Overview of Entities in the DIFC

April 2013
Roberta Calarese
1
Topic Objectives

At the end of this topic you will have learnt to:

Session 1
• identify the different legal structures used in the DIFC and their main
characteristics
• understand the concept of legal personality
• identify the rights and powers which exist under each legal structure
• be familiar with the role of the Registrar of Companies
Sessions 2 and 3
• identify how some of the legal structures are used for the purposes
of financial services business

2
Session 1: Legal Structures in the
DIFC
Types of DIFC Entities

• Individuals
• Companies
- Companies Limited by Shares
- Limited Liability Companies
- Recognised Companies
- Protected Cell Companies
- Open Ended Investment Companies

• Partnerships
- Limited Liability Partnerships
- Limited Partnerships
- General Partnerships

• Trusts
- Trusts
- Investment Trusts

• Associations

4
The Concept of Legal Personality

• Article 10 of DIFC Companies Law (the “Law”) provides:

“Companies registered under this Law shall have a separate legal

personality from that of their Shareholders or Members. The
liabilities of a Company, whether arising in contract, tort or
otherwise, are the Company’s liabilities and not the personal
liabilities of any Shareholder or Member, or officer of the Company,
except as provided by law.”

• What does having separate legal personality mean? It means that a

Company has the capacity, rights and privileges of a natural person.

• Because a Company is a separate legal entity it may enforce rights

by suing and being sued in its own name.

5
The Concept of Limited Liability

• Liability of Shareholders limited to their investment in the company

• Not responsible for the debts of the Company

• This allows Shareholders to delegate management to the directors

of the Company

• Salomon & Co case

6
The Registrar of Companies

• Article 7 of the Law - the Board of Directors of the DIFCA must appoint a
person to serve as Registrar.

• Article 8 of the Law - the powers and functions of the Registrar include:
- drafting Regulations, standards and codes of practice, guidance; and
- prescribing forms to be used for the purposes of the laws administered by the
Registrar.

• Main role of the Registrar - to incorporate and register companies and

partnerships wanting to operate in the DIFC in accordance with the Laws and
Regulations.

• Public register - the Registrar also maintains a public register which contains
information prescribed by the Laws and it is open to public inspection during
normal business hours.

• Other powers - the Registrar also has certain powers in relation to the
companies and partnerships in the DIFC such as power of inspection, power of
dissolution and power to give directions. The Registrar has delegated some
enforcement powers to the DFSA.
7
What is a Company?

• A body corporate with separate legal personality with all the rights
of a natural person. Different types of companies will have different
characteristics.

• Articles of Association (also known as the “constitution” of a

Company) set out rules governing the rights of Shareholders or
Members, the conduct of Shareholders or Members and Directors
meetings, powers of directors and their appointment and
remuneration. The articles may contain an object clause that
identifies and restricts the businesses and activities in which the
Company may engage in.

• The articles will also deal with issues relating to the share capital of
the Company including initial capital, types of shares to be issued,
variation of share capital.

8
How to form a Company?

• Application for incorporation - any one or more persons can

apply for the incorporation of a Company by signing and filing with
the Registrar an application for incorporation.

• Articles of association - must also be submitted to the Registrar.

• Principle place of business & registered office – registered office

is where communications and notices can be sent to.

9
Types of Companies

• Under the Law there are five types of Companies:

1. A Company Limited by Shares

2. A Limited Liability Company (LLC)

3. A Recognised Company

4. A Protected Cell Company (PCC)

5. An Open Ended Investment Company (OEIC)

10
1. Company Limited by Shares

• A body corporate incorporated by one or more Shareholders.

• Must be composed of:

- At least one Shareholder
- At least two Directors
- One company secretary who cannot also be a Director
- The liability of the Shareholders is limited to the payment of the
subscription price of their shares.
Creditors in this type of Company do not have access to the
personal property of the Shareholders.

11
Who Manages a Company Limited by Shares?

• Managed by its Directors appointed by the Shareholders.

• Powers and duties of Directors are prescribed by Law and by the Articles of
Association.

• Article 53 of the Law - a Director must, when exercising his powers and
duties:

- act honestly, in good faith and lawfully and in the best interest of the
Company; and

- exercise the care, diligence and skill that a reasonably prudent person
would exercise in similar circumstances.

• Directors must also act within their powers if not they would be acting ultra
vires i.e. outside the scope of their power and they would then become
personally liable to the debtors of the Company.

12
Shareholders’ Meetings

• Annual General Meeting - a Company Limited by Shares must hold each

year an Annual General Meeting by giving at least 21 days notice to all the
Shareholders.

• General Meeting - during the year General Meetings can be called by the
directors on request of a Shareholder. 21 days notice must be given.

• Resolutions – by the Shareholders generally are passed by a simple

majority with the exception of special resolutions which require at least 75%
of the votes of the Shareholders.

13
2. Limited Liability Company

• A Limited Liability Company (LLC) is a body corporate incorporated

by one or more Members whose obligation is limited to pay the
amount of their subscribed membership interest which cannot be
represented by securities.
• The interest of a Member in an LLC is recorded contractually. Such
interest can only be transferred if authorised by a Special Resolution
passed by the votes of the Members holding membership interest of
more than 75%.
• LLCs are used primarily for commercial trading and they are the
closest thing to a sole proprietorship with the exception that an LLC
has separate legal entity even if the sole member is also the only
manager of the LLC.

14
Who Manages an LLC?

• An LLC is managed by one or more Managers which may also be

Members of the LLC.
• The Members may remove a Manager at any time without the need
of a special resolution.
• If the Members do not appoint any Managers, the Members are
considered to be the Managers.
• The authority of a Manager may be overridden by a Resolution.

15
Members’ Meetings

• Meetings are called by:

- the Managers; or
- by the Members whose membership interests
represents more than one third of the Company’s
share capital.
• The Articles of Association have to prescribe the
procedure for calling the meetings.
• Resolutions to be passed require the votes of Members
holding membership interest of more than 50% of the
share capital of the LLC.

16
How does an LLC Differ from a Company Limited by Shares?

• An LLC has much lighter corporate housekeeping requirements i.e.

it does not have to hold AGMs, and does not have to approve
certain things by way of resolution of the Board;
• It is not required to have a Board;
• It has a very flexible management style (minimum one person who
can also be the sole member);
• It may not conduct activities regulated by the DFSA;
• It may not raise capital by way a public offer and it may not issue
securities; and
• There are no certificates issued in relation to the interest held by the
members. These interests are record by contract only and they can
only be transferred by Special Resolution.

17
3. Recognised Company

• A Recognised Company is a foreign company registered in

accordance with Article 115 of the Law.

• These bodies corporate are incorporated in other jurisdictions and

operate in the DIFC by way of branches.

• In order to operate these companies have to be registered by the

Registrar.

18
4 & 5. Protected Cell & Open Ended Investment Companies

• Article 114 of the Law - special types of vehicles created by way of

Rules as permitted under the Law and used solely for the purpose of
carrying on certain financial services.

• The consent of the DFSA is required in order to incorporate such

types of Companies.

19
The Concept of a Partnership

• A partnership is an relationship of two or more legal persons (they

may be companies) carrying on business in common with a view to
a profit.

• It is essential that the purpose of the partnership is to make a profit,

if not then such entity would not fall within the definition and it would
be an unincorporated association.

• The relationship among partners is governed by the various DIFC

Partnership Laws and a partnership agreement.

• Partnerships will vary depending on the type of partnership being

created.

20
Types of Partnerships in the DIFC

In the DIFC there are three types of partnerships:

1. General Partnership governed by General Partnership Law;

2. Limited Liability Partnership governed by Limited Liability
Partnership Law; and
3. Limited Partnership governed by the Limited Partnership Law.

All three also have a Recognised variation.

21
1. General Partnership

• A General Partnership is a partnership established by two or more

persons to carry on any lawful business, purpose or activity with a
view to making a profit.

• A General Partnership has separate legal personality and can sue

and be sued in its own name.

• General Partnerships, to exist and be able to operate in the DIFC,

need to be registered with the Registrar of Companies by submitting
an application form and filing the partnership agreement signed by
all parties.

• A General Partnership must have at all times a registered office in

the DIFC and it must carry on its principal activity in the DIFC.

22
Recognised Partnership

• Foreign general partnerships which are formed outside the DIFC are
defined in the Law as Recognised Partnerships.
• To carry on business in the DIFC such Recognised Partnerships
need to be registered by the Registrar.
• Recognised Partnerships have to appoint at least one person to
accept service of documents or notice on behalf of the partnership.
• The Registrar may in its absolute discretion refuse the registration of
a Recognised Partnership and he does not have to provide any
reason for such refusal.
• Such refusal is not appeallable.

23
Liability of the General Partnership

• Defining feature: All general partners are personally liable for the
debts and obligations of the General Partnership. There is no
limitation of liability in a General Partnership.

• If a general partner dies, his estate will remain liable for such debts
and obligations incurred by him during his tenure as a partner in the
same way as he would have been liable had he lived.

• The General Partnership is liable for any wrongful act, omission,

loss or injury done by a general partner in the ordinary course of
business of the General Partnership or with the authority of the
partners.

24
The General Partners

• The affairs of a General Partnership are managed by the general

partners who carry out the day to day activities of the General
Partnership.
• General partners are subject to various duties under the Law. For
example:
- a partner must account to the General Partnership and hold in a
fiduciary capacity any property, profit or benefit derived by the
partner during the management of the affairs of the General
Partnership;
- a partner must not compete with the business or affairs of the
General Partnership unless agreed by all the general partners.

• Each general partner is an agent of the General Partnership and his

actions bind the General Partnership.

25
Dissolution of a General Partnership

A General Partnership may be dissolved either

by:
• expiration;
• written notice by a partner to the other partners;
• by bankruptcy or death of a partner;
• illegality.

26
2. Limited Liability Partnership

• A Limited Liability Partnership (“LLP”) is created when two or more

persons apply to the Registrar for the incorporation of the LLP by
signing and submitting an application form together with the LLP
agreement.
• Once the Registrar registers the LLP, from that date the LLP will be
a body corporate with limited liability and separate legal personality.
• It must have at all times a registered office in the DIFC and it must
carry on its principal activity in the DIFC.
• LLPs operate in a similar manner to Companies and the partners
are called members.
• The members can leave the LLP or join the LLP without dissolving
the partnership. The names of such members are added or deleted
from the LLP agreement as the case may be.
27
Recognised LLPs

• Recognised Limited Liability Partnerships are foreign limited liability

partnerships formed in a jurisdiction other than the DIFC that are
registered with the Registrar to carry on business in the DIFC.

• Recognised Limited Liability Partnerships have to appoint at least

one person to accept service of documents or notice on behalf of
the partnership and they must have a principal place of business in
the DIFC to which all communications may be sent to.

28
Members’ Duties & Liabilities

• The rights and duties of the members are governed, in addition to

law, by the LLP agreement.
• Members have to act honestly, in good faith and in the best interest
of the LLP.
• They must exercise the care, diligence and skill that a reasonably
prudent person would exercise in similar circumstances.
• Every member is an agent of an LLP and binds the LLP with his
actions as long as those actions are carried out under the
appropriate authority.
• Defining feature: Members liability is usually limited to the amount
invested in the LLP unless the LLP agreement or the Law provides
otherwise.

29
3. Limited Partnerships

• A Limited Partnership (“LP”) is a partnership of two or more person

established in the DIFC for any lawful purpose.
• It has separate legal personality and can sue and be sued in its own
name.
• A Limited Partnership may consist of any number of persons but
must have:
- at lease one general partner who is liable for all the debts and
obligations of the Limited Partnership; and
- at least one limited partner, who shall at the time of entering into such
partnership make a contribution either in money, money’s worth or any
other property, and who shall not be liable for the debts and obligations
of the partnership beyond the amount he has contributed.

• The LP agreement prescribes the terms, the rights and powers, and
the conditions, limitations, restrictions and liabilities of the partners.
30
Management of an LP

Defining features:
• The general partners are responsible for the management of the
partnership.
• A limited partner cannot take part in the management of the
business of the LP and cannot transact business or sign documents
on behalf of the Limited Partnership.
• A limited partner may however inspect the books of the LP or
examine and inquire in the state of the partnership’s business

31
Registration of an LP

• In order to carry on business in the DIFC, an LP must apply for registration

by the Registrar by filing with the Registrar a declaration which contains the
following information as prescribed in Article 12 of the Law.

• On registration of a Limited Partnership the Registrar will issue a certificate

of registration and allocate to the Limited Partnership a number, which shall
be the Limited Partnership’s registered number.

• A Limited Partnership is formed when the Registrar issues a certificate of

registration under Article 12(3) of the Limited Partnership Law.

• A Limited Partnership that carries on business in the DIFC must have a

registered office in the DIFC to which all communications and notices may
be addressed.

• A Limited Partnership must carry on its principal business activity in the

DIFC, unless the Registrar otherwise permits.

32
General Partners & Limited Partners

• A person may not be a general partner and a limited partner at the

same time in the same Limited Partnership.

• A body corporate may be a general or limited partner.

• A general partner is an agent of a Limited Partnership for the

purpose of conducting the business of the Limited Partnership and
the acts of a general partner, performed in the usual course of
business of the Limited Partnership, bind the Limited Partnership.

33
Assignment of Interest by an LP

• Additional limited partners can be admitted to a Limited Partnership

in accordance with the LP agreement.

• A limited partner may, if the general partners agree or in accordance

with the terms of the Limited Partnership agreement, assign his
share of the interest, in whole or in part, in the Limited Partnership.

• The assignee shall not become a limited partner in the Limited

Partnership until the assignee’s ownership of the assigned interest
is entered into the register referred to in Article 15(4) of the Limited
Partnership Law.

34
Dissolution of an LP

• An LP can be dissolved by statement of dissolution signed by all the

general partners and delivered to the Registrar.
• If there is only one general partner, his death, bankruptcy, retirement
or withdrawal will cause the dissolution of the partnership unless a
new general partner is appointed by the limited partners within 90
days of the event occurring.
• A limited partner is not entitled to dissolve the Limited Partnership by
notice.
• Subject to any provisions to the contrary in the LP agreement, a
Limited Partnership is not dissolved by the death, legal incapacity,
bankruptcy, retirement or withdrawal from the Limited Partnership of
a limited partner who is an individual, or in the case of a body
corporate, its dissolution, bankruptcy or withdrawal from the Limited
Partnership.
35
Differences between Companies & Partnerships

• Companies have always separate legal personality.

• The manner in which Companies operate is contained in the Articles

of Association.

• One person alone can set up a Company.

• Companies are managed by directors or managers, whom in many

circumstances are not also shareholders or members.

36
Differences between Companies & Partnerships (2)

• Partnerships are relationships between two or more people carrying

on business with a view to making a profit. One person alone
cannot form a Partnership.
• With the exception of a Limited Liability Partnership, Partnerships
are not bodies corporate.
• The manner in which Partnerships operate is prescribed in the
Partnership Agreement.
• Partnerships may have separate legal personality only if prescribed
by law. In many jurisdictions Partnerships do not have separate
legal personality. In the DIFC all Partnerships have separate legal
personality.
• Partnerships are managed by their partners.

37
What is a Trust?

• Not a legal entity

• No separate legal personality
• It is a relationship between the settlor, the trustee(s) and the
beneficiary
• Settlor - the person that sets up the trust and transfers property to
the trustees
• Trustee - the persons who hold the legal title of the trust property
and who administer it for the benefit of the beneficiaries
• Beneficiaries - hold the beneficial title of the trust property and
receive income from the trustees. Beneficiaries do not administer
the assets of a trust

38
What is a Trust? (2)

• Trusts can be classified as:

- charitable trusts; and
- non-charitable or purpose trusts.

• Trusts can be created for an indefinite period of time or terminate

either in accordance with the Law or with the terms of the trust.

39
What is an Investment Trust?

• A special type of trust created solely for collective investment

purposes.

• The Law which governs these trusts is the Investment Trust Law,
DIFC Law No. 5 of 2006.

40
What is an Association?

• An association generally does not have separate legal personality

unless it an incorporated association.

• It is a group of individuals who voluntarily enter into an agreement to

form a body (or organisation) to accomplish a purpose.

• The word “association” is not defined in DIFC legislation.

41
Session 1: Revision & quiz

•What are the five (5) different types of companies in the DIFC?

•What are the key differences between a company limited by shares

and a limited liability company (LLC)?

•What are the three (3) different types of partnerships in the DIFC?

•What are the key differences?

•What is a Recognised Company or Recognised General Partnership?

42
Session 2: Legal Structures & their use
Session Objectives

By the end of this session you will be able to:

• identify how some of the legal structures are used for the purposes
of financial services business.

44
Legal Structures & their use

Companies Trusts

Protected Cell Investment Investment

Companies Companies Trusts REITS

45
Protected Cell Companies “PCC”

Protected Cell
Company

Cell

46
Protected Cell Companies “PCC”
Incorporated under Article 114
of the Companies Law

12.2 of Company Regulations

Permit a company to be
created as a PCC Legal
Person

√
Protected Cell
Company
Company

Cell Cell Cell Cell X

Name Name Name Name

47
Protected Cell Companies “PCC”

Protected Cell
Company

Cellular Non-Cellular
Assets Assets

Assets attributable Assets which are

to the cell not cellular
Assets represented by
proceeds of cell share
capital and reserves
and all other assets
attributable to the cell
48
PCCs & Disclosure Requirements

Protected Cell
Company

It is a PCC

Identify the cell which is the

subject of the transaction

Disclose that the assets of

the relevant cell are only
available in case of liability

49
PCCs & Disclosure Requirements

Protected Cell Non-Cellular

Company Assets

Cell Cell Cell Cell

50
Why a PCC?

√ One legal entity

Each cell ‘ring fences’ assets and liabilities in that cell

√ and effectively acts as if it were a separate legal entity

Protection of assets- prohibition of the movement of

√ assets between cells

Protection of assets- can’t amalgamate or consolidate

√ a cell into one or more cells of the company

51
Investment Companies

Open Ended Investment Company

DFSA
Closed Ended Investment Company

Consent
Regulation
FUND
Convert via special
13.4.1resolution an
existing company into an Open
Ended or Closed Ended Company

52
Investment Trusts

Trustee
(body Trust
corporate) Deed

Provide oversight in
Hold assets respect of the fund
Maintain register
on trust management and
use of fund property
Investment Trusts

REIT

54
Closing

55
Session 3: Understanding Legal
Structures
Group Activity

Understanding Legal Structures

57
THANK YOU