Unauthorised Use of Company Funds by a Business Partner: What Legal Options Are Available?

Discovering that a business partner may have used company funds without proper authority can become more than an internal disagreement. Depending on the facts, the issue may involve repayment, manager liability, corporate remedies or, in more serious circumstances, potential criminal proceedings.

The legal position depends on the company structure, the person's role, the authority granted to them and what the money was used for. This article focuses primarily on limited liability companies governed by Federal Decree-Law No. 32 of 2021 on Commercial Companies, as amended. Different rules may apply to other company forms and to businesses governed by free-zone or financial free-zone regimes.

Company Money Is Separate From Personal Money

A shareholder or partner does not have an unrestricted right to use company funds simply because they own part of the business. A company has its own legal personality, and its money and property are separate from the personal assets of its shareholders or partners.

For an LLC, Article 82 provides that a partner can be liable to the company for company property held by that partner in a fiduciary capacity and for profits or benefits gained through the company's business, activities, property, name or business relationships. If the partner is also a manager, Article 84 may also apply. It makes an LLC manager liable for fraudulent acts and for losses or expenses incurred by the company as a result of improper exercise of powers, violation of applicable law, breach of the Memorandum of Association or appointment contract, or gross error.

Establish What Authority the Person Had

A business partner may also act as a manager, authorised signatory or holder of a power of attorney. The company should therefore review its Memorandum of Association, management arrangements, shareholder resolutions, bank mandates and other relevant authority documents before concluding that a payment was unauthorised.

The distinction between external authority and internal responsibility is important. Article 23 provides that a company is bound by acts carried out by a person authorised to manage it in the ordinary course of management. Article 25 also protects a person dealing with the company in good faith in the circumstances provided by law. A transaction may therefore bind the company externally even where the manager may still face internal liability for improperly exercising their powers. The position of the company, the manager and the recipient of the funds should be considered separately.

Look at Why the Money Was Paid

The purpose of the payment can materially affect the legal analysis. Approved remuneration, documented business expenses, supplier payments and properly authorised distributions should not be treated in the same way as a transfer made for an unrelated personal purpose. The fact that one shareholder disagrees with a payment does not, by itself, establish that company funds were misused.

The company should establish who instructed the payment, who approved it, where the funds went and how the transaction was recorded. Bank statements, payment instructions, accounting records, invoices, emails, messages, contracts and corporate approvals should be preserved. Where several transactions are involved, a clear schedule recording the date, amount, recipient, stated purpose and supporting approval can make the position easier to assess.

Consider the Company's Internal Procedures

Court proceedings are not necessarily the first step in every dispute. Depending on the circumstances, the company's internal governance procedures may provide a way to examine the transactions, obtain information and decide what action should be taken. For an LLC, Article 92 provides that one or more partners holding at least 10% of the company's capital may require the manager, or the person authorised by the managers, to call a General Assembly meeting.

Where the person accused of misuse is also the company manager, Article 85 may become relevant. Unless the Memorandum of Association or appointment contract provides otherwise, a manager may be dismissed by a resolution of the General Assembly. One or more partners may also ask the court to dismiss a manager where the court finds legitimate cause. The company documents, voting requirements and available evidence should be reviewed before a removal process is started.

Recovery May Be a Claim by the Company

If company funds have been improperly used, the company may consider seeking repayment and compensation for losses caused by the conduct. The precise basis of the claim will depend on the person's role and what occurred. A claim against a manager may involve improper use of management powers, while a claim involving a partner may rely on Article 82, contractual obligations or other available civil remedies.

It is also important to establish who actually suffered the loss. Where money belonging to the company has been misused, the company itself may have the primary claim rather than an individual shareholder. A shareholder may have separate rights where that person has suffered a distinct legal injury, but the company's claim and the shareholder's personal claim should not be treated as the same thing.

When Can Criminal Law Become Relevant?

Misuse of company funds can raise criminal issues, but an unauthorised or disputed payment does not automatically amount to a criminal offence. Article 453 of Federal Decree-Law No. 31 of 2021 on the Crimes and Penalties Law addresses breach of trust where a person embezzles, uses or dissipates funds, written instruments or other movable property in a manner that harms the person entitled to them, where the property was handed to that person by way of trust, lease, mortgage, loan for use or proxy.

Whether Article 453 applies depends on the facts and whether the legal elements of the offence are established. The basis on which the property was handed over, the authority given to the person, the way the funds were used and the resulting harm all require examination. A commercial disagreement should therefore not automatically be described as theft, embezzlement or breach of trust merely because one party disputes a transaction.

Protect the Company While the Issue Is Investigated

If the person concerned still has access to company bank accounts, payment systems, accounting records or other financial controls, those arrangements may need to be reviewed promptly. Any changes to management authority, signing powers or system access should be made in accordance with the company's constitutional documents, internal approvals and applicable law.

The company should also preserve relevant evidence before the dispute develops further. Establishing what happened, securing the financial records and identifying the correct claimant can make a significant difference when deciding whether the appropriate response is internal corporate action, a civil claim, a criminal complaint or a combination of available remedies.

AY Advocates advises UAE businesses and shareholders on company disputes, misuse of corporate funds, manager liability, shareholder rights and related court proceedings. If you are concerned about unauthorized transactions or the conduct of a business partner, speak with our corporate and dispute resolution lawyers to assess the evidence and available legal options.

FAQs

1. Can a shareholder or partner use company funds because they own part of the business?

No. A shareholder or partner does not have an unrestricted right to use company funds simply because they own part of the business. Any payment should have a proper basis and be made within the authority and approvals applicable to the company.

2. Does a disputed payment automatically become theft or embezzlement?

No. A disputed or unauthorised payment does not automatically constitute theft, embezzlement or breach of trust. Criminal liability depends on the facts and whether the legal elements of a particular offence are established.

3. Can the company recover money that was improperly used?

Yes. Depending on the circumstances, the company may seek repayment and compensation for losses resulting from the improper use of its funds. The legal basis will depend on the person's role, authority and conduct.

4. Can a manager be removed if they misused company funds?

Yes. In a UAE LLC, a manager may be removed through the applicable General Assembly process, subject to the company's Memorandum of Association and appointment terms. A court may also order removal where legitimate cause is established.

5. Can an individual shareholder bring the claim personally?

No. If the financial loss was suffered by the company, the company itself may have the primary claim. A shareholder may have a separate claim only where they have suffered a distinct legal injury.

6. What evidence should be preserved?

Bank statements, payment instructions, invoices, accounting records, contracts, emails, messages and corporate approvals should be preserved. A clear record of each transaction can help establish who authorised the payment, where the money went and its stated purpose.