In the current constantly changing economic climate, it is very hard for companies and their stakeholders to make the right decisions in a short period. People have to comprehend the worth of management, as well as their liabilities and complete their duties regarding the standards set by a country and the companies they work in. Directors play an important role in the development of corporate culture and governance.
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Governance should be properly organized and successful to promote the growth of companies in different countries under different conditions. According to Sharma, corporate governance is “the set of processes, customs, policies, laws, and institutions effective the way of a corporation (or company) is directed, administrated or controlled” (216). Shareholders and other stakeholders cannot neglect their duties concerning a variety of transactions and other financial and commercial operations of their companies. At the same time, they have to set the requirements of the relations that may be developed between the stakeholders and describe the duties every director should meet while managing a company.
However, despite several attempts are made to forecast and avoid corporate problems, misunderstandings, and other mistakes, certain acts of fraud and mismanagement still take place, and companies have to identify the liabilities of directors in such situations. In this paper, the UAE and US company laws will be analyzed and evaluated with certain attention paid to fraudulent trading and wrongful trading to explain how and why directors of the UAE and US companies have to learn and comprehend their liabilities in regards to the acts of fraud and mismanagement.
Company Law’s Basics
In every country, citizens have to be aware of laws, follow, and respect them to live and consider the basics of governing and managing affairs. The idea of punishment is the required portion of control that does not make people follow their needs and interests only but know how to treat the people around and organize their activities. In the world of business, many challenges and laws can be offered to overcome them and make the right solutions.
Company law is one of the possible types of legislation that helps to gain control and administrate the activities of shareholders, directors, employees, and other stakeholders, who want to create, register, govern and dissolve companies (International Business Publications US Company Laws 21). Managers and directors clarify their responsibilities with the help of company laws and learn how to use their opportunities to promote the success of their companies.
Every country introduces a unique approach to the introduction of corporate law and the identification of directors’ potential personal liabilities for the acts that contradict the issues of company law. Also, every company has its own corporate culture and regulations that identify the duties of directors and the regulations that can be used for acts of fraud and mismanagement. However, there are also such researchers like Brian Cheffins, who continues arguing that company law is “fairly insignificant in constituting the company when compared with the greater impact of the market” (Talbot 21). Therefore, it is suggested to believe that company law may have a kind of peripheral impact on the company’s nature but provides the standards and reduces the bargaining costs (Talbot 23).
Lifting of Corporate Veil
Corporate personality is one of the main principles that are defined by company laws. Regarding this principle, it is possible to say that any organization is unique and free from shareholders, who may constitute it, and has to be treated a separate legal body. To comprehend the liabilities of each member of a company, the term “lifting the corporate veil” is used. It is defined as the possibility to look behind the organizational framework to make all members (including directors and ordinary employees) liable even though all of them have to shield by the existing corporate shell (Sealy and Worthington 52).
This principle helps courts to identify a true nature of a person that may be hidden behind the mask of an organization and make appropriate decisions in case such situations as fraudulent and wrongful trading have to be clarified. It may happen that lifting the veil of incorporation may be caused by breaching fiduciary obligations. Therefore, the courts need to clarify if the company’s liquidation happens because the director fails to comply with their fiduciary obligations or some other reasons can be offered.
In the United Kingdom, there is the Insolvency Act of 1986 according to which all cases of insolvency and other illegal operations can be investigated and analyzed. In Articles 213 and 214, fraudulent trading and wrongful trading are discussed. For example, if it is observed that the company has been taken the actions even though its’ directors knew that the company defrauds money from their creditors, the court may declare that the directors, who had to be aware of such activities, should be defined as liable to make the contributions and improve the situation.
Wrongful trading is another type of civil wrong that is used as a significant contribution to fraudulent trading. There is no need to search for the intent of defrauding. Wrongful trading is not as serious as fraudulent trading because this particular step may be taken by an organizational liquidator only. A liquidator has to find out proof that a director did continue trading operations even though financial problems were inevitable.
Company Laws in the UAE
In the UAE, several years were spent to identify the rules and regulations according to which all companies have to work and organize their activities. Federal Law No. 2 (2015) concerning Commercial Companies is one of the final improvements (New UAE Commercial Companies Law 1). According to this law, all companies have to improve their governance and amend all articles of association in regards to the new standards that are focused on the development of the UAE in a global market and the promotion of social responsibilities. However, the UAE Commercial Companies Law is not the only document that should be considered. There are also the Penal Code that establishes the rules and penalties in regards to the political, social, and economic issues of the country and the Commercial Transactions Law that introduces the provisions to traders and other commercial activists.
The peculiar feature of company laws in the UAE is the attention to the penalties that can be applied to those, who violate the law and meet personal demands and interests only. Therefore, it is required that not only directors have to know about their liabilities and understand the possible scope of their actions. It is more important for everyone, who is involved in a particular business learn their duties and consider the duties of their directors so that they can clarify what to expect from their directors, when directors make mistakes, wrong decisions, or poor judgments, and how ordinary employees and shareholders can protect their rights within a company. The UAE is the country of contrasts with certain attention to traditions, family relations, and fair business. All company laws introduced in this country aim at identifying and explaining the worth of cooperation and trust.
Company Laws in the US
US company laws have a long history with several stages that have a particular impact on the current state of business affairs. In comparison to the UAE company laws, the federal law of the United States of American regulates the governance and financial operations in the corporations through minimum standards because each state has its regulations and corporate codes. Therefore, if a person starts his/her business in one state, he/she should be very careful in case the decision to develop the same business in another state is made. Theorists and researchers offer several general laws and regulations that create a solid basis for state laws and regulations.
For example, there are employment and labor laws that identify the conditions for hiring people and ensuring the companies to follow the same standards. Finance laws help to protect the rights of investors, directors, employees, and customers in regards to the situations they can be found. Many environmental regulations have to be considered by business people.
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The USA is the country that strives for democracy and the protection of human rights. At the same time, many regulations have to be followed as the basis of citizens’ behavior. Therefore, it is hard to comprehend if the presence of strict regulations without serious punishment is the best solution for such a huge country. Still, the success of the combination of rights in different states may be regarded as a good example to follow.
Fraudulent Trading and Wrongful Trading
Regardless of the country and its specific attitudes to the development of national business, company law aims at identifying several steps and activities people may be involved in. Still, it is necessary to admit that there are no separate laws and articles that deal with fraudulent and wrongful trading and identify the liabilities of directors. Several articles in the new Company Law may be used to explain what directors have to do in the situations under analysis.
For example, in Article 84, it is mentioned that all stakeholders, who have found the company, have to compensate the paid-up value of shares to all shareholders even if the existence of the company is put under the question. Article 111 in the old Company Law (Article 162-1 in the new Company Law) declares that the directors have to be answerable to the company and its shareholders for all acts of fraud or other misuses of powers that lead to the violation of the law. Fraudulent trading and wrongful trading are the attempts that have been made within the field of company law “to curb situations in which it is arguable that limited liability is being abused” (Pettet 33).
There are many UAE and US companies that are under the threat of being accused of fraudulent and wrongful types of trading. It is necessary to comprehend the difference between these two concepts to identify the directors’ liabilities for acts of fraud and mismanagement under the UAE and US company laws.
Fraudulent trading is the activity that is taken to defraud the creditors of a company or the creditors of any person (International Business Publications United Arab Emirates Company 20). However, such a simple and clear description of the concept is characterized by several difficulties that may take place in courts. The point is that it is very hard to prove that a person was eager to develop a business and take the activities without any intention to pay all debts with time. The courts do not want to get involved in different tests to prove the guilt of a particular person because the majority of attempts are equal to zero. However, in some countries, if fraudulent trading has been proved, the accused person may be imprisoned up to several years (Pettet 33).
Wrongful trading may be considered as a severe form of fraudulent trading that covers the situations when companies continue developing their business and participating in various business and financial activities being aware that they cannot pay their debts according to the deadlines set. In such situations, people explain their activities are based on the hope that everything can be improved in case the business is in action. In the International Business Publications United Arab Emirates Company, the authors describe wrongful trading as:
If in the course of the winding-up of a Company it appears that the Company has gone into insolvent liquidation and at some time before the commencement of the winding-up of the Company one or more directors of the Company knew or ought to have known of that there was no reasonable prospect of the Company avoiding going into insolvent liquidation. (20)
In general, fraudulent and wrongful trading liabilities are used to control the activities of a company or its separate representatives and penalize them following company laws.
Directors’ Liabilities for Acts of Fraud and Mismanagement in the UAE
Nowadays, regarding the current intentions of the UAE government and business organizations, the UAE law tries to set as many regulations as possible to provide the country with the ability to control the activities of business people and shareholders, who are ready to invest their money. Still, some researchers admit that not many regulations can be applied to the duties of company directors in particular (Robinson and Laurence par. 2).
At the same time, they underline that not many positive duties are identified so that directors can understand the standards of their expected conduct and the regulations they have to follow respectfully. As has been already mentioned, there are several documents within the frames of which it is possible to identify and learn the duties of directors, and the UAE Companies Law is one of the possible sources. First, the law defines a director as a person, who has to manage a company and preserve the rights and achievements of the company with care of every person in the company and external stakeholders (New UAE Commercial Companies Law 3).
A not long time ago, only some limited duties and obligations were imposed on directors. Now, the framework for directors’ liabilities has been considerably improved. First, any director has several duties to a company and its shareholders. Second, a director has to stay loyal to his/her company and make everything possible to avoid conflicts. Finally, a director should demonstrate care and respect to each employee and stakeholder to promote the success of the chosen organization. Law explains that directors have to stay liable towards their companies and shareholders for all acts of mismanagement, fraud, and other violations of the law or the articles of the companies.
Almost the same duties are imposed on all managers. Besides, it is necessary to admit that both, wrongful and fraudulent trading may result in bankruptcy. In regards to the type of trading, bankruptcy may be negligent and fraudulent. There is a strict difference between these types of bankruptcy because negligent bankruptcy takes place as soon as the director recognizes their inabilities to pay debts relying on personal experience or financial opportunities. Punishment in this situation is about two years of imprisonment or a fine. Fraudulent bankruptcy is the result of the intentional decisions made by the director when the situation is clear and bankruptcy is inevitable. The conditions of punishment are changes in terms of five years of imprisonment.
Article 3 of the company law describes the following duties of directors that may be applied to the acts of fraud in the company:
- To act honestly and demonstrate fair work. Any director has to realize that he/she is an example for other employees to be followed. Such an attitude should not touch upon some working aspects only. A director is a person, who shows how faithful work should look like. It is not an easy task, but it is a duty that has to be fulfilled.
- To act in regards to the law. A director possesses a certain amount of power and several responsibilities that are described in the articles of association. Besides, this person takes responsibility for all activities taken in the company and has to explain each violation that may take place.
- Not to abuse the director’s powers. Director’s powers are considerable. One such duty is not to hide the profits from other members of the board of directors.
The following duties touch upon the acts of mismanagement that have to be considered by a director in case he/she pays enough attention to his/her liabilities:
- To demonstrate care and fair judgment. A director is a person, who controls the actions and decisions of all workers in the company. It is wrong to stay prejudiced or fails to analyze situations thoroughly. Every single decision made by the director has to be weighted and explained regarding the regulations of company law.
- To behave in regards to the interests of the company and its shareholders. To follow this liability, the director has to understand the goals, vision, and missions of the company clearly. It is not enough to learn them and repeat in cases of emergency. It is more important to use them when some explanation or evaluation should be given.
Taking into consideration all these liabilities, it is possible to say that the UAE directors are the best examples of how to develop a business and what rules are necessary for company laws. Regarding the fact that the majority of UAE companies are directed by the holders of the UAE nationality (International Business Publications United Arab Emirates Company 46), such leaders should combine the traditions of their country and social expectations with the values of their companies and make sure that such combination is beneficial for both, the company and the country. At the same time, the liabilities of directors have to be explained to all stakeholders of a company in the UAE. The company’s employees and shareholders learn these obligations and have to behave accordingly not to provoke a director to neglect some of these abilities.
Directors’ Liabilities for Acts of Fraud and Mismanagement in the USA
In the USA, the business situation differs from the one in the UAE. First, much attention is paid to personal responsibility that is dramatically imposed upon every director of a company and depends on the courts and all stakeholders. A good director is a prospective director, who is eager to accept all liabilities identified and allow the courts and public to administrate the standards that have to be followed. Such a director is liable for fraud and mismanagement that can take place in the company or touch upon non-shareholder third parties (Petrin 1663).
In the USA, there is the business judgment rule according to which all standards and regulations determined by company law make directors behave respectfully and attentive to the interests of all stakeholders. Using this doctrine, the courts may challenge the actions of directors because they fail to achieve the required corporate success, demonstrate good faith, and behave in regards to the regulations offered. However, even though such a rule is usually used to support and promote the activities of directors, if the cases of fraud or mismanagement are proved, it can hardly be used to help directors.
The main principles according to which American directors have to work are as follows:
- To demonstrate loyalty to all employees and shareholders. The Americans believe that it is necessary to treat people the way they want to be treated in the same situations. Loyalty is a kind of a gift that may be offered by directors to their workers. A director is a person, who has a required portion of knowledge with the help of which he/she can properly lead people. Employees want to believe that their directors are aware of such liability.
- To take care of everything and everyone in the company. If employees work in the company and follow the orders of a particular person, they have to understand that all their actions and decisions are under the control of a leader, who takes responsibility for them.
Regarding these two main aspects of directors’ liabilities, it is possible to say that that acts of fraud and mismanagement in terms of fraudulent and wrongful trading are more applicable to the majority of American companies.
In general, the evaluation of two different countries with different company laws and directors’ liabilities shows that still, they have one thing in common. Respect for people is the core of directors’ work. At the same time, it is possible to interpret the concept of respect in a variety of ways. For example, respectful treatment may gain the form of fair judgments and care (that is inherent in the USA companies) or can be identified as a portion of fair work that leads to the success and prosperity of the company (that is observed in the UAE business). The discussion of the directors’ potential personal liabilities for acts of fraud and mismanagement provides a chance to realize that Arab business and American business can be unique even though people have to follow the same rules and meet the same expectations.
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