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Deep Pocket

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Pursuing a parent company for damages

When a buyer of real estate claims money from a seller, with whom it has a contract, but the seller is merely a shell company with no assets, can the buyer "draw back the curtain" and pursue the more substantial parent company instead?
By Mark Fraser and Sarah Mather, Special to Gulf NewsPublished: 00:00 March 16, 2012
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When a buyer of real estate claims money from a seller, with whom it has a contract, but the seller is merely a shell company with no assets, can the buyer "draw back the curtain" and pursue the more substantial parent company instead?
The good news is that the answer may well be "Yes", depending on how the parent company was involved in the transaction.
Picture the scene in the Wizard of Oz where Dorothy thinks that the Wizard has a strange voice and is made of wheels and levers. She then draws back the curtain to reveal that the Wizard is, in fact, just another ordinary man.
In the real estate world, when a buyer seeks redress from a seller-subsidiary, which is invariably a shell company with no assets, can the parent company be sued? In certain circumstances, a parent company, which was involved in the original transaction albeit ostensibly not as a contracting party, may well be a legitimate target for recovery.
Before the property crash, it could be said that Dubai was a little bit like Oz — everything in techni-colour. The only problem with Oz was that it turned out to be a dream.
When the property crash woke everyone up in 2008, the techni-colour had gone and only one colour remained — red. It was of course the shade of red espoused by the banks rather than the colour of those famous ruby slippers. That said, the slippers came in handy for many debtors who clicked their heels three times and left the bouncing cheques and outstanding loans in Dubai behind them. For them there really was "no place like home".
Key documents
But what happened to the investors who stayed and faced the reality that what they were financing were only half-built or would not be built at all?
A common problem for property investors prior to the crash was that the sellers delayed or failed to provide key documents, such as the title deeds, which in turn prevented the investors from obtaining finance and building their projects as programmed.
When the property crash hit Dubai, the land lost its value, the projects were late and incomplete and there was little demand for more tower blocks. But for the seller's delays, the projects would have been completed on time and an income stream would have been generated from the rent or from further sales.
The investors were then faced with a long journey down a broken Yellow Brick Road. There were no scarecrows, tin men or cowardly lions but rather a motley crew of accountants, lawyers and surveyors.
In such a scenario, it is crucial to identify who the buyers can pursue in order to recover the money invested in the incomplete projects. In many cases, the investors entered into the sale and purchase agreements with vendors which were wholly-owned subsidiaries of the large developers.
Not separate
These subsidiaries had no assets and were set up for specific projects in order to limit the liability of the developers. In practical terms, however, the subsidiaries were not entirely separate companies and the way in which they operated resulted in a number of procedural complications.
Many sale and purchase agreements stated that the subsidiary was the vendor; however, the parent company was often the signatory. Sometimes the subsidiary, as the vendor, entered into the agreement but each page was "approved" with the parent company's stamp.
Often correspondence on the transaction emanated from both the subsidiary and the parent company. As a result, there was very little consistency in the contractual documents, or in the correspondence, making it difficult to identify the true seller.
In such situations, the Yellow Brick Road often proceeds via the Dubai International Arbitration Centre or the Dubai World Tribunal. Provided that there is sufficient evidence to show that the parent company was involved in the transaction and that it was authorised to act as an administrator or guardian of the affairs of its subsidiary, the parent company can be named as a joint respondent.
Alternatively, a case may be capable of being crafted against the shell company with a view to enforcement against the parent.

The writers are with the law firm of Taylor Wessing.

akhiabani's picture

Rholding

Ultimately Rholding as a master developer should also be liable as a deep pocket.
Judgement date is nearing hopefully. They can not just keep people's money forever.