Bankruptcy Law Commercial Companies Law
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].
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
Mainly liquidation has two types, for instance, Compulsory Liquidation and voluntarily liquidation
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
There are several reasons outlined by the law for the liquidation of the company; below-mentioned is some important reasons:
Moreover, there are some important reasons for liquidations, such as:
There should be specific terms decided by the liquidator, such as:
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
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.
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].
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.
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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