As Dubai World is struggling with massive debt repayments, particularly for its subsidiary Nakheel PJSC, its debt holders are conflicted on how to enforce the payment obligations. Under Nakheel’s sukuk (sharia compliant bond), if Nakheel defaults on its debt, the lenders would be limited to foreclosing on the sukuk’s secured assets. Taking into consideration that Dubai did not have a tested foreclosure law prior to the sukuk’s repayment date, December 14th 2009, it would be a monumental task to complete a foreclosure, particularly against a company controlled by the Ruler of Dubai. Further, given the value of the underlying assets, which are far less than half of the value when the sukuk was issued, the banks would best be served not to take land that is currently undeveloped and burdened with massive claims by contractors, consultants and vendors.

Although it is a practical impossibility (and naïve) to assert against the sovereign of Dubai personal claims for Nakheel’s debt, the often quoted but rarely enforced legal principle of “piercing the corporate veil” deserves scrutiny. Nakheel is a private joint stock corporation under Dubai law. Its original share capital was paid in by Dubai World and the developable land was gifted by Sheikh Mohammad in order to commence Nakheel’s ambitious agenda. Nakheel leveraged this land, along with receivables from the sale of development plots and real estate, into a massive real estate conglomerate. To raise capital, Nakheel went into the international financial markets and borrowed more than $5 billion US.

Sheikh Mohammed however did not operate Nakheel as a separate legal entity through which he could only exercise shareholder control from the point of owning Dubai World’s parent corporation (a corporation created by decree of the Ruler). Instead, His Highness often made management decisions as the ultimate shareholder (part of the “transparency” problem creditors face) without corporate resolutions and without the best interests of Nakheel in mind. As an example, during 2007, when Jumeirah Park was launched, a primarily villa project with approximately 2,000 villas for sale, Sheikh Mohammed mandated that the head of Nakheel’s sales and marketing transfer 300 villas to his five sons, 60 villas each. In addition to carrying the costs of constructing the villas, Nakheel was mandated to buy back 150 villas at full launch price. Taking into consideration the value of the villas at the time of the transfer, the costs to construct and the loss revenues, the transactional value was approximately $300,000,000. This transaction funded his son’s companies, such as United Holdings and Zabeel Investments. It in no way benefited Nakheel and damaged Nakheel’s financial standing. Further, many of the development plots on the Palm Jumeirah Crescent were also gifted to entities owned by the Sheikh’s sons, or to those with favored status. As each of the plots sale value was 100,000,000 AED, the total gifted plots were in excess of $100,000,000.

If the same transaction was concluded and we removed His Highness and his sons from the equation, then would a creditor at least not attempt to pierce the corporate veil and seek redress against the shareholder for the values of the underlying transfers? Such action, if successful, would then bring into the equation the shareholder’s other assets. In this case, the crown jewels of Dubai. Under the commercial law of the United Arab Emirates, can management or shareholders acting in the role of management be held personally liable for debts of a corporation? In certain situations, the answer is yes. However, this situation concerns the sovereign and changes the nature of the legal analysis.