The Liability of a Shareholder in a Limited Liability Company: Between the Rule and the Exception

A Limited Liability Company (LLC) has a unique nature, as it combines characteristics of both capital companies and partnership companies. The UAE legislator has integrated these features into a unified legal framework, establishing provisions to regulate this type of company (hereinafter referred to as the "Company").

A Limited Liability Company is defined as a business entity consisting of a number of shareholders, not less than two and not exceeding fifty. Each shareholder is liable for the company's obligations only to the extent of their share in the capital, meaning that shareholders are not personally liable for the company's debts and liabilities beyond their investment in the company.

According to the UAE Commercial Companies Law¹ (hereinafter referred to as the "Companies Law"), the UAE legislator defines a Limited Liability Company under Article (71/1) as follows: "A limited liability company is a company whose number of partners/shareholders is at least two and does not exceed fifty [50]. Any partner thereof shall be liable only to the extent of his capital contribution”.

However, as an exception to the general rule, the legislator allows for the establishment of a single-partner LLC, which may be owned by either a natural² or legal person³. This type of company is known as a (Single-Person Limited Liability Company) where the sole shareholder’s liability is limited to the company's capital and does not extend to their personal funds or assets.

This exception is stated in Article (71/2) of the UAE Commercial Companies Law, which provides that "Any single natural or legal person may incorporate and own a limited liability company. The capital owner of the company shall be liable for the obligations of the company only to the extent of the capital set out in its MOA. The provisions of the limited liability company contained in this Decree Law shall apply to such a person, without contradicting the nature of the company".

According to the UAE Commercial Companies Law, the liability of a shareholder in a company varies depending on the nature of the company, its activities, and the shareholder’s responsibilities and obligations toward the company, other shareholders, and third parties.

One of the fundamental principles of a Limited Liability Company (LLC) is the limited liability of its shareholders, meaning that a shareholder is liable for the company’s obligations only up to the amount of their share in the capital. As a general rule, a shareholder cannot be held personally liable for the company's debts beyond their assets, based on the principle of the separate legal personality of the company.

However, what happens if a shareholder abuses this principle to engage in activities that harm the company, other shareholders, or third parties?

The issue of shareholder liability in an LLC is a legally controversial topic, particularly regarding the extent to which a shareholder’s financial independence is recognised and whether there are exceptions that allow lifting the limitation on liability under certain circumstances.

¹ Federal Decree Law no. (32) of 2021 on Commercial Companies.

² Natural Person: A natural person is an individual who has legal personality, meaning they are capable of acquiring rights and bearing responsibilities. In legal terms, a natural person refers to a human being who can exercise rights and fulfill obligations.

³ Juridical (Legal) Person: A juridical person is an entity composed of a group of individuals or assets that has an independent legal identity and is established to achieve a specific purpose. It enjoys legal personality within the scope of that purpose.

In this article, we will explore this issue in depth by dividing our discussion into the following sections:

Chapter One: Definition of a Shareholder in a Limited Liability Company.

Chapter Two: The Liability of a Shareholder in a Limited Liability Company.

Chapter Three: Exceptions to the Principle of a Shareholder’s Financial Independence in an LLC.

Chapter Four: Advantages of These Exceptions on Shareholder Liability in an LLC.

Chapter Five: Challenges and Difficulties in Applying These Exceptions in Practice.

Chapter One: Definition of a Shareholder in a Limited Liability Company:

A shareholder in a Limited Liability Company (LLC) is defined as any natural or legal person who contributes to the company's capital. The number of shareholders in an LLC must not be less than two and must not exceed fifty.

However, the UAE legislator has introduced an exception to this rule by allowing the establishment of an LLC with a single shareholder, whether a natural or legal person. In this case, the company is referred to as a Single-Person Limited Liability Company (SP LLC).

A shareholder in an LLC enjoys limited liability, meaning that their financial responsibility is restricted to the amount of their share in the company's capital. This means that they are not personally liable for the company’s debts and obligations, in accordance with the principle of financial separation between the shareholder and the company.

Chapter Two: The Liability of a Shareholder in a Limited Liability Company:

One of the most defining characteristics of a Limited Liability Company (LLC) is the principle of limited liability, which ensures that a shareholder is only liable for the company’s debts and obligations to the extent of their share in the capital. This protection prevents creditors from claiming a shareholder’s personal assets to settle the company's debts.

This feature distinguishes LLC shareholders from shareholders in general partnerships, where the latter are subject to unlimited and joint liability for the company’s debts.

The UAE legislator has explicitly affirmed this principle in Article (71/1) of the UAE Commercial Companies Law, which states: “A limited liability company is a company whose number of partners/shareholders is at least two and does not exceed fifty [50]. Any partner thereof shall be liable only to the extent of his capital contribution”.

This provision clearly establishes that a shareholder’s liability is strictly limited and that they cannot be required to settle the company’s debts with their personal funds. This principle is based on the financial independence between the shareholder and the company.

While the limited liability rule is a fundamental aspect of LLCs, are there exceptions that allow this protection to be lifted? Can a shareholder be held personally liable under certain circumstances?

Chapter Three: Exceptions to the Principle of a Shareholder’s Financial Independence in an LLC:

As previously mentioned, the general rule in a Limited Liability Company (LLC) is that a shareholder’s financial liability is separate from that of the company. A shareholder’s obligations are limited only to their share in the company’s capital, meaning that their personal assets are protected from company debts.

However, what happens when a shareholder abuses this principle to engage in fraudulent or harmful activities that negatively impact the company, its creditors, or other shareholders?

1) The UAE Legal Perspective on Abusing the Principle of Financial Independence:

The UAE Commercial Companies Law does not explicitly define exceptions to the limited liability rule. However, it grants judicial discretion to determine whether a shareholder has improperly exploited the principle of financial independence. If the court finds evidence of misconduct, the shareholder may be held personally liable, meaning their personal assets could be used to cover company debts.

2) The UAE Judiciary's Position on the Abuse of Financial Independence

In recent landmark judgments, the Abu Dhabi Court of Cassation has clarified the circumstances in which a shareholder’s financial independence may be disregarded. One ruling stated “As a general rule, a shareholder in a limited liability company is not liable for the company’s debts beyond their share in the capital. However, as an exception to this rule, the principle of limited liability does not apply if the shareholder has exploited the company's financial independence as a shield or legal cover to engage in actions contrary to the company’s articles of association, thereby causing harm to other shareholders or creditors. If such actions involve fraud, deception, or gross misconduct, the shareholder will be held personally liable for these actions, and their personal assets may be affected.

The determination of whether fraud, deception, or gross misconduct has occurred falls under the discretion of the trial court, which must base its ruling on sound reasoning and evidence drawn from the case records”.⁴

In another decision, the Abu Dhabi Court of Cassation reaffirmed the liability of both the partner and the manager if they exploited the principle of financial independence. The court stated in its reasoning: "Although a limited liability company (LLC) has a separate legal personality and an independent financial liability distinct from that of its shareholders, and although it alone bears the debts arising from its activities and dealings with third parties—while the person managing the company has full authority to represent it, administer its affairs, and act within the scope of the powers granted to them—this general principle is subject to exceptions. The legislator has established that the manager of an LLC can be held personally liable for any acts of fraud or deception committed in the course of their management. They are also obligated to compensate the company for any losses or expenses incurred as a result of misuse of authority, violation of applicable laws, breach of the company’s articles of association or their appointment contract, or gross negligence.

Similarly, while the general rule states that a shareholder in an LLC is only liable for the company’s debts to the extent of their share in the capital, an exception to this rule applies if the shareholder has abused the principle of financial independence as a means or legal cover to engage in actions that violate the company’s articles of association, causing harm to other shareholders or creditors. If such actions involve fraud, deception, or gross misconduct, the shareholder will be personally liable for their actions, and the effects may extend to their personal assets. The determination of fraud, deception, or gross misconduct is a matter of fact, which falls within the discretion of the trial court, provided that its ruling is based on sound reasoning and evidence drawn from the case records”.⁵

Although the UAE Companies Law does not provide a specific list of misconduct that could result in piercing the corporate veil, UAE courts have identified certain actions that may trigger this exception:

• Using the company as a legal shield for unlawful activities, such as conducting illegal transactions or engaging in fraudulent business practices.
• Harming other shareholders or creditors through bad faith actions, misuse of authority, or deliberate misconduct.
• Committing acts of fraud, deception, or gross negligence, such as financial manipulation, presenting false financial statements, or misrepresenting the company’s financial status.

⁴ Abu Dhabi Court of Cassation, Judgment number 164 of 2025, Commercial Cassation, dated 5 February 2025.

⁵ Abu Dhabi Court of Cassation, Judgment number 865 of 2024, Commercial Cassation, dated 19 August 2024.

Since the UAE Commercial Companies Law does not explicitly define a list of actions that constitute an abuse of financial independence, it has left this determination to the judiciary. UAE courts play a crucial role in assessing whether a shareholder has wrongfully exploited the principle of limited liability.

Thus, judicial rulings serve as the primary legal reference in this matter. Courts rely on evidence and factual circumstances to establish whether a shareholder has misused the corporate structure to evade liability or harm others.

While the general rule in LLCs is that a shareholder is only liable for company debts up to their capital contribution, key exceptions exist when this principle is misused. UAE courts have consistently held that acts of fraud, deception, gross negligence, or intentional harm to creditors or shareholders justify lifting the corporate veil, making the shareholder personally liable for the company's debts.

In the next chapter, we will explore the advantages of these exceptions, particularly in terms of creditor protection and maintaining fair business practices

Chapter Four: Advantages of These Exceptions on Shareholder Liability in an LLC:

The exception to the principle of a shareholder’s financial independence aims to strike a balance between protecting shareholders from absolute liability and ensuring that this protection is not misused to the detriment of the company, other shareholders, or creditors.

The key advantages of this exception include:

1) Preventing misconduct and protecting the company: This legal safeguard acts as a deterrent, discouraging shareholders from abusing the principle of limited liability to commit unlawful acts. When a shareholder realises that they could be held personally accountable for fraudulent or harmful actions, they are more likely to act responsibly and in accordance with the law. This, in turn, reduces instances of misconduct and mismanagement within the company.

2) Enabling the company to seek compensation: If a shareholder’s actions cause harm to the company, this exception grants the company the legal right to file a claim against them for damages. This enhances the company's ability to recover financial losses resulting from misuse of authority or bad faith actions, thereby safeguarding its assets and operations.

3) Strengthening creditor protection: This exception plays a vital role in protecting creditors from fraudulent schemes or misuse of the company as a shield to evade debts. If a court determines that a shareholder has wrongfully exploited the company's financial independence, creditors may pursue claims against the shareholder personally to recover outstanding debts. This reinforces trust in the business environment and ensures fair treatment of all parties involved.

Chapter Five: Challenges and difficulties in applying these exceptions in practice:

Despite the importance of the exception to the principle of a shareholder’s financial independence, which aims to protect companies and creditors from its misuse, there are practical challenges that companies face when trying to apply this exception. These challenges include:

1) Lack of a clear definition of what constitutes abuse of financial independence: The UAE legislator has not provided a specific or exhaustive list of actions that constitute an abuse of the limited liability principle. Instead, the matter is left to judicial discretion, meaning courts assess each case individually. This can lead to inconsistencies in court rulings, as different judges may interpret situations differently, creating legal uncertainty for companies and shareholders.

2) Difficulty in presenting evidence and convincing the Court: Proving that a shareholder has misused the corporate structure is one of the most complex legal challenges. Companies must present strong.

evidence demonstrating that the shareholder acted in bad faith or engaged in fraud, deception, or gross negligence. Since courts have full discretion in evaluating the evidence, the outcome of legal proceedings remains unpredictable, making it difficult for companies to rely on this exception as a guaranteed legal remedy.

3) The burden on the shareholder to prove Good Faith: In some cases, a shareholder may find themselves in a defensive position, needing to prove their good faith and that their actions were not intended to harm the company or creditors. This becomes even more challenging in cases involving previous disputes between the shareholder and the company, where it may be difficult to establish that their decisions were legitimate and not motivated by malice or misconduct.

Conclusion

The principle of a shareholder’s financial independence from the company in limited liability companies is a fundamental legal concept that protects shareholders from the company’s financial obligations. However, this principle can sometimes be misused by certain shareholders to engage in actions that harm the company or its creditors.

Since the UAE legislator has not precisely defined the actions that constitute an abuse of this principle, courts have been given the discretion to decide on a case-by-case basis. This has led to variations in judicial rulings and a degree of legal uncertainty in commercial dealings.

To address these challenges, we recommend that the UAE legislator consider amending the Commercial Companies Law by introducing clear legal provisions that include:

• Defining the specific actions that constitute an abuse of the financial independence principle, to prevent broad interpretations that may result in inconsistent court rulings.
• Specifying legal penalties for such misconduct, ensuring sufficient deterrence and preventing unlawful exploitation of this principle.
• Establishing a clear legal mechanism to enable the company, shareholder, or creditors to seek compensation when a shareholder is found guilty of misusing this principle.

These legal reforms would help enhance transparency and fairness in business transactions, creating a stable and investor-friendly environment that ensures a balance between protecting shareholders and preventing legal loopholes.