Company Liquidation in UAE
Lavin Nalinababu, Business Consultancy
25 January, 2021
Liquidation is one among the most complex procedures for a business entity as it requires several formalities and the involvement of third parties. What exactly does liquidation mean? In short, liquidation is winding up of an entity and the selling of its assets to distribute them, depending on the factor whether the company is solvent or insolvent.
Liquidation as explained in finance and economics is the process of dissolving a company and distributing its assets to litigants. When a company is insolvent, its assets are used to pay the obligations as it failed to pay when they were due. It is the usual practice to pay the creditors and shareholders once the company is dissolved, based on the priority of their claims. General partners are subject to liquidation.
Liquidation occurs when a limited company decides to end their business for one or the other reason. At this point, you might consider liquidating your company; which in turn means turning your assets into cash.
When a company undergoes liquidation, they sell their assets so that they can pay back their debts/liabilities/obligations. Selling of poor-performing goods at a price lower than the cost of the business or at a price lower than the business’ expectation can also be referred to as liquidation.
When a company is being liquidated in the UAE the assets and properties of the company are distributed to the creditors and/or shareholders.
The reasons for liquidation can be different: it can either be due to the expiry of license/ duration mentioned in the articles of incorporation/ association or the completion of the objective for which the company was established; the loss of all/ most of the company’s assets; merger; approval of the shareholders that the company’s term of existence be brought to an end as per stipulated majority, etc.
Who is a Liquidator?
A liquidator is the person who conducts the overall liquidation process. They are appointed by the court or the shareholders of the company depending on the type of liquidation.
Cancelling your Business License – why is it important?
Cancelling your business license is important in the process of liquidating a company in UAE as it will inform the government entities that you are no longer in business. This helps the businesses from incurring any fines or penalties on the license which are bound to happen if the licenses are not renewed. In case of the shareholding company, discharging the liabilities towards creditors and partners is mandatory before finalising the cancellation process.
Formalities for cancelling your Business License
The procedure for canceling a license is different for sole proprietorships (single shareholder companies), and companies with multiple shareholders. As for the former, cancellation must be applied via licensing authority and all the required clearances must be obtained from various departments depending on the activity;
- Ministry of Human Resources and Emiratisation
- Directorate of Residency and Foreigners Affairs
- The relevant water and electricity authority
- The Leasing Entity
- Federal Tax Authority
As mentioned earlier, it is important to liquidate the shares of the companies with shares, collect the existing debts and pay the creditors before finalizing with the LICENSING AUTHORITY.
The below mentioned legal forms of companies need to appoint a liquidator to carry out the liquidation process in the UAE;
- Mainland companies
- Free zone companies
- Offshore companies
The process of liquidating a company
The formal insolvency procedure in which a company is brought to an end is called liquidation; the liquidation of all the assets of the company is followed and the proceeds are used to repay the creditors. There are two main types of liquidations for insolvent companies– compulsory liquidation and creditor’s voluntary liquidation (CVL).
Compulsory Liquidations: If a company fails to pay their debts on time, the creditors may request the courts to liquidate the company with which the dues can be cleared. When the courts force a company to liquidate and pay the outstanding debt by selling its assets, it is called compulsory liquidation.
Creditors’ Voluntary Liquidation (CVL): If a company does not have any assets and cannot get back to its former state, then the laws in UAE demand the liquidation of the company.
Cancellation of the business license from the licensing authority is the first activity to be done in the liquidation process, followed by the procedures given below:
The first procedure is the cancellation of all existing employees’ visas. Prior to the company liquidation, all the active UAE resident visas should be canceled in case the employees have to shift to the sponsorship of another company or leave the country.
The second Procedure: The board of director’s resolution with the liquidation decision, which is attested by the Notary Public, must be issued. This is then followed by the appointment of the liquidator.
The third Procedure: Once the liquidation process is complete, the liquidator issues the company liquidation certificate. The liquidator is in charge of submitting the License Copy, Auditor Registration Certificate and Authorized Signature Certificate attested by Notary Public.
The fourth Procedure is the publication of liquidation advertisement in two local Arabic newspapers for one day; giving an opportunity for the creditors to submit their financial claims if any for a period of 45 days from the day of publication.
Procedure number five is to get confirmation from the liquidator and partners that no objections or claims have been received from the third party during the advertisement period.
Procedure number six: A final audit report of the company must be prepared and submitted to the registration authority, once all the previous five conditions are met.
Procedure number seven is to cancel the visas of the investors and partners that are still active and associated with the company.
And the final and eighth procedure is obtaining the clearance letters from the Ministry of Labour, Immigration, and utility providers.
Process may slightly vary depending on the regulator however, the basic requirements of liquidating the company more or less the same.
The time span required to complete the process would be 3 months or more depending on the type of license and legal status of the company.
Consequences of Liquidating a company
When the company is liquidated, all its functions will be ceased and it cannot do any further business or employ candidates. The company will no longer exist once it’s been removed from the companies register at the Companies House. The assets of the company are used to clear its debts and any money left will be distributed among the shareholders after liquidation.
Assets of the Company
The assets of the company after liquidation upon payment of the debts shall be divided among all the partners. Each partner shall obtain an amount equal to his share in the capital, and the rest shall be divided among the partners at the pro rate of their shares in the profits. If a partner fails to collect his share, the liquidator has the authority to deposit the share in the treasury of the Competent Court.
If the net funds of the company are not sufficient to pay the shares of the partners in full, the loss shall be distributed among them according to the prescribed rate for the distribution of losses.
Employee’s situation when a company dissolves in UAE
If a company dissolves or shuts down, the employees are still entitled to outstanding holiday pay and gratuity but the involvement of the Ministry of Labour would be necessary. The employees are also allowed to transfer their sponsorship to a new employer. In case they fail to find a new job then it is mandatory to cancel the visa and leave the country.
Liquidation process marks the end of an entity in every possible way, it affects the employees, shareholders and everyone associated with it. It is important to have someone to guide you throughout the liquidation process, as there are scopes fraudulent practices. A business consultant can help you complete the tasks smoothly and can even help you get the certifications done. They can also help you in choosing the liquidator.
HLB HAMT is one of the leading auditing and business consultancy firms in Dubai and the whole of UAE. Our professionals will ease your task with their prowess in attaining the documents and also aid you with any accounting or auditing service you require. We provide every service related to liquidation from preparing the board’s resolution to the complete process of liquidation.
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