6- Invalidity of Fixed Payment Agreements

1. Business Practices to Invest in a Limited Liability Company in the UAE

2. The Invalidity of Limited Liability Company (LLC)

3. The National Partner Controlling the Majority of the Voting Rights in LLC’s

4. Profit and Loss Distribution Ratio in LLCs

5. Distribution of the Company Assets (Fixed and Movable)

6. Invalidity of Fixed Payment Agreements

7. Invalidity of the LLC due to Non-Capital Payment

Introduction

The next  concern is how to proceed with a fixed payment schedule to the National Partner  when the law specifically prohibits the partners from making any fixed payment other than as per their actual shares, which must be a percentage of the shareholding and not a fixed amount. In the previous Article we have mentioned that the profit shares and liquidation dividend shall be 1% to 0.5% with limitations, therefore it is required to elaborate the process as how to ensure a fixed payment to compensate the National Partner for being an actual partner with less power and limited profit ratio.

First: The fixed Payment of profit with regards to the Regulations under Law.

The Federal Civil Transactions Law has made it impossible to pay a fixed profit ratio instead of a profit percentage to the National Partner. The article 660 of the Federal Civil Transactions Law has put a restriction on the relationships where a partner shares a fixed profit amount regardless of the shareholding ratio and declared it as invalid and has further stated that the distribution of profit should be according to the shareholding percentage of the partners and the agreed term will be invalid.

Article 660 of Civil Transaction Law

“If the partners agree that the share of any of them in the profits should be a fixed sum of money, that condition shall be void, and the profits shall be distributed in accordance with the share of each of them in the capital.”

Second: The Limitation Under the Laws

The Partners cannot prevent a partner from profit neither can they set a fixed amount as a profit. However, the law did prevent the company from paying any partner any fixed amount of money for providing specific services as long as all partners approve it and agree to the terms of payment.

Third: The Risks with common practice of setting a fixed payment term under the Nominee Shareholder Agreement

The general practice of executing Nominee Shareholder Agreements  or Trustee Agreements wherein the terms set a fixed payment to be made to the National Partner as consideration, will result in liquidation of the LLC, in light of the prevailing laws as elaborated above and in previous articles. Even if we deduce that the National Partner agreed on a fixed profit amount to avoid the illegal/unlawful solution than also it will be invalid.

Fourth: The Solution

The solution is that the LLC should sign a contract with the National Partner as an “Independent Contract” limited to the fact that the National Partner is the partner to proceed with specific duties of representation in front of local authorities for a fixed amount to be paid annually to him and this contract shall be valid as long as the National Partner is the partner of the company and upon his sales of shares the Independent Contract shall deem terminated as well as we will set the terms stating that profit ratio of 1% or 0.5% will be considered as a part of the consideration of this Independent Contract and to agree that when the profit ratio will exceed the consideration payable to the National Partner the other partners shall not pay the National Partner any consideration.

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Lawyer & Legal Consultant
Mr. Mohamed Nouredin

1. Business Practices to Invest in a Limited Liability Company in the UAE

2. The Invalidity of Limited Liability Company (LLC)

3. The National Partner Controlling the Majority of the Voting Rights in LLC’s

4. Profit and Loss Distribution Ratio in LLCs

5. Distribution of the Company Assets (Fixed and Movable)

6. Invalidity of Fixed Payment Agreements

7. Invalidity of the LLC due to Non-Capital Payment