Businesses and companies falter for many reasons and, accordingly, when the losses suffered reach a certain threshold, that the business or company cannot continue trading.
There are two forms of liquidation, namely voluntary liquidation which takes place with the consent of the owners of the company or its shareholders, and involuntary liquidation which is a situation where the court rules to appoint a liquidator to dissolve and liquidate the company. This can be an extremely time-consuming and arduous exercise especially in the event that the company to be liquidated and dissolved is large, has multiple branches and trading activities.
The Legal Liquidator
The liquidator is considered a legal representative for the company. The Federal Law No. 2 of 2015 on Commercial Companies (the “Companies Law”) has specific rules for the appointment of the liquidator and the powers assigned to him. A liquidator may be appointed by the partners or the general assembly, or the court. After his appointment, the liquidator must take the necessary steps to wind up the company's business taking into account his responsibilities, duties and obligations to all the relevant parties.
Liquidation of the Company in the UAE Companies Law
Chapter 2 of the Companies Law addresses the liquidation of Companies and the division of their assets. Article 306 provides that unless the Memorandum of Association or Articles of Association of the company provides for the method of liquidation or the partners agree otherwise upon the dissolution of the company, the provisions of the Companies Law shall apply to the liquidation of the company.
General Reasons for Liquidation and Expiration of a Company
- The end of the company’s term as specified in the company’s constitutional documents.
- Completion of the company’s objectives.
- If the company suffers losses of half of its nominal capital so that it cannot continue trading.
- The shares of all partners lie with one person, transforming the company into a sole proprietorship.
- The decision of the majority of capital owners to dissolve and liquidate the company.
- A court rules to dissolve the company.
- The merger of the company into another results in the dissolution of each of them and the formation of a new company.
Special Reasons for Liquidation and Expiration of a Company
- The death of one of the partners.
- Withdrawal of one of the partners.
- Declaration of bankruptcy or insolvency of one of the partners.
The Necessary Professional Controls to be Observed by the Liquidator
- The convening and attendance of regular meetings with interested stakeholders and the provision of the necessary documentation and correspondence with partners.
- To ensure that the word "under liquidation" is placed in all company correspondence and documents.
- Moving to the headquarters of the company, taking inventory and receiving all funds and records, and placing them under his custody.
- Organizing the financial position of the company that includes the company's current assets of cash, bank balances, debtors, etc., fixed machinery and equipment, furniture, cars, etc. and all of the company's liabilities, including credit banks, loans, creditors, and property rights.
- In the case of liquidation by court order, obtaining the executive version of the judge on the ruling of liquidation of the company merits the case. Obtaining a certificate declaring the liquidation and appointing the liquidator from the competent authority.
- Announcing the liquidation in two widespread local newspapers, provided that the most recent ones are in the English language
- Send official letters by registered mail to all the company's creditors providing them with a timeframe within which to submit a claim.
- Receipt of claims and confirmation of the date of receipt.
- Addressing the banks that the company deals with and advising that it is under liquidation.
- A cancellation residency and work permits of employees.
- Selling all the company's fixed and movable assets where permissible.
- Collecting all the company's outstanding funds and depositing them in the company's account.
- Keeping regular accounts for the liquidation in which all financial activities related to the liquidation are recorded.
- To cease contracting for new business for the company, except for the completion of the in-progress operations and the works necessary for liquidation.
- Appointing the necessary assistant experts to work under his supervision to assist him in completing the liquidation timeously.
- Appointing a lawyer or legal firm if the need arises to represent the company in judicial disputes.
- Interfering in lawsuits and judicial procedures related to the company under liquidation.
- Preparing the final liquidation report and submitting it to the commercial registry or to the court, as the case may be.
- Submission of requests to the commercial registry to remove the company from the commercial registry and issue a certificate confirming such removal.
- Submission of the aforesaid certificate to the judge if the liquidation was ordered by the court or for shareholders if the liquidation is consensual.
The company may enter into voluntary liquidation in the following instances:
- The termination of the specified period for the company unless the General Assembly decides to extend it.
- The completion or absence of the purpose for which the company was initially established, or the impossibility or absence of the company’s goals.
- If a decision to dissolve and liquidate the company is issued by the company's general assembly.
- In any other cases which may be stipulated by the company's statute.
A company may be involuntarily liquidated in the following cases:
- If the company commits violations of the law or its articles of association.
- If the company fails to fulfill its obligations.
- If it stops its activities for a year without a justified or legitimate reason.
- If the company's total losses exceed (75%) of its subscribed capital unless its general assembly decides to increase its capital.
The Arrangement to be followed by the Legal Liquidator in settling the Company's Debts
The liquidator pays the company's debts in the following order after deducting the liquidation expenses:
- Amounts and debts owed to government agencies or to a party that has a lien on the company's funds under liquidation.
- Amounts owed to the company's employees.
- Amounts owed to creditors and those who have judgments against the company.
Responsibility of the Liquidator in terms of the Companies Law
In accordance with Article 312 of the Companies Law, the liquidator shall immediately upon his appointment, shall prepare an inventory of all the assets and liabilities of the company.
The liquidator’s responsibilities further include:
- Preparation of a separate detailed list of the company's assets and liabilities.
- Performance in terms of the company's obligations and repayment of the company’s debts.
- Retaining the company's funds and depositing them in a bank account opened for purposes of liquidation.
- The liquidator shall complete his task within the period as determined in the document appointing him.
- The liquidator shall provide to all the partners or the General Assembly every three months an interim account of the liquidation procedures.
- Within one week from the date of the approval by the General Assembly, the liquidator shall notify the partners to receive their dues within no later than 21 days under an announcement to be published in two daily local newspapers, one of them issued in Arabic.
- The liquidator shall, upon completion of liquidation, provide to the partners or the General Assembly or to the Competent Court a final account of the liquidation process. Such process shall be complete upon approval of the final account.
- The liquidator shall be liable if he mismanages the affairs of the company during the period of liquidation. The liquidator shall also be liable for the damage incurred by third parties due to his professional faults in the liquidation process.