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Limited Liability Companies (“LLCs”), established pursuant to Law No(5) of 2002 as amended (the “Companies Law”), are the most common vehicles used by foreign investors wishing to invest or conduct business in Qatar. |
LLCs have traditionally been seen as a safe option by foreign investors who are familiar with the general principle of the “corporate veil”, a legal concept which separates the personality of a limited liability corporate entity from the personalities of its investors.
Investors rely on this concept to limit their liability to the amount each invested in the LLC, except in exceptional circumstances, generally involving fraud.
These exceptional circumstances can be referred to “lifting” or “piercing” the corporate veil.
In Qatar the circumstances where the piercing of the corporate veil is possible may not be so exceptional.
Under Article 290 of the Companies Law (“Article 290”) it is possible to look beyond the limited liability of an LLC and to expose the shareholders to the LLC’s liabilities in circumstances where the LLC looses half or more of its capital regardless of the reason for those losses.
In such circumstances, the principle of limited liability may be lost and so it is critical that foreign investors are aware of the effect of Article 290 when doing business in Qatar through an LLC.
Article 290
According to Article 290 where an LLC has losses amounting to half or more of its share capital, as a result of losses from its business, the following steps should be taken:
(1) The Manager(s) (or any person whose name appears on the Commercial Register as an LLC authorised signatory ) must call a Shareholders’ General Assembly to be held no later than 30 days from the date the losses amounted to half or more of the LLC’s share capital.
(2) The shareholders must resolve (by a majority of shareholders holding 75% of the share capital), to either:
(a) reinstate the LLC’s capital; or
(b) dissolve the LLC.
Both of these steps must be complied with and completed within the required 30 day period, in order to avoid the shareholders and/or the Manager(s), as the case may be, becoming jointly and severally liable for all the LLC’s debts. Failure to comply with these steps therefore effectively results in a shareholder guarantee.
How to avoid a breach of Article 290
Anyone who has started a new business will know that it is not unusual for an LLC to incur losses which exceed half of its capital; this will often occur in the early stages following incorporation but will not necessarily prevent the business becoming profitable once it is more established. So what can be done to prevent the principle of limited liability being lost in the early stages of a business?
(1)The minimum capital requirement for an LLC is QR200,000. Nevertheless, in order to minimise the risk to shareholders the initial capitalisation should be carefully considered. This is also a requirement in Article 232 of the Companies Law which states that the LLC’s capital be “…sufficient to realise its objects”. Therefore, by considering and carefully assessing the amount of capital needed to run the business in its pre-profit stages rather then merely complying with the minimum capital requirements in the Companies Law, the adverse consequences of Article 290 could be avoided.
(2)Ensuring the LLC appoints an auditor and/or financial manager at an early stage could be key in preventing a breach of Article 290. The Companies Law does not specify when and how to determine the LLC’s losses, although the generally accepted position is that when the net position of the LLC is negative (ie. when the losses appear in the audited accounts) and the losses amount to half or more of the LLC’s share capital then Article 290 could apply.
Having accurate audited accounts and regular interim (management) accounts prepared and considered will allow the auditors and the Manager(s) to monitor the capital of the LLC and to foresee when losses of half or more of the LLC’s share capital are likely to occur. In such incidences preventative action could be taken, such as further capitalisation, if necessary.
What does this mean in practice?
The application of Article 290 remains largely untested before the Qatari courts. Indeed, as discussed above it is not unusual for an LLC to have losses exceeding half or more of the LLC’s share capital and to still continue trading. In practice, the Article 290 issue will usually only crystallise in situations where:
a) the LLC’s third party creditors issue a debt recovery or bankruptcy claim against the company for failure to make payments; or
b) where a shareholder wishes to sell its shares and the third party buyer questions the valuation of the LLC.
Although the economy is showing signs of improvement, dissolution proceedings still continue. In order to avoid falling foul of Article 290 the preventative measures suggested in this article should be considered as a matter of standard practice by foreign investors in Qatar.
Note: all Qatari Laws (save for those issued by, eg. the QFC to regulate its own business) are issued in Arabic and there are no official translations; therefore for the purposes of drafting this article, Clyde & Co LLP has used its own translation and interpreted the same in the context of Qatari laws, regulation and current market practice.
♦ Should you have any questions in connection with this article or the legal issues it covers, please contact David Salt or Louise Verrinder of Clyde & Co LLP at [email protected] or [email protected]
