Duties & Responsibilities of an LLC Director under the Qatari Commercial Companies Law

“Every company should be headed by an effective board which is collectively responsible for the success of the company.” – UK Corporate Governance Code 2010.

Introduction:

The Qatari legislator has recently updated some provisions governing the establishment and the management of the commercial companies. A new law (n. 11 of 2015) was enacted on 16 June 2015, published in the Official Gazette on 7 July 2015 and took effect on 6 August 2015.

Under the new Commercial Companies Law (“CCL”), the regime of the single-person company has been repealed and a new legal form for the private joint-stock companies has been added.

Accordingly, article 4 of the CCL enumerates (7) seven different legal forms for companies to be incorporated in Qatar.

1. General Partnership Co.
2. Limited Partnership Co. (Commandite Co.)
3. Participation Co.
4. Public Joint-stock Co.
5. Private Joint-Stock Co.
6. Partnership Co. Limited by Shares
7. Limited Liability Co.

However, this article shall focus only on the Limited Liability Company (“LLC”) passing in review the duties and liabilities of its director(s), since this is currently the most common form of companies registered in Qatar.

Under the new Law, LLC has undergone some significant changes, such as the removal of the minimum paid in capital requirement (fixed under the old law at QAR 200,000) and the decrease of the minimum number of partners to one, as this was made in order to transform all the existing single-person companies into LLCs.

Legislative Sources

The duties and liabilities of directors in Qatar are drawn from various and non-consolidated legislative sources, with no consolidated legislative framework.  These sources include, Law No. 2 of 2015 concerning Commercial Companies (“Commercial Company Law”); Law no 22 of 2004 Civil Code (“Civil Law“); and Law No. 27 of 2006 on Trade (“Trade Law”)

1- Appointing and Controlling the LLC Director(s)

a. Appointment of the director(s)

The appointment of a director(s) is governed by the LLC’s Articles of Incorporation (“AoI”) and he/she may be one or more of the founding partners. Unless the Director’s powers are restricted in the AoI, the Director will have full authority to manage the business and   actions are binding on the Company (article 242 CCL).

In case of several directors, the AoI shall provide for a “board of directors” and determine both the operating mechanism and the majority needed for the validity of its decisions.

The board of directors shall be responsible for the management of the LLC. In general terms, this means that the board is responsible for supervising senior staff, providing strategic planning to the corporation, and developing and implementing corporate policy. Board members must be (or at least must become) knowledgeable about the business and financial affairs of the corporation

b. Controlling the administration acts 

Any LLC with more than (20) twenty partners must also have a “supervisory board” or a “board of commissioners” appointed under the AoI for a specified period and comprise at least three partners (art. 246 CCL). This supervisory board may inspect the company’s books, documents, finances, and may request from the director(s) to provide reports on company’s activities, budget, financial distributions and other matters.

2- General Duties of LLC Directors

A director must undertake different acts in accordance with the company’s objectives and within the powers granted to him/her by the Partners. However, some specific acts such as opening bank accounts, signing cheques, obtaining loans, initiating proceedings, appointing advisers should be explicitly mentioned in the AoI.

Furthermore, an LLC Director shall prepare, within two months from the expiry of the financial year, the Company’s balance sheet and the profit and loss account. The Director shall also prepare an annual report on the company’s activities and its financial position. He/She may advise the General Assembly about the amount of the dividends to be distributed among the shareholders.

The director/Board of directors shall invite the partners for a General Meeting at least once every year within the four months following the end of the financial year. Such invitation shall be addressed to each partner (21) twenty-one days before the date of the Meeting.

At the General meeting, the director shall answer any of the partners’ questions related to the issues included in the Agenda.

Also, article 529 of the Civil Code states “In the management of the company’s affairs, a shareholder shall use such level of care as he would in the conduct of his own affairs …. A shareholder may not conduct any activity that may cause damage to the company or may be contrary to the company’s purpose”.

3– Liabilities of the Directors

a. Mismanagement & liability

The Companies Law (CCL) contains some explicit provisions relating to directors liabilities. Of key relevance is article 244 CCL, which states that provisions pertaining to liabilities of a joint-stock company board of directors shall applymutatis mutandis to the LLC directors. This provides – by transposition – that the director shall be liable to the LLC, the partners and third parties respectively for all acts of fraud, abuses of authority, gross error in management, violations of the law or the Company’s AoI (article 113 CCL).

In particular, the mismanagement of the directors entails their direct liability towards the LLC for any deliberated act or serious wrongdoing.

The Qatari legislator considered that such liability is of mandatory nature (i.e. any agreement to the contrary or stipulation in favour of the directors shall be deemed void).

In case of several Directors, they shall be jointly liable towards the company unless the wrongful act in question arises from a resolution  In this case, any director who voted against that resolution – should its objection be noted in the minutes of the meeting – shall not be answerable to the LLC. If the company is in the course of liquidation, then the liquidator shall institute such action.

In addition, article 115 CCL indicates that the prescription period for any judicial action raised by the LLC against its director(s) – by virtue of a resolution of the General Meeting – is of 5 years. In addition, any individual partner may also institute such action in case the company fails to do so; should he sustain a personal damage as a partner from such act, he notifies the company of his intention to sue.

b. Conflict of Interest and unfair competition

Also, the LLC Director shall be accountable in case of his participation – without the approval of the General Meeting – in the management of any similar business or carrying out alike activities on his own account. In case of any violation to such rule, the Director may be dismissed and must be for compensation.

Every year, the General Meeting shall decide on the board of director’s discharge from managerial liability.

Directors may be held liable for wilful misconduct, fraud or any criminal offences, notwithstanding any ‘discharge of liabilities’ granted by partners.

Shareholders’ decision to discharge directors from liabilities will be void if it is made in breach of the law or the company’s AoI.

The granted discharge of liabilities is only valid if there have been no relevant omissions or misstatements in the annual report and accounts and other documents provided to shareholders.

Discharge of liabilities granted by shareholders can release directors from liability to the company, but does not release directors from liabilities towards third parties (including shareholders).

Claims against directors usually become time-barred after a certain period, which varies considerably across markets.

c. Liability in solidum with the Company

Under several provisions, the LLC director shall be jointly and severally liable with the company towards (i) the partners or (ii) third parties.

This liability stems from his failure to fulfil some acts or obligations such as:

(i) Towards the partners

• In the event of any delay to call for the annual General meeting which should be held within the four months following the end of the financial year (art. 250 CCL)
• In the event of any recklessness in calling for the annual general meeting in case the losses sustained by the LLC exceed half of its capital. (art. 298 CCL)

(ii) Towards third parties

• In the event of failure of the directors to add the term ” limited liability company ” to the company’s name (article 229 CCL)
• In the event of the non-accuracy of the Partners’ register (art. 236 CCL)
• Another example concerns the case of an over-evaluation of any in-kind assets presented by one of the LLC founders to the LLC and which has been approved by the other founders. All of them shall be liable jointly and severally for any difference between its actual registered value and its real value. (art. 232 CCL)

d. Time Bar for action of liability against LLC Directors

As the General Assembly is considered the highest organ governing an LLC and controlling the acts of its director(s), it may decide to file an action for liability against any of the directors within a time bar of five years (art. 115 CCL). By the same, any individual partner who has suffered of any mismanagement acts, may file an action before the court. This last provision is mandatory and any agreement to the contrary in the AoI shall be void and without effect (art. 116 CCL).

e. Potential Criminal Liability of LLC directors

In addition to the general duties, an LLC director may be subject to both civil and criminal liability in the event that the company is unable to meet its financial obligations and may become subject to insolvency.

The Trade Law contains several provisions as to how courts should treat insolvent companies and their directors. Of particular importance in this respect is article 837 of the Trade Law which provides that directors may find themselves subject to a custodial sentence in the event that

– They have failed to provide adequate details in the financial books and records of the company to reflect the true financial position of the company.

– They do not supply information requested by the court or trustee in bankruptcy or if they deliberately supply false information.

– If they have sold assets of the company at less than their value in an effort to delay the suspension of payment of debts or declaration of the company’s bankruptcy or if the directors have taken any action to obtain credit or funds illegally in order to achieve the foregoing.

"Arab Commercial Laws" lecture by Prof. William Ballantyne, McNair Chambers, Doha, Qatar
November 17, 2013