Abu Dhabi Court of Cassation Endorse the Judgment Rendered by the Court of Appeal Obliging a Former Owner of a Private Commercial Establishment with the Debts and Liabilities in solidum with the New Owner thereof

Abu Dhabi Court of Cassation Endorse the Judgment Rendered by the Court of Appeal Obliging a Former Owner of a Private Commercial Establishment with the Debts and Liabilities in solidum with the New Owner thereof, Three Years After Having Passed the Establishment Title.

Grounds:

The Claimant, acted for by our Law Firm, "BIN NAKHIRA & PARTNERS", filed a case petitioning the court to oblige the Private Commercial Establishment and its current and former owners to pay the Claimant an amount of USD 2,260,133 (AED 8,294,688) for the goods it received in favor of the Establishment, on the grounds that the Private Commercial Establishment does not duly have a legal personality that is independent of the personality of its owner and is deemed one of the components of its owner's financial liability. The Federal Commercial Transactions Law has set forth certain procedures to be followed until the person to whom the Commercial Establishment title has passed is discharged from the debts prior to the disposal of the Commercial Establishment, which procedures were not followed by the Second and Third Defendants.

The Second Defendant, "the new Establishment owner", argued that the Establishment Sale Contract Agreement stipulated that he [the Second Defendant] was not deemed liable for any rights or obligations prior to the Title Transfer Date in October 2017. Therefore, the former owner is deemed liable for refunding the Claim Amount.

The Third Defendant, "the former Establishment owner", also argued that the new owner was not deemed liable for the Establishment's liabilities so long as its title was passed thereto, and it was registered in the official registry. He [the Third Defendant] also argued that the Establishment was invested by another party, which party was requested to be impleaded as a Fourth Defendant to be obliged with any judgment to be rendered thereagainst.

The Court of First Instance ruled to oblige the Establishment and its former and current owners to pay the Claim Amount. The Defendants challenged the judgment before the Court of Appeal, which decided to endorse the judgment rendered by the Court of First Instance.

The former owner challenged the judgment under Commercial Cassation Appeal No. 105/2021. The grounds for the challenge were:

• That the Private Commercial Establishment, when it was owned thereby, was invested by another party and that he was just a Sponsor, which taints the judgment rendered by the Court of Appeal for disregarding the plea to [the lack of] capacity.

• The Contested Judgment decided that he shall be deemed liable without presenting any grounds and rejected the request to appoint an expert.

• The Second Respondent is deemed liable for the amounts subject of the case, as he did not follow the procedures set forth in Article 47 of the Federal Commercial Transactions Law until he was discharged from the debts prior to the disposal of the commercial concern.

The current owner also challenged the judgment under Commercial Cassation Appeal No. 111/2021, whereas he stated in the grounds for challenge, that:

• He is not deemed liable for any liabilities or debts prior to the date of sale and recording in the Commercial Register, especially since the Establishment Sale Contract notarized by the notary public stipulates that he is not deemed liable for any rights or obligations prior to the Title Transfer Date in October 2017.

The Court of Cassation decided to join both appeals to have a single judgment rendered therefor.

The Respondent, "our Client", responded to the grounds for appeal submitted by the former owner under Commercial Cassation Appeal No. 105/2021 as follows:

• That investigating the litigants' capacity in the case and concluding whether such capacity is available or lacking falls solely within the authority of the trial court without any review from the Court of Cassation.

• It shall not make the Petitioner discharged, arguing that the Establishment is invested by the impleaded litigant, so long as he [the Petitioner] left him [the Impleaded Litigant] dealing with third parties bona fide in the name of the Establishment, and that the name of a specific person in the sole proprietorship's commercial license indicates that he [such specific person] is the owner thereof. Therefore, such specific person shall be deemed liable for the Establishment's liabilities, unless it is proven that the creditor knew that such Establishment was being invested by a third partyin favor of the Creditor, so he [the Creditor] shall be committed with such Establishment's liabilities. In such case, the Creditor shall be deemed liable for such liabilities. Assessing whether (or not) the third party is aware of the agreement concluded between the license holder and the investor falls within the authority of the trial court, as such an issue is deemed one of the issues considered at the trial court's sole discretion.

• The Legislator has imposed upon the person to whom the title to the commercial concern has passed, some procedures set forth in the aforementioned Article (47/1), to ensure the stability of commercial transactions, to protect former creditors from disposing of the sale in contracts related to the commercial concern, and to protect the one who disposes thereof at the same time. Such procedures have a specific effect on the extent of the Disposed Party’s liability to the debts prior to the transfer of title thereto. Should such Disposed Party fail to follow such procedures, he shall be deemed liable for paying the previous debts payable to creditors precedent to such disposal. However, the last clause of the same aforementioned  Article, i.e., (47/3) stipulated that “The disposing party shall remain liable for the debts, related to the commercial concern, which have arisen prior to the publication of the disposal unless he is discharged thereof by the creditors, meaning that the Legislator differentiates between the relationship of the Disposed Party with the creditors and his relationship with the Disposing Party, so the Legislator made the Disposed of Party, in the event of not having the prescribed procedures taken, liable for the debts related to the store prior to the transfer of title thereto. Nevertheless, such debts shall remain payable by the Seller to the Disposed Party, so he [the Disposed Party] may claim the Seller for such debts so long as the date of debt accrual is prior to the publication of the disposal, unless he is discharged thereof by the creditors.

The Respondent also responded to the grounds for appeal submitted by the former owner under Commercial Cassation Appeal No. 111/2021 as follows:

• That the Petitioner kept executing the contract concluded with the Respondent after the Commercial Establishment was passed thereto in October 2017, meaning that when the Petitioner purchased the Establishment, he was aware of the Establishment contracts and liabilities, and whereas it is established from the case papers that the Petitioner did not comply with the procedures set forth in Article 47 of the Federal Commercial Transactions Law of 1993, he shall be jointly liable with the Second Respondent for the debts payable prior to his title of the Establishment, and he shall principally be deemed liable for the debts payable during and after the period when the Commercial Establishment was owned thereby.

•Should the commercial concern title transfer to the Disposed Party, the latter shall, by force of law, subrogate the former owner in all rights and obligations arising from transactions prior to this disposal, whenever such transactions were related to the commercial concern. The latter shall be deemed liable for all transactions, and for the liabilities and debts arising therefrom, which the former owner entered into, the source of which liability is the law, unless otherwise agreed upon in the sale contract.

Judgment Rendered by the Court of Cassation

The grounds for the judgment stated that: The Legislator imposed upon the person to whom the title to the commercial concern has passed, some procedures set forth in Article (47/1) of the Commercial Transactions Law, to fix a date for the creditors to submit a statement of their debts in order to settle them, provided that such date is to be published in two daily papers issued in the State. The date fixed to the creditors may not be less than ninety (90) days, and the law has a specific effect on such procedures regarding the extent of the Disposed Party’s liability to the debts prior to the disposal, and conducting title transfer of the commercial concern to the Disposing Party shall not dispense with such procedures. Accordingly, whereas as it is established from the papers that the Petitioner in Commercial Cassation Appeal 111/2021 did not take the procedures of calling the creditors precedent to title-transferring disposal, nor did he notify the creditors that the sale contract includes an agreement that the seller bears all the debts prior to the title transfer of the Commercial Establishment before recording in the Commercial Register, as such previous debts are payable thereby.

Building on the foregoing, and whereas the Appealed Judgment ruled on its grounds that, “the documents submitted in the case did not comprise evidence that the procedures set forth in Articles 42-45 of the Commercial Transactions Law were followed, and this entails the liability of both the former and the new owner for the debts incurred by the Establishment. The conclusion inferred in the trial court judgment in both instances were reasonable and consistent with the proper application of the law. Therefore, what was stated in the grounds for both appeals was inapposite.

The court ruled to dismiss both appeals.

Conclusion:

• Following the procedures prescribed in Articles 42, 43, 44, 45 of the Commercial Transactions Law regarding the title transfer of the commercial concern, "the Private Commercial Establishment", is a mandatory issue imposed by law to protect creditor’s precedent to disposing of the sale in contracts related to the commercial concern and to protect the Disposed of Party in the same time, and should the Disposed of Party fail to follow such procedures, he shall be deemed liable for paying the previous debts payable by the commercial concern.

• The provisions set forth in the Establishment Sale Contract do not discharge the new titular of the title to the Establishment from any rights or obligations prior to the Title Transfer Date so long as he did not follow the procedures set forth in Article (47/1) of the Commercial Transactions Law.