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UNRAVELING PARTNERSHIP DISPUTES MOST COMMON LEGAL CHALLENGES IN DUBAI

20 January 2025

INTRODUCTION

In recent decades, the United Arab Emirates (UAE) has experienced remarkable economic growth, fueled by its open-market policies and ambitious Vision 2031. These efforts have positioned the UAE as one of the most attractive destinations for global investors, and entrepreneurs for its flexible investment policies, infrastructure, and stable economic climate. This growth has led to the establishment of thousands of companies, playing a pivotal role in diversifying the UAE economy.

However, alongside this flourishing business environment, partnership disputes become a common challenge, particularly in Limited Liability Companies (LLCs), which are among the most popular business structures in the UAE due to their flexibility and ease of formation.

Before diving deeper into the specifics of LLCs partnership disputes and how to avoid such disputes in the future, it’s important to first understand the various types of companies recognized under UAE law, which is including but not limited to:

Limited Liability Companies (LLCs): The most common type among investors, requires minimum least two (2) partners and maximum fifty (50) partners.Joint Stock Companies (JSC): Often associated with large corporations and used in financial markets.

Sole Proprietorships: Suitable for small business owners.

Partnerships: (i). General partnerships, (ii). Limited partnerships.

Free Zone Companies: Operate within free zones (i.e. Rakez, DIFC, ADGM, DMCC etc……) and are subject to their specific regulations for each free zone.

MOST COMMON REASONS FOR DISPUTES AMONG PARTNERS IN THE LLCS

Despite the numerous advantages of the LLCs, partnership disputes are among the most significant challenges and barriers it faces. As a law firm, we constantly come across multiple partnership disputes. Based on our experience, we identified the following five most common reasons behind partnership disputes and their impact on businesses.

A- Non-Existence of a Clear Partnership Agreement

One of the primary reasons for partnership disputes is the absence of a well-drafted and comprehensive partnership agreement. Many partnerships in Dubai, especially small to medium size businesses, are formed on the basis of verbal agreements or vague, boilerplate contracts that fail to address critical aspects of the business relationship.

A clear partnership agreement should define key terms, such as:

    • The roles and responsibilities of each partner.
    • Capital contributions and ownership percentages.
    • Profit-sharing mechanisms.
    • Decision-making processes.
    • Procedures for resolving disputes, and more.

Without such provisions, disagreements over expectations and obligations often escalate into legal disputes rapidly. This lack of clarity can leave parties relying on the default provisions of UAE law, which may not reflect their intended business arrangement. Crafting a detailed and enforceable partnership agreement tailored to the specific needs of the business can significantly mitigate the risk of partners misunderstanding leading to disputes.

B- Lack of Understanding of the Company Manager Role and its Legal Responsibilities

In Dubai, the role of a company manager carries significant legal responsibilities under UAE law. However, many partners fail to understand the full scope of these duties or the potential liabilities associated with the role.

A company manager is typically tasked with overseeing the day-to-day operations, ensuring compliance with laws and regulations, and safeguarding the company’s financial and operational interests. Under UAE Commercial Law, A manager may either be appointed from within the partners, referred to as the Managing Partner (whose name will appear on the trade license), or they can be an external party hired to manage the company.

When the manager is also a partner, it creates a dual role that carries a high level of risk. As a partner, they have a personal stake in the company’s success and are entitled to share in the profits, ensuring their personal goals align with the company’s prosperity. On the other hand, as a manager, they hold significant decision- making authority, including control over the company’s finances, operations, and strategic direction. However, this combination of roles can sometimes lead to conflicts of interest, particularly in financial matters. If the partner-manager misuses their authority for personal benefit or makes decisions without consulting the other partners, it can erode trust and threaten the stability of the company.

Disputes frequently arise when:

    • The manager acts beyond their authority without consulting other partners.
    • There is a lack of transparency in the manager’s decision-making process.
    • The manager fails to fulfill fiduciary duties, such as acting in the best interests of the company and avoiding conflicts of interest.
    • These misunderstandings often stem from poorly defined managerial roles in the partnership agreement or the absence of regular communication among partners. Establishing clear boundaries and accountability measures for the manager can help prevent such conflicts.

C- One Partner Controlling the Company’s Bank Account(s)

A common flashpoint in partnership disputes is the control of the company’s bank accounts. When one partner has sole control over the company’s financial resources, it can lead to mistrust and allegations of misuse or mismanagement of funds.

Issues that frequently arise include:

    • Lack of transparency in financial transactions.
    • Unauthorized withdrawals or expenditures.
    • Exclusion of other partners from accessing or reviewing bank statements.

Such situations can create an imbalance of power within the partnership and foster suspicions of financial misconduct. To address this, partnerships should establish joint signatory requirements or implement systems that ensure equal access to financial information, which will create more trust and eliminate any misunderstandings. Regular financial audits and transparent banking practices are also critical in maintaining trust among partners.

D- Lack of Proper Bookkeeping of the Company’s Financial Records

Proper bookkeeping is a legal requirement in the UAE for all types of companies. It is also essential for maintaining transparency and accountability in any business. In Dubai, the failure to maintain accurate and up- to-date financial records is a frequent cause of partnership disputes. In some cases, we even see partners running the business from their personal bank accounts, this indeed not only illegal, but may implicate the respective partner in case of any corporate fraud claims.

Common issues include:

    • Disorganized or incomplete financial documentation.
    • Unrecorded transactions or revenues.
    • Disputes over the accuracy of financial statements.

Poor bookkeeping not only creates friction among partners but also exposes the company to regulatory penalties and legal liabilities. Ensuring that the company employs qualified accountants and adheres to recognized accounting standards can mitigate these risks. Additionally, partners should conduct periodic reviews of the company’s financial records to maintain trust and accountability.

E- The Management Lack of Distribution of Profits based on a Yearly Audited Financial Statement

Profit distribution is often at the heart of partnership disputes, particularly when it is not conducted transparently or in accordance with agreed-upon terms. In Dubai, partners frequently clash when profits are distributed arbitrarily or without reference to a yearly audited financial statement.

This issue is exacerbated when:

    • There is no consensus on the timing and method of profit distribution.
    • Partners are unclear about their entitlement to profits.
    • The lack of audited financial statements leads to disputes over the company’s actual profitability, loss or future expansion.
    • To avoid such conflicts, partnerships should implement clear procedures for profit distribution, ensuring it is conducted based on audited financial statements prepared by a certified accounting firm. This not only provides an accurate picture of the company’s financial health but also minimizes the likelihood of disputes arising from perceived inequities in profit-sharing.

CONCLUSION

Partnership disputes can be highly disruptive, potentially leading to the dissolution of business and financial losses for all parties involved. Addressing these common causes of conflict requires proactive measures, such as drafting comprehensive partnership agreements, defining clear roles and responsibilities, and maintaining transparent financial practices. By taking these steps, partners can build a strong foundation for their business and reduce the likelihood of disputes in the future.

Furthermore, liquidating a company or terminating a partnership in Dubai can present significant legal challenges, particularly when disputes exist between partners. In the absence of a clear agreement, the default provisions of UAE law may apply, which can complicate matters. Partners may face hurdles such as disagreements over the valuation and distribution of assets and settlement of outstanding debts. Additionally, if one partner opposes the dissolution or obstructs the process, it may require court intervention to resolve the impasse, which can be time-consuming and costly. Ensuring that the partnership agreement includes detailed exit mechanisms and seeking legal advice early in the process can help mitigate these challenges.

If you are an investor facing partnership disputes or need legal advice to prevent potential conflicts, we encourage you to contact us for a consultation.

Mohamed Abdelrehiem
Partner, Head of Dispute Resolution
M: +(971) 50 397 7689
Email: [email protected]

Youssef Diab
Junior Associate, Dispute Resolution
M: +201062222773
Email: [email protected]

 

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