Overview of Entities in the DIFC

Overview of Entities in the DIFC

Table of Contents Page Topic Objectives... 3 Session 1: Legal structures in the DIFC... 4 Session 2: Legal structures & their use... Error! Bookmark not defined. Session 3: Understanding legal structures. Error! Bookmark not defined. 2

Topic Objectives Overview of Entities in the DIFC Topic Objectives: Key learning points. By the end of this topic you will have learnt to: identify the different legal structures used in the DIFC and their main characteristics; understand the concept of legal personality; identify the rights and powers which exist under each legal structure; be familiar with the role of the Registrar of Companies; and 3

Legal structures in the DIFC Types of DIFC Entities The following legal vehicles are used in the DIFC for a variety of commercial purposes: Companies: Companies Limited by Shares; Limited Liability Companies; Recognised Companies; Protected Cell Companies; Open Ended Investment Companies. General Partnerships; Limited Liability Partnerships; Limited Partnerships. Trusts: Trusts Investment Trusts Associations The Concept of Legal Personality Article 10 of DIFC Companies Law (the Law ) provides: Companies registered under this Law shall have a separate legal personality from that of their Shareholders or Members. The liabilities of a Company, whether arising in contract, tort or otherwise, are the Company s liabilities and not the personal liabilities of any Shareholder or Member, or officer of the Company, except as provided by law. What does having separate legal personality mean? It means that a Company is an artificial legal person as opposed to individuals, who are known as natural persons and who in the DIFC cannot be licensed to do business. The liabilities of a Company are not the personal liabilities of any shareholder or member or officer of the Company unless the Law says otherwise. Because a Company is a separate legal entity it may enforce rights by suing and being sued in its own name. A Company may be sued by its own shareholders or members. A Company may also own property in its own name distinct from the property of its shareholders. A Company continues to exist until it is deregistered by the Registrar of Companies. Its shareholders may come and go but this does not affect the continuing legal personality of the Company. 4

The Concept of Limited Liability Originally individuals used to do business in their personal capacity. If the business failed, the individual failed. Individuals were personally liable for the debts they incurred in doing business. The defining case in this area was the Salomon v. Salomon& Co case (1897). Mr Salomon was a prosperous leather merchant, who decided to convert his business into limited company. He incorporated Salomon & Co Limited, with himself, his wife and his five children as directors. The company purchased the business as a going concern for 39,000 which was made up 20,000 in share capital, 10,000 in debentures and the remainder in cash. The company ran into financial difficulties, and the debenture holders appointed a receiver. The receiver sold off all of the company's assets, which were sufficient to pay off the debenture holders, but nothing was left for the unsecured creditors. At first instance and in the Court of Appeal, the courts felt that the whole transaction was a sham contrary to the intention of the Companies Act, and that the company was an agent, trustee or nominee for Mr Salomon, and ordered him to indemnify the company's creditors against its trading debts. But the House of Lords unanimously reversed the decision. The House of Lords decided that: "The company is at law a different person altogether from the [shareholders]...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act." Business enterprises with limited liability are a feature of virtually all developed legal systems. What does limited liability in a company actually mean? It means that shareholders cannot loose more than the capital they have invested in the company and they are not personally responsible for the debts and obligations of the company in the event these are not fulfilled. The risk of business failure is transferred from shareholders to the creditors of the company. Limited liability is particularly necessary for efficient functioning of companies with large numbers of shareholders, especially public listed companies. If the Law did not provide limited liability for shareholders, they would be less likely to delegate management functions to the directors of the company. Often creditors such as banks and other financial institutions prefer to lend money to limited liability entities by requiring security for their advance. The security may take the form of a debenture granting the lender a fixed or floating charge over company assets. It may also consist of a mortgage over real estate or goods owned by the company. The Registrar of Companies Article 7 of the Law - the Board of Directors of the DIFCA must appoint a person to serve as Registrar. Article 8 of the Law - the powers and functions of the Registrar are contained include: drafting Regulations, standards and codes of practice, guidance; and 5

prescribing forms to be used for the purposes of the laws administered by the Registrar. Main role of the Registrar - to incorporate and register companies and partnerships wanting to operate in the DIFC in accordance with the Laws and Regulations. Public Register - the Registrar also maintains a public register which contains information prescribed by the Laws and it is open to public inspection during normal business hours. Other powers - the Registrar also has certain powers in relation to the companies and partnerships in the DIFC such as power of inspection, power of dissolution and power to give directions. The Registrar has delegated some enforcement powers to the DFSA. What is a Company? A Company is a body corporate with separate legal personality which has capacity, rights and privileges of a natural person. Generally the articles of association (also known as the constitution of a Company) set out rules governing the rights of shareholders or members, the conduct of shareholders and directors meetings, powers of directors or managers and their appointment and remuneration. The articles may contain an object clause that identifies and restricts the businesses and activities in which the Company may engage in. Many Companies choose to include object clauses in their articles as its shareholders do not want the Company to depart from its purpose. The Articles will also deal with issues relating to the share capital of the Company including initial capital, types of shares to be issued and variation of share capital. How to Form a Company Any one or more persons can apply for the incorporation of a Company by signing and filing with the Registrar an application for incorporation. A Company must also submit to the Registrar Articles of Association. A Company must have a principal place of business and registered office to which communications and notices can be sent to. Types of Companies Under the Law there are five types of Companies: 1. Companies Limited by Shares; 2. Limited Liability Companies; 3. Recognised Companies; 6

4. Protected Cell Companies; 5. Open Ended Investment Companies. 1.Company Limited by Shares A Company Limited by Shares is a body corporate incorporated by one or more shareholders. A Company Limited by Shares is made up of shareholders, a minimum number of two directors and a company secretary. The company secretary may not be a director of the Company. The liability of the Shareholders is limited to the payment of the subscription price of their shares. Creditors in this type of Company do not have access to the personal property of the Shareholders. Who Manages a Company Limited by Shares? Companies are managed by its directors who are appointed by the shareholders or members of a Company. The powers and duties of directors are prescribed by Law and by the articles of association. Under Article 53 of the Law a director must, when exercising his powers and duties, act honestly, in good faith and lawfully and in the best interest of the Company. The director does not act in the best interest of the shareholders as his duties are to the Company and the Company is a separate legal person from its shareholders. A director must also exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances. Directors must also act within their powers if not they would be acting ultra vires i.e. outside the scope of their power and they then would become personally liable. Shareholders Meetings A Company Limited by Shares must hold each year an Annual General Meeting by giving at least 21 days notice to all the Shareholders. During the year General Meetings can be called by the directors on request of a Shareholder. 21 days notice must be given. Resolutions by the Shareholders generally are passed by a simple majority with the exception of special resolutions which require at least 75% of the votes of the Shareholders. 2. Limited Liability Company A Limited Liability Company (LLC) is defined in Article 84 as a Company incorporated by one or more members whose obligation is limited to pay the amount of their 7

subscribed membership interest which cannot be represented by securities. An LLC differs from a Company limited by shares in the fact that it cannot conduct activities regulated by the DFSA, it may not raise capital by way a public offer and it may not issue securities. The interest of a Member in an LLC is recorded contractually. Such interest can only be transferred if authorised by a Special Resolution passed by the votes of the Members holding membership interest of more than 75%. LLCs are used primarily for commercial trading and they are the closest thing to a sole proprietorship with the exception that an LLC has separate legal entity even if the sole member is also the only manager of the LLC. Who Manages an LLC? An LLC is managed by one or more Managers which may also be Members of the LLC. The Members may remove a Manager at any time without the need of a special resolution. If the Members do not appoint any Managers, the Members are considered to be the Managers. The authority of a Manager may be overridden by a Resolution. Members Meetings LLCs have less stringent requirements than Companies Limited by Shares in relation to the conduct of meetings. Meetings are called by the Managers or by the Members whose membership interests represents more than one third of the Company s share capital. The Articles of Association have to prescribe the procedure for calling the meetings.resolutions to be passed require the votes of Members holding membership interest of more than 50% of the share capital of the LLC. Special resolutions require more the votes of Members holding more than 75% of the share capital of the LLC. How does an LLC Differ from a Company Limited by Shares? An LLC differs from a Company Limited by Shares in the fact that: it has much lighter corporate housekeeping requirements i.e. it does not have to hold AGMs, and does not have to approve certain things by way of resolution of the Board; it is not required to have a Board; 8

it has a very flexible management style (minimum one person who can also be the sole member); it may not conduct activities regulated by the DFSA; it may not raise capital by way a public offer and it may not issue securities; and there are no certificates issued in relation to the interest held by the members. These interests are record by contract only and they can only be transferred by Special Resolution. 3. Recognised Company A Recognised Company is a foreign company registered in accordance with Article 115 of the Law. These Companies are incorporated in other jurisdictions and operate in the DIFC by way of branches. In order to operate these companies have to be registered by the Registrar. 4& 5. Protected Cell & Open Ended Investment Companies They are special types of vehicles created by way of Rules as permitted under Article 114 of the Law and they are used solely for the purpose of carrying on certain financial services. The consent of the DFSA is required in order to incorporate such types of Companies. The Concept of a Partnership A partnership is an association of two or more legal persons (they may be companies) carrying on business in common with a view to a profit. It is essential that the purpose of the partnership is to make a profit, if not then such entity would not fall within the definition and it would be an unincorporated association. The relationship among partners is governed by the various DIFC Partnership Laws and a partnership agreement. Partnerships will vary depending on the type of partnership being created. Types of Partnership in the DIFC In the DIFC there are three types of partnerships: 1. a General Partnership (including a Recognised General Partnership) governed by General Partnership Law; 9

2. a Limited Liability Partnership(including a Recognised Limited Liability Partnership) governed by Limited Liability Partnership Law; and 3. a Limited Partnership((including a Recognised Limited Partnership) governed by the Limited Partnership Law. 1. General Partnership A General Partnership is a partnership established by two or more persons to carry on any lawful business, purpose or activity with a view to making a profit. Under Article 24 of the General Partnership Law, a General Partnership has separate legal personality and can sue and be sued in its own name. General Partnerships, to exist and be able to operate in the DIFC, need to be registered with the Registrar of Companies by submitting an application form and filing the partnership agreement signed by all parties. A General Partnership must have at all times a registered office in the DIFC and it must carry on its principal activity in the DIFC. Recognised Partnership Foreign general partnerships which are formed outside the DIFC are defined in the Law as Recognised Partnerships. To carry on business in the DIFC such Recognised Partnerships need to be registered by the Registrar. Recognised Partnerships have to appoint at least one person to accept service of documents or notice on behalf of the partnership. The Registrar may in its absolute discretion refuse the registration of a Recognised Partnership and he does not have to provide any reason for such refusal. Such refusal is not appealable. Liability of the General Partnership The defining feature of a General Partnership is that all general partners are personally liable for the debts and obligations of the General Partnership. There is no limitation of liability in a General Partnership. If a general partner dies, his estate will remain liable for such debts and obligations incurred by him during his tenure as a partner in the same way as he would have been liable were he still alive. The General Partnership is liable for any wrongful act, omission, loss or injury done by a general partner in the ordinary course of business of the General Partnership or with the authority of the partners. 10

The General Partners The affairs of a General Partnership are managed by the general partners who carry out the day to day activities of the General Partnership.General partners are subject to various duties under the Law. For example: a partner must account to the General Partnership and hold in a fiduciary capacity any property, profit or benefit derived by the partner during the management of the affairs of the General Partnership; a partner must not compete with the business or affairs of the General Partnership unless agreed by all the general partners. Each general partner is an agent of the General Partnership and his actions bind the General Partnership. Dissolution of a General Partnership A General Partnership may be dissolved either by: expiration; written notice by a partner to the other partners; by bankruptcy or death of a partner; illegality. 11

2. Limited Liability Partnership A Limited Liability Partnership ( LLP ) is created when two or more persons apply to the Registrar for the incorporation of the Limited Liability Partnership in accordance with Article 8 of the Limited Partnership Law (the Law ) by signing and submitting an application form together with the LLP agreement. Once the Registrar registers the LLP, from that date the LLP will be a body corporate with limited liability and separate legal personality. It must have at all times a registered office in the DIFC and it must carry on its principal activity in the DIFC. LLPs operate in a similar manner to Companies and the partners are called members. The members can leave the LLP or join the LLP without dissolving the partnership. The names of such members are added or deleted from the LLP agreement as the case may be. Recognised LLPs Recognised Limited Liability Partnerships are foreign limited liability partnerships formed in a jurisdiction other than the DIFC that are registered with the Registrar under Part 8 of the Law to carry on business in the DIFC. Recognised Limited Liability Partnerships have to appoint at least one person to accept service of documents or notice on behalf of the partnership and they must have a principal place of business in the DIFC to which all communications may be sent to. Members Duties & Liabilities The rights and duties of the members are governed, in addition to the Law, by the LLP agreement. Members have to act honestly, in good faith and in the best interest of the LLP. They must exercise the care, diligence and skill that a reasonably prudent person would exercise in similar circumstances. Every member is an agent of an LLP and binds the LLP with his actions as long as those actions are carried out under the appropriate authority. Defining feature:members liability is usually limited to the amount invested in the LLP unless the LLP agreement or the Law provides otherwise. 12

Limited Partnerships A Limited Partnership ( LP ) is a partnership of two or more person established in the DIFC for any lawful purpose. It has separate legal personality and can sue and be sued in its own name. A Limited Partnership may consist of any number of persons but must have at least one general partner who is liable for all the debts and obligations of the Limited Partnership; and at least one limited partner, who shall at the time of entering into such partnership make a contribution either in money, money s worth or any other property, and who shall not be liable for the debts and obligations of the partnership beyond the amount he has contributed. The LP agreement prescribes the terms, the rights and powers, and the conditions, limitations, restrictions and liabilities of the partners. Management of an LP A defining feature of a LP is that the general partners are responsible for the management of the partnership. A limited partner cannot take part in the management of the business of the LP and cannot transact business or sign documents on behalf of the Limited Partnership. He may however inspect the books of the LP or examine and inquire into the state of the partnership s business. Registration of an LP In order to carry on business in the DIFC, an LP must apply for registration by the Registrar by filing with the Registrar a declaration which contains the following information: (a) the name of the Limited Partnership which shall end with the words Limited Partnership or the abbreviation LP ; (b) the address of the Limited Partnership s registered office; (c) the nature of the business to be conducted. It shall be sufficient to state that the purpose of the Limited Partnership is to engage in any lawful act or activity; (d) the full name and address of each of the general partners; (e) a statement that the partnership is a Limited Partnership, and the full name and address of each limited partner; (f) the term, if any, for which the Limited Partnership is entered into, and the date of this commencement; (g) the amount and type of contribution by each limited partner; and (h) such other particulars as the Registrar may require. 13

On registration of a Limited Partnership the Registrar will issue a certificate of registration and allocate to the Limited Partnership a number, which shall be the Limited Partnership s registered number. A Limited Partnership is formed when the Registrar issues a certificate of registration under Article 12(3) of the Limited Partnership Law. A Limited Partnership that carries on business in the DIFC must have a registered office in the DIFC to which all communications and notices may be addressed. A Limited Partnership must carry on its principal business activity in the DIFC, unless the Registrar otherwise permits. General Partners &LPs A person may not be a general partner and a limited partner at the same time in the same Limited Partnership. A body corporate may be a general or limited partner. A general partner is an agent of a Limited Partnership for the purpose of conducting the business of the Limited Partnership and the acts of a general partner, performed in the usual course of business of the Limited Partnership, bind the Limited Partnership. Assignment of Interest by an LP Additional limited partners can be admitted to a Limited Partnership in accordance with the LP agreement. With the consent of the general partners or in accordance with the Limited Partnership Agreement, a limited partner mayassign his share of the interest, in whole or in part, in the Limited Partnership. The assignee only becomes limited partner in the Limited Partnership oncehis interest is entered into the register referred to in Article 15(4) of the Limited Partnership Law. Dissolution of an LP An LP can be dissolved by statement of dissolution signed by all the general partners and delivered to the Registrar. If there is only one general partner, his death, bankruptcy, retirement or withdrawal will cause the dissolution of the partnership unless a new general partner is appointed by the limited partners within 90 days of the event occurring. A limited partner is not entitled to dissolve the Limited Partnership by notice. Subject to any provision, express or implied, of the partnership agreement to the contrary, a Limited Partnership is not dissolved by the death, legal incapacity, bankruptcy, retirement or withdrawal from the Limited Partnership of a limited partner 14

who is an individual, or in the case of a body corporate, its dissolution, bankruptcy or withdrawal from the Limited Partnership. Differences between Companies & Partnerships (1) Companies have always separate legal personality. The manner in which Companies operate is contained in the Articles of Association. One person alone can set up a Company. Companies are managed by directors or managers, whom in many circumstances are not also shareholders or members. Differences between Companies & Partnerships (2) Partnerships are relationships between two or more people carrying on business with a view to making a profit. One person alone cannot form a Partnership. With the exception of a Limited Liability Partnership, Partnerships are not bodies corporate. The manner in which Partnerships operate is prescribed in the Partnership Agreement. Partnerships may have separate legal personality only if prescribed by law. In many jurisdictions Partnerships do not have separate legal personality. In the DIFC all Partnerships have separate legal personality. Partnerships are managed by their partners. What is a Trust? (1) A trust is not a legal entity.it is a concept created in common law and used for a variety of purposes such as charity, wealth management or estate planning and usually, but not always, driven by tax considerations. A trust is a relationship in which a person or entity (the trustee) has legal control over certain property (the trust property), but is bound by fiduciary duty to exercise that legal control for the benefit of someone else (the beneficiary), according to the terms of the trust deed and the law. Thus, in a trust the legal ownership that the trustee has is split from the equitable or beneficial title that the beneficiary has.a trust is set up by a person (the settlor) who transfers property to the trust. The trust deed is the document which details the rights and duties of the parties including but not limited to the settlor, the trustee and the beneficiaries. What is a Trust? (2) 15

Trusts can be categorised in two main types: charitable trusts and non-charitable or purpose trusts. Charitable trusts are created for the relief of poverty, the advancement of education or religion, the promotion of health or art, the protection of the environment or for any other purpose which is beneficial to the general public. Non charitable or purpose trusts may only be created if their purpose is lawful, possible to be carried out and not contrary to public policy in the DIFC. Trusts can continue indefinitely or terminate in accordance the Law or the terms of the trust. What is an Investment Trust? An Investment Trust is a special type of trust created solely for collective investment purposes. The Law which governs these trusts is the Investment Trust Law, DIFC Law No. 5 of 2006. What is an Association? An association is not a legal entity and it does not have separate legal personality unless it an incorporated association.it is a group of individuals who voluntarily enter into an agreement to form a body (or organization) to accomplish a purpose. The word association is not defined in DIFC legislation. Session 1: Revision & quiz What are the five (5) different types of companies in the DIFC? What are the key differences between a company limited by shares and a limited liability company (LLC)? What are the three (3) different types of partnerships in the DIFC? What are the key differences? What is a Recognised Company or Recognised General Partnership? 16

Handout: Standard articles of a company Exercise: Complete the standard articles with information as if you were to create a Company. In addition think what additional powers you would want the directors to have, how many directors you want to appoint and who will be the secretary of the Company. 17