies: "Limited Liability Company: The liability of its partners is limited to their shares in the company's capital and does not extend to their personal assets. Exception: When a partner uses the independent legal personality of the limited liability company as a veil for fraud, deception, or misappropriation of company assets."

• (1) The liability of partners in a Limited Liability Company (LLC) is limited to the extent of their shares in the capital and does not extend to their private assets, without joint and several liability among them. Exception: Where it is proven that a partner exploited the principle of independent legal personality of the LLC as an instrument or veil for fraudulent acts, deception, or misappropriation of company funds. Partnerships are otherwise, where a partner bears personal, joint, and several liability alongside other partners for the company's debts.

• (2) Comprehending the facts of the case, verifying the standing and capacity of the litigants, interpreting contracts and instruments, and evaluating and weighing evidence and presumptions falls within the discretionary authority of the trial court, provided its reasoning is sound.

• (3) An illustration of error in the application of law in the contested judgment for failing to establish liability against two partners in an LLC who breached their obligations toward their co-partner under the company agreement by halting company operations, acting to shut it down to the detriment of its business, establishing another company with the exact same name and same activity, and unlawfully competing against the first company using its trade name and website. This creates a right for the aggrieved partner in the LLC to file a claim in his own name against his co-partners claiming his profits resulting from their gross fault, necessitating their personal liability in their private assets by way of exception, in accordance with the relief sought in the lawsuit.

Federal Supreme Court
(Commercial Appeal No. 291 of 2025, Hearing of 3/6/2025)

1. It is well-established—and according to the settled jurisprudence of this Court—that the general rule is that the liability of partners in a limited liability company is limited to the extent of their shares in its capital and does not extend to their private assets, with no joint liability among them, as there is no guarantee for its creditors other than the company's own assets. Therefore, it is impermissible to join them together personally in respect thereof as long as the company remains existing and continuing. Defining the partner's liability in this manner is an absolute determination governing the relationship of partners among themselves and their relationship with third parties. This limited, non-joint liability distinguishes this type of company from partnerships, in which a partner is personally, jointly, and severally liable with other partners for the company's debts and obligations. As an exception to this general rule, partners and third parties are entitled to pursue a partner in his personal assets and hold him personally liable for the company's debts whenever it is established that he abused the principle of the company's separate financial liability from that of its partners as an instrument and veil for his apparent fraud, deception, and gross fault in his dealings with partners or third parties, or in misappropriating company funds.

2. It is established that the trial court possesses the discretionary power to understand the factual reality of the lawsuit, verify the legal capacity and standing of the litigants, interpret contracts, instruments, and other documents in a manner most consistent with the true intent of the contracting parties, and evaluate, balance, and weigh evidence and presumptions. It is sufficient for the court to clarify the truth it was convinced of, provide its supporting evidence, and base its judgment on sound grounds firmly rooted in the case records and sufficient to sustain it.

3. Whereas that is the case, when the contested judgment ruled to overturn the appealed judgment in respect of ordering [First Respondent] and [Second Respondent] to pay [First Appellant] the amount of AED 280,468.35 along with interest at a rate of 5% from the date of filing the claim until full settlement—provided that interest does not exceed the principal sum awarded—and ruling afresh to dismiss the claim for profits, it initially affirmed that it had remitted the mandate back to the accounting expert [...], a member of the tripartite committee previously appointed at first instance, to complete the investigation on seven specific points set forth in the assignment order to assist in adjudicating the dispute. The technical expert determined that [...] Company, a free zone company, achieved sales to former clients of [...] LLC amounting to AED 146,680.20, and that while it could not be conclusively determined that the free zone company diverted the clients of [...] LLC to itself, the latter was indeed inactive and had suspended operations because the two partners, [...] and [...], closed it down. The expert also established that [...] and [...] held administrative authority over the bank account of [...] LLC, controlling all deposit and withdrawal operations, and that from the commencement of its business on 14/09/2020 until the establishment date of [...] Company on 03/11/2022, it achieved profits amounting to AED 580,502...

Federal Supreme Court

...dirhams. The judgment grounded its ruling regarding the subject of the challenge leading to the dismissal it ordered on the premise that [...] did not conclude his report regarding profits and that the case records were devoid of any formal resolution regarding profit distribution, in addition to the fact that the person demanding profits is the manager himself according to the trade license data, who failed to submit to the court or the expert panel any proof of the partners adopting a resolution in the general assembly approving profit distribution that would entitle him to claim as an aggrieved party. This is notwithstanding the fact that the contested judgment and the expert reports commissioned since the inception of the lawsuit had already established that the two partners, [...] and [...], ceased operations of [...] LLC and worked to shut it down, causing damage to its activity, breaching a duty owed to the company, and depriving their co-partner of his share in its profits at a time when he was an active partner in the company while these actions were being committed by the other two partners. Furthermore, they established [...] Company bearing the identical name and identical activity, breaching their contractual obligations in a manner detrimental to the interests of [...] LLC and partner [...], and trading for their own personal account in direct competition with the latter company's activities, with the consequential effects of utilizing its personal name, using its website, updating all credentials and passwords, and using the email address belonging to [...].

Where that is the case, and whatever the merits of the reasoning adopted by the contested judgment regarding the closure of [...] LLC and the suspension of its activity by the two partners [...] and [...], since they breached their contractual obligations by their aforementioned conduct which caused harm to the company they held shares in and to their third partner, and deviated from the standard of ordinary conduct in commercial dealings by establishing a new company, [...], with a 50% stake each, in the absence of their third partner, Hossam Al Asmar, bearing the exact same name and same activity through illegitimate means to harm the competing [...] LLC through dealings with some of the latter's clients—who constitute the most essential intangible element of the company's goodwill—which contradicts the principles of honesty, integrity, and good faith in commercial dealings, therefore the resultant gross objective fault arising from the two partners' breach of statutory provisions and the company's memorandum of association, as noted at the outset, exceptionally dictates holding them liable in their personal private assets for the appellants' claims. It vests the damaged partner in the LLC with the right to initiate a lawsuit in his own personal name against his co-partners to claim his share of profits for the year 2022 arising from the gross fault committed by them. Inasmuch as the contested judgment failed to abide by the settled principles in this regard and ruled to dismiss the claim in this respect, it committed an error in the application of law, warranting its quashing and remand, without need to examine the remaining grounds of the appeal.

The Court

Federal Supreme Court

Whereas the appeal has fulfilled its formal statutory requirements.

And whereas the facts, as disclosed by the contested judgment and the case files, are summarized in that the plaintiffs, [...] and [...] LLC (Appellants), filed Lawsuit No. 7658 of 2023 seeking an order against the first and second defendants, [...] and [...] (First and Second Respondents), jointly and severally, to pay the first plaintiff, [...], the amount of AED 362,192.40 representing his share in profits, along with legal interest at 12% from the maturity date on 31/12/2022 until actual payment, and ordering them jointly and severally alongside [...] Company (Third Respondent) to pay [...] the amount of AED 4,981,567.48 in compensation for lost profits and sustained losses as a result of damages suffered due to the defendants taking over the clients of the second plaintiff company, along with moral damages; striking off the third defendant company from the commercial register in which it is registered along with all resulting legal effects; restraining the defendants from using the website belonging to the second plaintiff company, enjoining them from displaying any products thereon, ordering the return of all credentials, access codes, and passwords to the plaintiffs, and returning the email address to the first plaintiff.

In statement of their claim, the plaintiffs stated that in September 2020, [...] and [...] agreed to establish a company in the Emirate of [...] for marketing and trading digital machine operating equipment specialized for [...] companies in the Gulf and Middle East region through [...] Company, being the entity responsible for the sales of [...] Company in the region of [...]. On 14/09/2020, the second plaintiff was established between the parties in the Emirate of [...], under the arrangement that the office of [...] Company (Supplier) would utilize part of the client funds and pay the agreed commission to the second plaintiff for every sales transaction. It was agreed between the two partners, [...] and [...], to appoint the second defendant, [...], as Sales Manager due to his expertise in marketing such machinery, and he was introduced as a partner in the company with a 10% share, while the two founding partners held 45% each. On 17/12/2020, the three partners issued a resolution to pay the operating expenses of the company and that none of them would be permitted to receive any salaries or fees from the company in return for their work therein. On 29/12/2020, while [...] was inspecting the financial accounts, he discovered that [...] had committed several violations, including deducting 33% of the second plaintiff's profits in favor of his private company in [...], and establishing a company bearing the identical name as the second plaintiff to perform the same...

Federal Supreme Court

...activity without the knowledge or consent of the first plaintiff. On 05/10/2022, [...] offered [...] to purchase his shares and exit him from the second plaintiff in exchange for AED 150,000, which he refused. [...] demanded that [...] hand over his share of the profits that had been misappropriated, estimated at AED 350,000, but both partners refused. It then became apparent that the first and second defendants had established the third defendant company [...] in the Emirate of [...], which bears the identical name and engages in the same commercial activity, taking over all clients of the second plaintiff as well as the distribution agreement with [...] Company (the Supplier). They completely halted all activities of the second plaintiff and asked [...] to close it down and transfer its balances to their newly formed company. They also updated the login credentials, changed the website access passwords of the second plaintiff to convert it for use as the third defendant's website, and disabled the first plaintiff's email address.

In light of these violations, the first plaintiff engaged a consulting expert to prepare a report on the committed infractions and assess the damages incurred, whereupon this lawsuit was initiated. Following proceedings and the defendants' response, the Court of First Instance appointed an expert to examine the lawsuit. Pursuant thereto, the expert completed the assigned task, and the matter was remitted to him to reply to the parties' objections. Following the submission of his supplementary report and the parties' comments, the court appointed a tripartite expert committee, which concluded its assigned mandate, after which both parties commented.

On 04/09/2024, the Federal Court of First Instance ruled ordering the first and second defendants to pay the plaintiff the amount of AED 280,468.35 along with 5% interest from the date of filing until full payment, provided interest does not exceed the principal judgment amount; striking off the third defendant from its commercial register with all consequences, foremost of which is canceling its licenses and halting its activities; enjoining the defendants from using the trade name of the second plaintiff; halting their use of the second plaintiff's website and enjoining them from displaying any products thereon; ordering the surrender of all credentials and passwords to the plaintiffs and the email account to the first plaintiff; and dismissing the remaining claims.

Both plaintiffs and defendants appealed this judgment respectively under Appeal Nos. 1611 and 1648 of 2024. Following proceedings and joinder of the appeals for connection, the appellate court remitted the mandate to the accounting expert [...], a member of the tripartite committee, to complete research into specific points. Following the completion of the supplementary report and submissions by both parties...

Federal Supreme Court

...the Federal Court of Appeal of [...] ruled on 20/02/2025 in Appeal No. 1611 of 2024 to overturn the appealed judgment in respect of dismissing the compensation claim, and ruling afresh to order the respondents jointly and severally to pay the appellants compensation for damages in the amount of AED 22,000 along with legal interest at 5% from the date of the judgment until full payment, provided it does not exceed the awarded sum, and upholding the remainder of the judgment; and in Appeal No. 1648 of 2024, to overturn the appealed judgment in respect of the awarded profits, and ruling afresh to dismiss this branch of claims in its current state, while upholding the remainder of the judgment rendered in Commercial Lawsuit No. 7658 of 2023.

This ruling was not accepted by the appellants in Appeal No. 1611 of 2024, who filed the present cassation appeal against it. When the appeal was reviewed in chambers, the Court deemed it worthy of consideration in a hearing. It was accordingly heard as recorded in the hearing minutes, and today's session was set for the pronouncement of judgment.

Whereas the Appellants argue against the contested judgment on grounds of error in the application of law, inadequacy of reasoning, and contradiction of the established facts in the case records: namely that it denied the first appellant the value of profits due to him for the year 2022 based on reasoning that contradicts reality and fails to remedy the respondents' violations and infractions which inflicted substantial damages upon the appellant, as affirmed by all expert reports that investigated the facts of the lawsuit. Furthermore, the respondents exploited the name of the second appellant company and established a company bearing the same name and engaging in the same activity as the second appellant company—in which they held shares—without the knowledge of the appellant co-partner; they halted all activities of the second appellant company and closed it down, updated access codes, and changed website passwords so that the site served the company they newly created in isolation from the appellant partner. All documents and expert reports confirmed the breach by the two respondent partners of their contractual obligations and confirmed the appellant's entitlement to the profits due for the year 2022. The legal basis for holding the two partners liable for payment of their appellant partner's dues lies in Article 82 of Federal Decree-Law No. 32 of 2021 on Commercial Companies, as well as the fraud, deception, and gross errors they committed in breach of the company contract that damaged their appellant partner, for which they are personally liable in their private assets...

Federal Supreme Court

...whereby the contested judgment, in depriving the appellants of their dues, erred in applying the law, which necessitates its quashing.

And whereas this grievance is well-founded: it is established, as per this Court's settled rulings, that the general principle is that the liability of partners in a limited liability company is limited to their shares in its capital and does not extend to their private assets, without joint and several liability among them, as there is no guarantee for its creditors other than company assets. Thus, it is impermissible to sue them jointly in respect thereof so long as the company remains existing and continuing. This determination of partner liability is absolute, applying between partners inter se and in their relationships with third parties. This limited, non-joint liability distinguishes this corporate form from partnerships where partners bear personal, joint, and several liability alongside other partners for company debts and obligations.

By exception to this rule, partners and third parties have the right to pursue a partner in his personal assets and hold him personally liable for company debts whenever it is proven that he used the principle of the company's independent legal personality as an instrument and veil for his apparent fraud, deception, and gross fault in his dealings with partners or third parties, or in the misappropriation of company funds. Furthermore, the trial court possesses the authority to understand the facts of the lawsuit, verify the legal standing and capacity of the litigants, interpret contracts, instruments, and documents in accordance with the contracting parties' true intentions, and evaluate and weigh evidence and presumptions, provided it demonstrates the facts it was persuaded of, cites its supporting evidence, and bases its judgment on sound reasons rooted in the record.

Whereas that is the case, when the contested judgment ruled to overturn the appealed judgment in respect of ordering [...] and [...] to pay [...] the sum of AED 280,468.35 along with 5% interest from the date of filing until full payment—provided interest does not exceed the principal sum awarded—and ruling afresh to dismiss the profit claim, it initially confirmed that it remitted the mandate back to the accounting expert [...], a member of the committee previously appointed at first instance, to complete research into seven specific points set forth in the assignment order to assist in resolving the case. The technical expert determined that [...] Company, a [...] company, achieved sales to former clients of [...] LLC amounting to AED 146,680.20, and that while it was not possible to state definitively that [...] Company converted the clients of [...]

Federal Supreme Court

...LLC to itself, the latter is inactive and does not practice its activities, the reason being that the two partners, [...] and [...], shut it down; and that [...] and [...] possessed the authority to manage the bank account of [...] LLC and controlled all withdrawals and deposits; and that from the date of its activity on 14/09/2020 until the date of establishing [...] Company on 03/11/2022, it achieved profits of AED 580,502. The appellate judgment grounded its decision to dismiss the claim on the basis that [...] did not conclude his report regarding profits and that the case records were devoid of any formal distribution resolution, and that the person demanding profits is the manager himself according to trade license data who presented no general assembly resolution approving profit distribution allowing him to claim as an aggrieved party.

However, the contested judgment and the appointed expert reports had established from the inception of the lawsuit that the two partners, [...] and [...], halted the operations of [...] LLC and closed it down, causing damage to its activity, violating a duty owed to the company, and depriving their co-partner of his profits at a time when he was a partner in the company. In addition, they established [...] Company bearing the identical name and activity, breaching their contractual obligations to the detriment of [...] LLC and partner [...], trading for their own account in direct competition with the latter company's activities, using its trade name, utilizing its website, updating credentials and passwords, and using [...]'s email address.

Where that is the case, and whatever the reasoning of the contested judgment regarding the closure of [...] LLC and the suspension of its activities by [...] and [...], since they breached their contractual obligations by their conduct, causing damage to the company in which they are shareholders and to their third partner, and deviated from standard commercial conduct by establishing a new company, [...] ..., with a 50% share each in the absence of their third partner, Hossam Al Asmar, bearing the exact same name and activity, using unlawful means to harm the competing [...] LLC by dealing with some of its clients—who represent the most vital intangible asset of the company—which is incompatible with the principles of honesty, integrity, and good faith in commercial dealings, therefore the resultant gross objective fault arising from the two partners' violation of the law and the memorandum of association, as mentioned above, exceptionally requires holding them liable in their personal assets for the appellants' claims...

Federal Supreme Court

...and establishes the right of the damaged partner in a limited liability company to file a lawsuit in his own name against his co-partners claiming his profits for the year 2022 resulting from the gross fault committed by them. Inasmuch as the contested judgment did not adhere to the settled principles in this regard and ruled to dismiss the claim in this respect, it erred in the application of law, which necessitates quashing the judgment with remand, without examining the remaining arguments raised in the appeal.

Operative Ruling (Judgment):

The Court ruled to quash the contested judgment with remand to the competent appellate court for a new trial before a different bench, without prejudice to costs.