UAE Civil Companies Law

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The UAE Civil Code which was promulgated in 1985, i.e. subsequent to the Company Law of 1984, adopted a different classification of companies than the Company Law, but similar to that of Islamic Law. It provided for:

1. Work Companies: are defined as companies where two or more partners join together to perform specific work.
2. Persons' Companies: are established when two or more persons join together to purchase goods on credit based on goodwill and reputation to sell such goods for a profit.

3. Speculative (Mudharaba) Companies: are defined as those companies in which a person lends capital to another to carry out speculative business.

Questions might arise regarding the exact meaning of a 'civil company'. In some Arab countries commercial laws define the concept of trade and categorise the different operations or transactions that are considered as trade, such as the purchase and sale of goods, contracting, transport, banking and finance and other similar transactions. The main difference between civil and commercial companies, which can be quite significant, depends primarily on the intention to trade, and can be compared to the distinction made between a 'merchant' and an 'investor'.
A merchant is a person who has the capacity to engage in his name and for his account in commercial transactions making a profession of the practice of these transaction. A company performing commercial activities or adopting one of the types specified in the Company Law shall also be considered commercial concern or merchant. Consequently, he should declare his intention to trade by registering with an appropriate authority, keep proper books of account, pay taxes and dues on profits and may be subject to all commercial laws and regulations including bankruptcy. An investor is defined by the absence of the intention to trade as a profession irrespective of the odd commercial transaction. The investor is therefore not obliged to declare his intention to trade by registering nor need he fulfil the other requirements of a merchant.

As the definition of the merchant clearly provides, the same criteria apply to companies. A company formed to carry on commercial business with the intention to trade will be considered a commercial company and is obliged to register, maintain books of account and be subject to commercial laws and regulations, unlike a company which merely invests and is considered a civil company.

Thus, when a person or a company is performing an activity not classified as trade and that person or company does not have the intention to trade as a profession, then that person is not classified as a merchant and that company is not classified as a commercial company but as a civil company. The legal concepts and differences may be clear, yet the practical application could be more problematic.

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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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Islamic jurists have defined the word 'company' ("Shirkah" in Arabic) to mean "join together or intermix" and have interpreted it as a legal concept "as a contract between partners in capital and profits". A Shirkah is further elaborated to mean "participation of two or more persons in a certain business with defined amounts of capital according to a contract for jointly carrying out a business and for sharing profits and losses". This concept was recognised from the dawn of Islam and jurists emphasised its importance as a useful method of organising business relations. The corporate personality of a company was implied, particularly in references made to the settlement of the company accounts and the company's profits and losses.

Under the rules of Islamic Law (Sharia), companies are divided into two main classes:

1. Property Companies: this type of company involves the ownership of property and is in turn usually classified into:
1.1 Voluntary: this company is established when two or more persons agree jointly to own property.
1.2. Mandatory: this company is established by two or more persons who find themselves in a situation where ownership of property is forced upon them, for example, by inheritance or through endowment.

2. Contractual Companies : are established on the contract, and are divided into two main categories:

2.1 'Mufawadha': which when translated literally means 'negotiation' or 'delegation' , and is considered established when the partners have equal shares in the company as well as equal rights and benefits in profits and management.

2.2 'Aanan': literally translated as 'reins', where the partners' shares are variable and not distributed equally between the members.

In addition to the general categorisation referred to above, contractual companies are classified into three types:

1. Capital Companies: are defined as a company where each of the partners provides a specific share in the capital of the company to conduct a trade together or separately and share in the profits.
2. Work Companies: established by two or more partners providing efforts as capital for the conduct or performance of a specific work or profession and share in the fees or consideration for such efforts.

3. Personal Companies: are defined as a company where two or more partners join together to conduct trade based on the trust and goodwill enjoyed by them in the business community. Its establishment does not require the provision of a specific capital. The object of this company is to achieve a profit in the conduct of its business based on such goodwill.

Al Majala had adopted precisely the aforementioned classification of companies. The UAE Federal Courts had also, prior to the application of the Company Law, recognised this classification of companies.

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The UAE Company Law defines a company as "a contract in accordance with which two or more persons participate in an economic project by providing a share of the funds or effort required and to share the profits or losses resulting from such project". An economic project is defined as "any commercial, financial, industrial, agricultural, real estate or such like economic activity".
This definition is similar to that adopted for companies in the UAE Civil Code. A business established by an individual could not be considered as a company in accordance with the aforementioned definition in the Company Law. The conduct of business through individual establishments owned either by a UAE national, or by an expatriate, is quite common in the UAE. Foreign individuals establishing a business presence would be required to have a national sponsor. Thus, the provisions of the Company Law will not be applicable to such individual establishments. However, such establishments have to register in the Commercial Register and acquire the requisite Municipality licence in the Emirate where business is being conducted.

Companies incorporated in the UAE have to take the form of one of seven types.

1. General Partnership
2. Simple Limited Partnership

3. Joint Participation (Venture)

4. Public Joint Stock

5. Private Joint Stock

6. Limited Liability

7. Partnership Limited with Shares

The above types of companies may also be classified into two distinct groups and a third group which is a combination of the first two:
1. Personal Companies: which are normally established when there is a strong personal relationship and trust between the members, namely:

1.1 General Partnership
1.2 Simple Limited Partnership
1.3 Joint Participation (Venture)
2. Capital Companies: incorporated by shareholders to participate in the capital of the company, with the personal relationship between the members being of less importance:
2.1 Public Joint Stock
2.2 Private Joint Stock
3. Combination of Personal and Capital: in which, as the description signifies, both the personal relationship and the capital provided is of importance:
3.1 Limited Liability
3.2 Partnership Limited with Shares.
This classification has some relevance in the registration procedures for the different groups as will be later detailed.
In addition to the provisions stipulated for these types of companies, the Company Law provides for the registration of branches and offices of foreign companies.