Swiroset.com

With Dubai World struggling with massive debt repayments, particularly for its subsidiary Nakheel PJSC, its debt holders are in conflict over how to enforce payment obligations. Under Nakheel’s sukuk (Sharia-compliant bond), if Nakheel defaults on his debt, lenders would simply foreclose on the sukuk’s collateralized assets. Given that Dubai had no proven foreclosure law prior to the sukuk’s payment date of December 14, 2009, it would be a monumental task to complete a foreclosure, particularly against a company controlled by the Ruler of Dubai. Also, given the value of the underlying assets, which are much less than half the value when the sukuk was issued, banks would be better off not taking land that is currently undeveloped and saddled with massive claims by contractors, consultants and vendors. .

Although it is a practical (and naive) impossibility to assert personal claims for Nakheel’s debt against the Dubai sovereign, the often-cited but rarely applied legal principle of “piercing the corporate veil” deserves scrutiny. Nakheel is a private limited company under Dubai law. Its original share capital was paid for by Dubai World and developable land was donated by Sheikh Mohammad to start Nakheel’s ambitious agenda. Nakheel parlayed this land, along with receivables from land sales for development and real estate, into a massive real estate conglomerate. To raise capital, Nakheel entered the international financial markets and borrowed more than $5 billion US dollars.

However, Sheikh Mohammed did not operate Nakheel as a separate legal entity through which he could only exercise shareholder control from the point of ownership of the parent corporation of Dubai World (a corporation created by decree of the Ruler). Instead, His Highness often made management decisions as ultimate shareholder (part of the “transparency” problem creditors face) without corporate resolutions and without regard to Nakheel’s best interests. As an example, during 2007, when Jumeirah Park, a primarily villa project with approximately 2,000 villas for sale, was launched, Sheikh Mohammed ordered Nakheel’s head of sales and marketing to transfer 300 villas to his five sons, 60 villas each. In addition to taking over the construction costs of the villas, Nakheel was mandated to buy back 150 villas at full introductory price. Taking into consideration the value of the villas at the time of transfer, construction costs and loss income, the transaction value was approximately $300,000,000. This transaction financed his son’s companies, such as United Holdings and Zabeel Investments. It in no way benefited Nakheel and hurt Nakheel’s financial situation. In addition, many of the development plots on Palm Jumeirah Crescent were also given away to entities owned by the sheikh’s sons, or to those with privileged status. Since the sale value of each parcel was AED 100,000,000, the total parcels given away were over USD 100,000,000.

If the same transaction were to be concluded and we removed His Highness and his children from the equation, wouldn’t at least one creditor try to lift the corporate veil and seek relief against the shareholder for the values ​​of the underlying transfers? Such an action, if successful, would bring the shareholder’s other assets into the equation. In this case, the crown jewels of Dubai. Under UAE business law, can management or shareholders acting in the role of management be held personally liable for the debts of a corporation? In certain situations, the answer is yes. However, this situation worries the sovereign and changes the nature of the legal analysis.