Compulsory liquidation or “winding up” is a court-based procedure under which the assets of a company are realized and distributed to the company’s creditors. This procedure usually forced upon the company, rather than the directors complying with their duty to wind up the insolvent company in a formal manner. The winding up petition is usually made by a creditor, but a company director or shareholder can also issue a winding up petition to close the company down. The most common reason for a compulsory liquidation is when a company is insolvent.
Grounds for compulsory liquidation
The most common ground of winding up is when a company cannot pay its debts
The court may order for winding up on any other grounds as prescribed by the law.
Process of compulsory liquidation
Most common procedures of winding up of a company under compulsory liquidation are
- Filing a winding up petition:
The first step of the compulsory liquidation process is to file a winding up petition in the competent court
- Winding up order by the court:
Once the court is satisfied that the company should be liquidated, they will issue a winding up order.
- Appointing a liquidator
The official liquidator will take over control of the company, meaning the existing directors will cease to have any influence over the day to day running of the business.
- Company assets are sold:
The process of liquidating the company assets which may include all movable and immovable property of the company. The assets will be managed by the liquidator in order to repay the company’s debts.
- Dissolution of the company
Following the sale of assets, the company will be officially shutdown and its name removed from the register of companies.
Outcomes of compulsory liquidation
- Compulsory liquidation for creditors
An unsecured creditor may receive all the outstanding debts at the end of liquidation of process of the company.
A creditor has to provide the liquidator with details of the claim (proof of debts). The liquidator will then assess all the proofs of debt. He may either accept a claim in whole or part or reject it.
- Compulsory liquidation of employees
All workers of a company are automatically dismissed if a winding-up order is created. A former employee, may be entitled to a gratuity benefit as per UAE employment law.
- Compulsory liquidation for directors
When a company goes into compulsory liquidation, the powers of its directors cease and they are automatically dismissed from office.
As a former director of a company that is being wound up, you may be required to assist the liquidator and to provide a statement of the company’s assets and liabilities
The risks of compulsory liquidation depend on how the administrators have run the company so there can be various issues that are exposed as a result of this method. If the directors are found to be guilty of wrongful or fraudulent trading and mismanagement of the insolvent company, they can further face consequence as mentioned below (but not limited)
- Being made personally liable for company debts.
- Disqualification as a director and of all future appointments as a director.
- A fine.
Most common reliefs claimed by the company under compulsory liquidation are as follows:
- Paying the debts
When the company is in a situation to pay the debts of the creditors.
- Enter into a mutual agreement.
The company can enter into a mutual agreement with creditors for voluntary winding up of the company.
HHS lawyers and legal consultants are one of the leading liquidators in the country. Our specialized and expert team deeply investigates the case and executes the compulsory Liquidation process smoothly. If you feel your business is heading into compulsory liquidation then contact us for further details.