The most recent amendment has been introduced in respect of insolvency and bankruptcy in a new law Federal Law 35 of 2021 bankruptcy (Bankruptcy Law). The UAE is a well-known business location with lots of potential for business expansion. However, not every firm will be successful in the vibrant and cutthroat market of the United Arab Emirates. A large number of companies throughout the world have been forced to close their doors due to a failure to forecast market dynamics. As a result, some businesses choose to liquidate[1].
Company Liquidation
There are several types of business in the UAE, such as a Limited Liability Company (LLC), a subsidiary of any company, an offshore company, a free zone company, a single establishment, and an institution that closes its operations, Therefore all properties and assets of the corporate body must be divided among its shareholders/owners and creditors in accordance with their respective share/rights. Liquidation is also known as winding up or dissolution of a company in the case when the corporate body could not liquid funds to hold the routine transaction. In case of bankruptcy, all these businesses can be stopped, the firm’s licenses must be revoked, and the assets must be divided among its owners and creditors in accordance with their rights. Due to the extensive documentation requirements and participation of the pertinent regulators, the liquidation and license cancellation procedures are time-barred and complicated[2].
You should know: Contract Liquidation Minutes in UAE: Protection from Breach of Contract
Types of Liquidation:-
Mainly liquidation has two types, for instance, Compulsory Liquidation and voluntarily liquidation
- Compulsory Liquidation:- Compulsory liquidation is also known as creditors liquidation under compulsory liquidation, the court may compel a company to sell all its assets to clear its outstanding debt on the application file by the creditors for collection of their dues.
- Voluntary Liquidation:- the company’s shareholder may choose an option to liquidate a solvent company by selling its all assets to pay their outstanding bills.
Legal Procedures
The legislation establishes a framework for legal action to assist struggling businesses in the UAE to avoid liquidation and bankruptcy using a variety of processes, such as out-of-court agreements for financial restructuring and composition proceedings. Financial restructuring can range from an announcement of bankruptcy and the sale of the debtor’s assets to the possibility of obtaining fresh debts on terms stipulated by the law[3].
You need to Understand Company Liquidation or Deregistration of Company
Reasons for Liquidation
There are several reasons outlined by the law for the liquidation of the company; below-mentioned is some important reasons:
- The completion of the company’s tenure as outlined in its charter documents
- The accomplishment of the company’s goals.
- In case the company is bearing losses equal to half of its nominal capital and is unable to operate.
- The business becomes a sole proprietorship when one individual owns the shares of every partner.
- The majority of stockholders made the decision to dissolve and liquidate the business.
- A judge ordered the company to be liquidated
- When two businesses combine, each of them is dissolved, and a new business is created[4]
Moreover, there are some important reasons for liquidations, such as:
- Death of any partner
- Withdrawal of any partner
- Insolvency of any partner[5]
Liquidator and Control over Assets (for Asset Division)
There should be specific terms decided by the liquidator, such as:
- The liquidator manages the organization and takes part in frequent meetings with interested parties
- The liquidator must take control over the delivery of the required paperwork and communicate with partners
- It is the duty of the liquidator to provide a guarantee that all corporate correspondence and papers, including the phrase “under liquidation,” must be confidential and never shared with any irrelevant party or institution
- Take control over inventory, collecting all monies and documents, and handing them over to him at the company’s headquarters
- The liquidator must arrange the company’s financial situation to reflect its current assets, bank accounts, cash reserves, details of debtors, fixed assets, machinery and equipment and automobiles
- Take control over credit cards, cash receivables and other relevant accounts[6]
Division of Assets in Liquidation by the Liquidator
The distribution of liquidation funds follows a highly defined procedure. Lower priority creditors simply won’t be paid entirely as part of the liquidation processes if the bankruptcy estate runs out of money before they get paid. Suppose the collateral’s value drops or is much less than the number of debt holders’ holdings. In that case, even the utmost priority creditors could not get their entire share.
you should read how to Liquidating a Company and Filing Bankruptcy in UAE
Prioritization of Creditors
Secured Claims (Category One) – Secured claims frequently take precedence during the liquidation process. This occurs because their funds are protected by an agreement with a debtor and guaranteed against the property. Secured debts are given priority over all other claims to liens[7].
Secured Claims (Category Two) – Several lien claims might possibly be made against a single asset. Each secured claim continues to be given first priority to obtain bankruptcy profits after the priority order has been determined. However, lenders with secondary or worse claims, paid ahead of any other creditor, are treated less favorably than first lien claims.
Unsecured claims with priority – Preferential creditors shall not be paid until the secured credit obligations are satisfied. They do, however, receive preferential consideration over other unsecured claims.
Unsecured general claims
Frequently, general unsecured creditors are falling on the last stages to get payment.
Shareholders with preferred equity – The last lenders to get money from liquidations are frequently investors. Equity holders of preferred stock are given preference over those of common stock.
Common Equity Shareholders – The stockholders of common equity frequently have the lowest level of importance [8].
Secure Creditors on Top Priority
As they frequently have a claim against particular resources of the insolvent person, secured creditors are frequently paid first in the insolvency process. The secured creditor frequently has the option of either reclaiming the asset they have secured against or receiving the revenues from its sale.
General Rules for Priority
The usual guideline regarding priorities is that preference is awarded to the party who is more secure upon presence. This matters to parties that are members of the same priority class, particularly if they hold liens on the same asset. The widest guidelines indicate that if many creditors have claims against a single asset, the creditor who received the earlier claim has precedence[9].
Conclusion
The Commercial Companies Law of the UAE and the Bankruptcy Laws both can provide flawless guidelines to make a secure insolvency process and for the division of assets. Comprehending the priority of the creditors’ list in the liquidation procedure involves a lot of complexity. In general, priority unsecured creditors come in second to secured creditors in order of importance. Equity stockholders frequently receive payment before the remaining creditors. There are exceptions to these extremely wide principles that shuffle creditors, diminish the value of their claims, and alter the amount of priority for who receives payment first during bankruptcy[10].
HHS Lawyer in Dubai is a leading international firm in UAE well known to undertake matters like insolvency and liquidation, bankruptcy or more. With a trustworthy track record, HHS Lawyers can assist with the deregistration process in accordance with the UAE law.
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