Conditions of Liquidation

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Overview

Dubai is one of the world’s most iconic place for emerging businesses. From easy grants to several opportunities provided by the government for budding businesses, doing business proves to be quite a pleasant journey. But sometimes due to some misfortunes or unforeseen circumstances, companies end up in complications, which may lead to severe consequences. In extreme cases, companies may have to take serious decisions and terminate the term of the company. Henceforth, companies are expected to set up legal proceedings to end the business term of the company, which is technically known as the process of liquidation. For the liquidation process to go smoothly, few conditions are to be met, which are discussed below.

 

What is Liquidation?

Company Liquidation is the procedure of winding up of business operations when the company becomes incompetent in carrying forward their line of business. During this process companies sell their assets and shares, to pay for the debts and pending payments or penalties. The amount collected after selling the assets is shared accordingly by the shareholders of the company. This is a legal process which includes generation, authentication, and closure of legal documents. Since there are many emirates and registration authorities, there are many different rules and conditions for the liquidation process. To liquidate a company, certain conditions should be met in accordance with the rules and regulations of the relevant authority. Apart from this, the procedures are nearly the same. Liquidation could either be compulsory (creditors’ liquidation) or voluntary (shareholders’ liquidation).

 

Types of liquidation

Voluntary liquidation

Voluntary liquidation is a process which is decided by the shareholders to enact to if the company is on the verge of bankruptcy. In order to free up the funds, a shareholder poll is conducted that allows the company to liquidate its assets for freeing up the funds to settle its debts. Voluntary liquidations may occur due to poor operational circumstances or due to failed business strategies. Such purposes can assist in restructuring and transferring assets to another company in lieu of the ownership. Voluntary liquidations are also allowed in case the liquidating company was created only for a particular purpose. Additionally, voluntary liquidation can also take place if the shareholders decide to do so if any crucial member has left the organization. 

 Process  of Voluntary Liquidation 

In Dubai, Board members are supposed to decide the stake of the company, and if they decide to liquidate the company then, a liquidator is appointed. The liquidator is directly answerable to the shareholders of the company as well as the creditors. If the company has enough liquidity, then the shareholders can themselves manage the process of voluntary liquidation. Otherwise, the creditors and shareholders must take control of the liquidation process through a court order. 

Voluntary liquidations in Dubai is divided into two categories. 

  • One is the creditors’ voluntary liquidation, that takes place because of the state of corporate insolvency. 
  • The other one is the members’ voluntary liquidation, which requires only a corporate declaration of bankruptcy. Wherein the firm is solvent, but it needs to liquidate its assets for honouring its obligations. Upon clearance of the process, the formal process of liquidation is initiated.

Compulsory liquidation

Compulsory liquidation or “winding up” is a court-based procedure in which the assets of a company are distributed to the company’s creditors. The procedure is initialized by filing (or “presenting”) a petition at the court. Then a court hearing is organized, which decides whether it is appropriate to make a winding-up order. If the company is insolvent, then the “winding-up” order is issued. Finally, at the end of the liquidation, the company is dissolved.

Liquidation, winding up and dissolution means the same in Dubai and refers to the same process. Depending on the company type, liquidation is implemented by following the provision of either Commercial Companies Law for mainland companies, Free Zone Regulations for free zone companies or Offshore company Regulations for offshore companies. 

Causes of liquidation:

  • Expiry of license or duration. After the expiry of the issued license, the company need to either renew(in case of continuation of the business) or return the license(in case of liquidation process)
  • The accomplishment of the objective for which the company was established. For example, the company is established to deal with specific tasks like cleaning or building some specific architecture then the company has no further use and can be successfully liquidated
  • Loss of all or most of the company’s resources or assets. In case of extreme loss, the company can liquidate to save from further complications and bankruptcy.
  • Agreement of the shareholders that the company’s term should be ended as per required majority, etc.

For liquidation to happen smoothly, Irrelevant of the main liquidation reason certain, few conditions have to be met, these conditions lead to the process of advancing the process of liquidation simultaneously.

  • Cancellation of all existing employees’ visas. In case there are active Dubai resident visas, they must be cancelled before the process of company’s liquidation, as the employees need to either move to the sponsorship of any other company or leave the country.
  • Issuance of Board of Directors resolution with liquidation decision. After this, the company is required to hire a liquidator (in the mainland) for further implementations of the remaining steps of liquidation. The Resolution should be attested by Notary Public.
  • If the involved company has shared, then it is essential to dissolve its assets first, restore debts and pay the shareholders. On completing the process of liquidation of shares, companies can proceed towards DED (Department of Economic Development) for finalization of the process. For cancelling a private shareholding company, the company is required to get approval from the Ministry of Economy. And for cancelling of public shareholding companies, the decision of Securities and Commodities Authority’s should be obtained.
  • The company is then provided with a certificate by the liquidator upon the completion of the process. The liquidator should also provide with a License Copy, Auditor registration certificate and authorized signature certificate attested by Notary Public.
  • Publication of liquidation advertisement in two local Arabic newspapers for one day and non-attendance of financial claims against the company within the period of forty-five days since publication.
  • Confirmation from the Liquidator and Partners that there are no objections or claims from the third party during the period of forty-five days after the publication of an ad in the newspaper.
  • If the previous five conditions are met, a final audit report of the company should be prepared and submitted to the Registration authority (In Northern emirates outside Dubai auditors report is not required).
  • Cancelling of investors and partners visas if they are still active and associated with the company.
  • Finally Getting clearance letters from the Ministry of Labour, Immigration and Utility providers marks an end to the procedure.

Upon the meeting of these conditions, company can be successfully termed as liquidated. 

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