Introduction
In a landmark judgment, the Abu Dhabi Court of Cassation recently pronounced (in Civil Appeal 30 of 2015) that in case an UAE national purposely sells his shares in violation of the UAE Companies Law and public policy prevalent in the country, shall have no right to subsequently claim the profits of the company he had voluntarily served as a service agent and not as an active shareholder (which is requirement of law) once the side agreement is nullified. It is important to note here that nullification of the sale and purchase agreement/side agreement shall come into effect from the date of the court judgment. This article aims to highlight the brief facts about the case and the judgment of honorable court.
Background
All companies in UAE are mandatorily required to have registered at least 51% of its shares in the name of UAE national. In the UAE, it is a general practice to form side agreements (sponsorship or nominee arrangements) to be entered between foreign nationals on the one side and UAE national shareholders on the other side which state that the beneficial interest and/or economic benefit in shares of the company which is legally held by the UAE shareholder belongs to the foreign national (other party to the agreement) and that the economic interest or stake of the UAE national in the company is limited to an agreed annual fee or other benefits as may be mentioned in the agreement.
In this case, the Company was going through a tough time and performing badly. The claimants (UAE National) do not wanted to be a part of a loss making company and sold their shares to Defendants. Both the parties voluntarily entered into an agreement in 2004 by which the Claimant sold their shares to the Defendants for AED 5 million, stopped being an active shareholder, but continued to remain shareholders on paper to satisfy the legal requirements for the Company, and agreed to receive an annual sponsorship fee of AED 150,000 for it.
This sale was not registered with any authority or the Notary Public, nor was it on the company’s records or registrar or the commercial register. The Claimants gave a Power of Attorney for management without referencing the side agreement for all future transactions. In succeeding two years, the Company’s business improved and it started making profits. Claimants with an intention to claim their shares in profits of the Company, brought an action against the Defendants to nullify the agreement for sale of the shares.
The Decision
The Court at first exemplification appointed an expert who prepared his report and educe that the sale of the shares was made upon the request of the Claimants. The Defendants have fulfilled their obligations under the voluntary agreement with claimants and therefore claim for share in profits was dismissed. The Claimants could not provide any proof to prove that they were deceived.
The Claimants were not satisfied with decision of Court of Appeals and filed an appeal with court of Cassation. It overturned the ruling of Court of Appeal’s and returned the case again for a decision by another panel.
A three persons committee was appointed by court of Appeal which concluded that sale is not valid as it was contrary to the public policy prevalent in the country. The court pronounced that parties were to be restored to the state they were before entering into the side agreement as it void ab initio, and if it is not possible to restore them into previous position, claimants are entitled for compensation which was more than AED 20 million.
Now, the defendants were aggrieved of the decision and appealed the decision. Their first argument was that the Court of Appeal was unconscionable to decide on the basis of Memorandum of Association (MoA) of Company to make the Claimants entitled to 51% of profits of the Company, since the MoA is only factitial contract and the side agreement is the real contract which accurately defines the relationship between the parties and documented the fact that the Claimants were only dummy partners to fulfill the requirement of law. The side agreement is not registered on the commercial register as it is against the law and cannot be lodged. The Claimants intentionally acted as nominal partners so that the Defendants’ could take benefit from the Claimants’ status of being a UAE National.
The Court of Cassation of Abu Dhabi ousted this argument. It construed that the existence of a dummy agreement is a matter of fact for the trial judge and not a matter that could be scrutinized by the Court of Cassation. The further arguments rose by the Defendants were also dismissed. However, the last argument raised in the Court of Cassation by the Defendants was that the Court of Appeal had been erroneous to pronounce that the Claimants are entitled to the profit on account of their status of 51% shareholding in the company because the decision of the Court of Appeal had been denotative and therefore can be applied to future profits and not to the profits earned between 2004 to the date of judgment. This is quoted as an exception to the general principle that the parties to these types of contracts should be restored to the positions they occupied prior to such agreement or contract. Furthermore, the Claimants were cognizant since 2004 that the side agreement was against the public policy, and maintained their role as service agents voluntarily and received compensation for the same.
The Court of Cassation agreed that the Court of Appeal had been amiss to award the Claimants and direct defendant to pay 51% of profits earned from 2004. In this case the Claimants had knowingly and voluntarily participated in the violation of the Companies Law which led to the agreement being invalidated, and no person(s) should be allowed to take benefit from their wrongful conduct. Therefore, defendants are only liable to pay profits from the date of the Court of Appeal (remand) judgment and not from 2004 (the date of entering into side agreement with claimants).
The matter referred back to the previously appointed committee for recalculating the amount payable. The Cassation Court pronounced that the Claimants should return the money received for entering into the side agreement and selling the shares (which was approximately AED 5 million), and fee received for serving as Service Agent from 2004 until 2015.
Conclusion
The honorable Court of Cassation judgment addresses key issues concerning service agents who attempt to claim profits of a company despite voluntarily acting only as a sleeping partner and not being an active shareholder. The head rending judgment in this case is that whilst the Claimants had tried denial of the agreement and sue the defendants for the sharing profit from past, even after knowingly participating in violation of public policy. The judgment not only denied them from any share in profit, but also was ordered to repay the purchase price they received for selling their shares to defendants and the annual sponsorship fee that they had received for over a decade.
