Recent court judgments: A Parent Company's Liability for satisfaction of the debts and obligations of the branch
Dispute Resolution / UAE
Omar SaifanSenior Associate,Dispute Resolution
Dina AssarProfessional Support Lawyer,Dispute Resolution
The Dubai Court of Cassation recently issued a judgment in Cassation No. 18 of 2024 (Labour), dated 14 May 2024 in relation to the enforcement and attachment of a parent company's assets in satisfaction of debts and obligations of a branch of the same company. In this case, the Court of Cassation reversed the lower court's judgment where the court refused to add the parent company of a debtor branch as a party in the enforcement action. The Court of Cassation held that the parent company and the branch share one financial account and constitute a single legal entity, and therefore the parent company's assets may be attached to satisfy the branch's debts.
The Court of Cassation held that the parent company's assets may be attached in satisfaction of the debts and obligations of the execution respondent, as the latter was a branch of the former and the branch was an agent or representative of the parent company.
In this case, the court clarified the legal relationship between a parent company and its branch in the context of enforcement proceedings and its liability for debts.
In a labour dispute between an employee (the Appellant) and the execution respondent, a Dubai branch of a foreign company (First Respondent), the Appellant obtained a judgment in his favour, which ordered the First Respondent to pay the Appellant AED 647,195. During the enforcement proceedings, the Appellant's counsel filed an application to join the parent company (Second Respondent) to the execution proceedings as a party in addition to the First Respondent and to proceed with enforcement and attachment against its assets in Dubai.
On October 23, the Execution Judge dismissed the application. In its reasoning, the Execution Judge [incorrectly] held that the First Respondent and the Second Respondent were each a limited liability company (LLC) with separate and independent financial obligations. The Court of Appeal upheld the Execution Judge's decision, and concluded that the First Respondent's status as a branch of the parent company did not affect their legal and financial independence.
The Appellant appealed the decision issued in the Execution-Labor Court. In January 2024, the Court of Appeal dismissed the appeal on its merits and upheld the Execution Judge’s decision.
The Appellant appealed to the Court of Cassation, arguing that the lower courts erred in law because their interpretation of the Companies Law was incorrect and that the First Respondent and the Second Respondent were not independent legal and financial entities, but rather shared one financial account and one legal entity. The Appellant relied on the trade license of the Execution Respondent/First Respondent, which showed that it was a local branch, wholly owned by the parent company and set up with the object of carrying on the parent company's business in Dubai.
The Court of Cassation accepted the appeal and reversed the lower courts' decisions. The Court of Cassation held that when a company goes into liquidation for any reason, the branch must immediately notify the competent authority and initiate the process of its liquidation and closure, and that the competent authority may also initiate this process if it comes to its attention that the branch's parent company has gone into liquidation.
The Court of Cassation concluded that this meant that the parent company and the branch shared one financial account and that the principal establishment and the branch constituted a single legal entity. This means that although a corporate branch is, prima facie, independent of its parent company, it shares one financial account so that the principal establishment and the branch constitute a single legal entity.
This view is also consistent with the Abu Dhabi Court of Cassation in its Judgment numbered No. 174 of 2022 (Commercial), which held that a company’s branches, however many there may be, are subsidiaries of the parent company. It is a well-established rule that the ancillary follows the principal, meaning that a corporate branch is dependent on its parent company, in view of the rule that the parent company owns all of its branches, in terms of all of their tangible and intangible assets.
Furthermore, the Court of Cassation held that the Court of Appeal erred in law and its decision reversed. As a result, the Execution Judge’s decision was set aside and, the Second Respondent was added as a party in the execution proceedings.
The Court of Cassation recognised that a parent company and its branch share one financial account, reinforcing the idea that they operate as a single financial entity. This principle ensures that a parent company cannot shield its assets from being used to satisfy the debts of its branch, thus providing greater protection for creditors.
The Commercial Companies Law no. 32 of 2021(“Companies Law”) provides that any foreign entity can establish a presence in the United Arab Emirates by establishing a branch thereof after it obtains all the required requirements set out under Article 336 of the Companies Law.
In view of Articles 336, 337 of the Companies Law and Article 10 of the Civil Procedures Law, a parent company and its branch in the UAE are considered a single entity; the branch is not separate from the parent company. This is evidenced by the following points:
1. The branch serves as the chosen domicile for the foreign company for its activities in the UAE and for judicial notifications.
2. According to Article 337 of the Companies Law, the branch must maintain independent financial records, an auditor registered in the working auditors’ register, and a separate account for profits and losses.
3. In the event of the parent company’s bankruptcy or liquidation, the branch must notify the relevant authorities in the UAE about these proceedings.
In Abu Dhabi Court of Cassation Judgment No. 434 of 2021 (Commercial), in its ruling the court considered that the branch is an extension and not independent of the parent company, and therefore, the branch is considered a domicile for serving notices to the parent company. It also stated that the branch must have an independent financial budget and a registered auditor listed in the official registry and views the branch as an independent domicile for notifying the parent company, which did not fully address the essential relationship between the branch and the parent company regarding management and control.
In Abu Dhabi Court of Cassation judgment No. 67 of 2018 (Commercial), the court left the matter of proving the relationship between the parent company and the branch to the litigants, with the court having the right to study this relationship based on the documents submitted to the court. In this judgment, the court held that a company is considered a subsidiary or a branch if the parent company has actual control, enabling it to manage the branch/company or plan its general strategies, whether through the general assembly or its shares. The approach it took is as follows:
1. There should be a branch of a foreign company established in the UAE and it satisfies the legally stipulated conditions.
2. The branch should be under the actual administrative and financial control of the parent company. The parent company influences the branch’s board of directors and intervenes in its financial decisions.
The approach of Abu Dhabi Court of Cassation in case No.434 of 2021(Commercial) was adopted in many subsequent cases. For instance, in judgment 174 of 2022 (Commercial), the Court concluded that all branches managed by the parent company are deemed one single entity under the management of the parent company.
Furthermore, Articles 53, 54 and 436 of the Civil Transactions Law govern the relationship between a parent company and a branch, and confirms that a branch’s existence is fundamentally linked to the parent company’s continuity. Articles 53 and 54 provide the basis for holding a parent company liable for any debt.
The Dubai Court of Cassation’s decision in Cassation No. 18 of 2024 marks a significant development in UAE case law concerning the relationship between parent companies and their branches. As mentioned above, the judgment refers to two important elements- continuity and management control. This judgment establishes that a parent company and its branch, despite being distinct legal entities on paper, can be treated as a single financial and legal entity in enforcement proceedings. The Court of Cassation recognised that a parent company and its branch share one financial account, reinforcing the idea that they operate as a single financial entity. This principle ensures that a parent company cannot shield its assets from being used to satisfy the debts of its branch, thus providing greater protection for creditors.
For further information,please contact Omar Saifan and Dina Assar.
Published in June - July 2024
