Invalidity of the LLC due to Non-Capital Payment

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Invalidity of the LLC due to Non-Capital Payment

Introduction

As it is difficult for the Foreign Investor to find a National Partner who is willing to contribute the required capital of 51% of the LLC which brings us to the subject of the Nominee Shareholder Agreement which is invalid as clarified by the law. This invalidity of LLC due to non-capital payment may apply on real scenarios when one partner has mentioned wrong information in the MOA, leading to the invalidity and liquidation of LLC.

Even the principles set by the courts (specifically in Dubai) are so wide that we are not sure if the same happened with the actual partner will also result in invalidity or not.

First: The Regulations under the Law for non-capital Payment

There is no specific law governing this kind of arrangement. However, the principle has been established by the courts in Dubai under various judgements passed by them stating that any partner entering into the arrangement consisting of the terms which are contrary to the terms of the MOA will result in the invalidity and liquidation of the LLC. The same is referred to in detail in Article 1 of this Publication.

Second: The Risks with common practice Non-payment of Capital by the Nominee Shareholder

The common concern is that the Nominee Shareholder Agreement signed between the partner will state that the National Partner has not paid the Capital Contribution, which will be against the terms mentioned in the MOA wherein is has been stated that each partner has paid his share. This kind of arrangement will result in the invalidity of the LLC, thereby resulting in the liquidation of the LLC.

Third: The Solution

The solution is that the Foreign Investor shall grant a loan without interest to the National Partner, guaranteed by his shares only without any personal liability and in exchange for that, the National Partner will handover the possession of the shares with the voting rights to the Foreign Investor as stated in the Article 2 of the Publication concerning the voting rights.

Observation

Introduction

To set up things in right perspective, we can state that if the general practice of the Side Agreement is continued to be followed, it will definitely result in the liquidation of the LLC after being declared as invalid whenever the conflict between the partners will arise. In our opinion it will always be wise to incorporate the LLC as per the mandate of the existing laws while restructuring it as per the solutions provided in this Publication so as to ensure that the investment made by the Foreign Investor is legally safe and that the Foreign Investor can enjoy the profits while within the legal framework.

The ultimate purpose of this Publication is to encourage the foreign investments in UAE by providing the opportunity to the Foreign Investors to set up the LLC wherein they can earn the maximum profit while having all the decision making power and that to within the purview of the existing laws.

As per the limitation imposed by the existing laws, it is required that the National Partner shall hold 51% shares of the Mainland LLC. The risks associated with this will result in the National Partner controlling the LLC with majority of the voting rights and getting the maximum profits of the company on the basis of the profit sharing ratio.

However, by following the steps suggested by us, the Foreign Investors can overcome these hurdles while staying with the domain of the existing laws thereby mitigating the risks which might result in the liquidation of the LLC.

Further, the risks stated in this Part I of the Publication are not conclusive and there are further risks and concerns which might require detailed explanation and the same shall be provided in the Part II of this Publication. In the Part II of the Publication we will deal with the risks pertaining to the limitation on changing the 51% share percentage of the National Partner, rights of the heirs of the National Partner, Jurisdiction, termination by court in the event of cheating and finally implementing the solution proposed by us without compromising on the existing laws and the most key risk is following the formalities required for each step of the solution as each step requires specific to make is legal as per the laws.

To conclude this part of the publication, we would like to state that the problem of the existing issue with respect to the Mainland LLC can be resolved legally without facing the risk of liquidation by restructuring the LLC in the way proposed by us in this Publication. It is pertinent to note that the laws are flexible and risks can always be mitigated by staying in the boundaries of the prevailing laws and by seeking the professional advice from the right set of individuals who are well aware of the laws and how to deal with them.

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Lawyer & Legal Consultant
Mr. Mohamed Nouredin

Invalidity of the LLC due to Non-Capital Payment