The Legal Framework

Particular registration requirements apply to companies established under the Commercial Companies Law No. 8. The 1984 Law, Article 11, specifically states that, with the exception of joint participation, all businesses wishing to participate in contracts shall be registered alongside their memorandum of association and any alterations through the Commercial Register.

Moreover, Article 12 declares that no company shall have corporate personality or carry on commercial activity unless registered in the Commercial Register. Moreover, until the completion of registration, any transactions and business activities performed in the name of the company will be severally owned by the parties involved.

This also applies to public joint stock companies. Article 72 states that during the period of incorporation, a company has corporate personality only to the extent necessary for its incorporation. Until then, as long as the company fulfills the requirements of the UAE contract law to incorporate successfully, it will be held liable for the conduct of its founding members. In the same manner, Article 225 stipulates that a limited liability company may not engage in or practice any activity except after registering it with the Commercial Register.

Free Zone Companies Under UAE Contract Law

The 1984 Law generally applies to corporate entities in Free Zones in the UAE, although specific Free Zone regulations may be provided with respect to matters addressed by the 1984 Law. Nevertheless, Free Zone regulations are usually in harmony with the 1984 Law, particularly related to the pre incorporation contracts.

For example, in line with Article 8 of the Implementing Regulation 1/2006 of Dubai Silicon Oasis, a “Limited Liability” Free Zone Company is deemed to be officially incorporated upon registration in the FZCO Register. At this time the company can perform all functions of a Free Zone company, and the shareholder has the liability to contribute to the assets of the company. This strategy is in line with the overall contract law in UAE, particularly in dealing with pre-incorporation contracts.

Scope of Personal Responsibility

Whether the individuals provide any protections from personal liability until the company is formed? What happens to contracts an individual signed on behalf of a company before that company was formally registered, once the company is formally recognized?

Article 12 (final paragraph) of the 1984 Law states, “Incorporated, the Company shall have a corporate personality for as far as necessary for its incorporation.”

This essentially means that a company can operate to a certain extent before the completion of its registration. For example, it can open a bank account or execute a lease — both foundational processes in incorporation. At this stage, any agreements will usually describe the company as “XYZ LLC (under formation).

But what does this actually mean for the people who are involved? A good example of this is if someone signs a contract for a company that has not yet been properly incorporated, they are personally liable.

However after the company has completed its incorporation, the law transfers that risk. Under UAE contract law, courts usually construe Article 12 so that as soon as the company is legally established, it immediately inherits those pre-registration contracts. At that time, the individual signatory is granted no personal liability.

This part of contract law UAE is an essential concept that every entrepreneur and business guy should know before engaging in any contract to proceed with relevant ways to mitigate the risk of forming a company.

Conclusion

To summarize, pre-incorporation contracts as per UAE contract law are subject to stringent registration requirements that are fundamental for any company to attain corporate personality. Until that time, any dealings done in the company’s name are personally binding on the parties involved. Once the company is properly incorporated, however, it becomes responsible for all pre-incorporation contracts, releasing the signers from all personal exposure. 

Generally, the Free Zone regulations are harmonized with the wider UAE contract law and solidify these fundamentals. In dealing with these legal nuances, businesses are advised to engage expert services like Khairallah Law Firm which is among the top law firms in Dubai to mitigate the risks associated with the violation of UAE corporate laws.

Having said that, Contact Khairallah Advocates & Legal Consultants and benefit from our free 30-min legal consultation.

*Disclaimer: our blogs, law updates and FAQ’s are freely distributed for educational purposes and to showcase recent updates and regulations in the UAE’s framework.

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