Piercing the Corporate Veil – The Case of the Dubai World
While Dubai World is struggling with massive debt payments, particularly for its subsidiary Nakheel PJSC, its debt holders are in conflict over how to enforce payment obligations. Under the Nakheel sukuk (sharia-compliant bond), if Nakheel defaults on its debt, the lenders would simply foreclose on the sukuk’s secured assets. Considering that Dubai did not have a proven foreclosure law prior to the sukuk repayment 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. Furthermore, given the value of the underlying assets, which are much less than half the value when the sukuk was issued, it would be best if banks did not take over land that is currently undeveloped and burdened with massive claims by contractors, consultants and suppliers. .
Although it is a practical (and naive) impossibility to enforce against the Dubai sovereign’s personal claims for Nakheel’s debt, 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 the developable land was gifted by Sheikh Mohammad to begin Nakheel’s ambitious agenda. Nakheel leveraged this land, along with accounts receivable from the sale of development parcels and real estate, into a massive real estate conglomerate. To raise capital, Nakheel entered the international financial markets and borrowed more than $ 5 billion.
However, Sheikh Mohammed did not operate Nakheel as a separate legal entity through which he could only exercise shareholder control from the point of owning the parent corporation of Dubai World (a corporation created by decree of the Ruler). Instead, His Highness often made management decisions as the ultimate shareholder (part of the “transparency” issue facing creditors) without corporate resolutions and without Nakheel’s best interests in mind. 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 children, 60 villas each. In addition to assuming the construction costs of the villas, Nakheel was ordered to buy back 150 villas at the full launch price. Taking into account 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 harmed Nakheel’s financial position. Additionally, many of the development parcels on Palm Jumeirah Crescent were also donated to entities owned by the children of the Sheikh, or those with favored status. As the sale value of each of the parcels was AED 100,000,000, the total of gifted parcels exceeded $ 100,000,000.
If the same transaction were to conclude and we removed His Highness and his children from the equation, wouldn’t a creditor at least attempt to break through the corporate veil and seek compensation against the shareholder for the values of the underlying transfers? Such action, if successful, will 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 personally liable for the debts of a company? In certain situations, the answer is yes. However, this situation worries the sovereign and changes the nature of legal analysis.