Expulsion of a Partner in LLCs: Legal Deficiencies and Practical Difficulties in the UAE
authors: Alia Al Mulla and Ahmed Abdel Ghani
The expulsion of a partner from a Limited Liability Company (LLC) presents a significant challenge for companies and their legal counsel in the UAE. This matter strikes at the intersection of partners’ rights, the smooth operation of the company, and the broader implications for corporate governance. The UAE’s Commercial Companies Law fails to address this critical issue, resulting in businesses operating in a legal grey area and facing considerable operational risks.
The Legal Void in UAE Commercial Law
The UAE’s Federal Commercial Companies Law does not explicitly address the mechanism for expelling a partner from an LLC, leaving a critical gap in corporate governance. This exclusion compels companies and legal professionals to resort to the UAE Civil Transactions Law for direction, as it forms the foundation of contractual relationships, including partnerships.
The Civil Transactions Law offers a general rule: a majority of partners can petition the court for the expulsion of the disruptive partner from the company. While this provision seems to offer assistance, a critical question remains—can a general provision from civil law apply to commercial companies, where no specific commercial law exists? This is where judicial interpretations become critical.
Diverging Judicial Approaches: Federal Supreme Court vs. Dubai and Abu Dhabi Courts
The Federal Supreme Court of the UAE has adopted a progressive position by applying the Civil Transactions Law to LLCs, thereby permitting the expulsion of disruptive partners. This was established in a landmark ruling (Appeal No. 108 of 2024), wherein the court emphasized the principle that, in the absence of explicit provisions in the Commercial Companies Law, one must refer to the general law. This approach ensures that companies are not constrained by rogue partners and that their operations can continue without unwarranted disruptions.
On the other hand, the Courts of Cassation in Dubai and Abu Dhabi have taken a more conservative approach, declining to apply the Civil Transactions Law to LLCs. The courts in their rulings (Dubai: Appeal No. 68 of 2023 and Abu Dhabi: Appeal No. 375 of 2024) contended that the relationship among partners in an LLC is not personal but regulated by the company’s legal framework. They assert that the Civil Transactions Law, which applies to civil companies, cannot be extended to commercial entities like LLCs. This strict interpretation has raised concerns about the practical implications for companies facing internal disputes.
The Practical Implications: When Legal Uncertainty Threatens Businesses
The lack of a clear, unified approach to partner expulsion in LLCs can have severe practical consequences. Should a partner obstruct key decisions or create internal conflicts, the company may find itself in a legal and operational complication. In the absence of a clear legal mechanism to remove disruptive partners, businesses could face delayed decisions on financial, administrative, or strategic matters, leading to potential financial loss or even corporate insolvency.
This legal uncertainty forces companies to balance the interests of individual partners with the broader interests of the company. While a partner’s rights to remain involved in the company must be respected, the company’s need for stability and continuous operation is paramount. The Federal Supreme Court’s methodology, which prioritises a reversion to overarching legal principles when specific provisions are lacking, offers a more adaptable and pragmatic solution, enabling companies to manage disputes without becoming paralysed.
Personally, I am inclined to support the position adopted by the Federal Supreme Court. The Civil Transactions Law clearly applies to companies in general without distinguishing between civil and commercial ones. This is evident in Article 654 of the Civil Transactions Law, which defines a company as “a contract under which two or more persons undertake to contribute to a financial enterprise by providing a share of capital or labour to invest in the enterprise and share in any profit or loss arising from it.”
This definition serves as a foundation for defining companies, regardless of whether they are civil or commercial. It shows that the legislature did not restrict the application of these provisions to a specific type of company. Furthermore, the Commercial Companies Law itself, in article 8(1) provides a similar definition, describing a company as “a contract under which two or more persons agree to participate in an economic project aimed at generating profit, by contributing a share of money or labour and sharing in the profit or loss arising from the project.” The second paragraph of the same article clarifies that the economic project includes “any commercial, financial, industrial, agricultural, or real estate activity.”
This definition clearly indicates that the legislature does not distinguish between types of companies in these provisions. This implies that the general rules on companies in the Civil Transactions Law apply to all types of companies, including commercial ones.
Conclusion: The Path Forward
The Federal Supreme Court’s decision to apply the Civil Transactions Law to LLCs presents a sound and practical solution to the issue of partner expulsion. This approach of recognizing that the law’s general provisions are broad enough to encompass all types of companies aligns with the realities of modern business. Furthermore, providing a legal mechanism to remove disruptive partners can ensure that companies continue to thrive without unwarranted internal conflict.
For the UAE to maintain its reputation as a leading global business hub, a unified legal framework that foster corporate stability is essential. Clear and consistent rulings on the expulsion of partners in LLCs would be a critical step toward achieving this goal, ensuring that companies can operate without being derailed by internal disputes.
As the UAE continues to grow as a hub for international investment, legal certainty in company law will remain a key factor in fostering a stable and attractive business environment. A clear, well-defined path for resolving partner disputes, including the expulsion of disruptive partners, will not only protect businesses but also promote confidence among investors, thereby contributing to the UAE’s ongoing economic success.