Business

Lifting the corporate veil – The case of Dubai World

With Dubai World struggling with massive debt repayments, particularly for its Nakheel PJSC subsidiary, its debt holders are conflicted over how to enforce payment obligations. Under Nakheel’s sukuk (sharia-compliant bond), if Nakheel defaults on its debt, lenders would simply foreclose on the sukuk’s collateralized assets. Considering that Dubai had no proven foreclosure law prior to the sukuk 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 burdened with massive claims by contractors, consultants and vendors. .

Although it is a practical (and na├»ve) impossibility to assert personal claims for Nakheel’s debt against Dubai’s sovereign, the oft-cited but seldom-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 donated by Sheikh Mohammad to start Nakheel’s ambitious agenda. Nakheel leveraged this land, along with accounts receivable from the sale of land 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 faced by creditors) 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 bearing the construction costs of the villas, Nakheel was mandated to buy back 150 villas at 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 the companies of his son, such as United Holdings and Zabeel Investments. It did not benefit Nakheel in any way and hurt Nakheel’s financial situation. Additionally, many of the development parcels on Palm Jumeirah Crescent were also gifted to entities owned by the Sheikh’s sons, or those with privileged status. Since the sales value of each parcel was AED 100,000,000, the total parcels given away exceeded USD 100,000,000.

If the same transaction were concluded and Her Highness and her children were removed from the equation, would not at least one creditor attempt to pierce the corporate veil and seek redress against the shareholder for the underlying transfer values? Such an action, if successful, would bring the shareholder’s other assets into the equation. In this case, the Dubai crown jewels. Under UAE commercial law, can management or shareholders acting in the management role 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 legal analysis.

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