Company Liquidation in the UAE

Imagine a company that had been running successfully for over 10 years was hit by a severe financial downturn. Its sales dropped significantly, and the company found it harder and harder to meet its financial obligations. Expenses began piling up, and soon, the company was unable to pay its suppliers or cover essential business costs.

Faced with mounting debts, the company chose to close its operations. The company had assets worth AED 5 million, including a warehouse, delivery trucks, and machinery. It also owed AED 3.5 million to creditors and AED 1 million to suppliers, totalling AED 4.5 million in debt. The company sold its assets, raising the necessary funds to settle its debts. The warehouse, trucks, and machinery were sold to various buyers, and the proceeds were distributed to cover the obligations to creditors and suppliers.

What we have described here is the process of liquidation, specifically voluntary liquidation. Liquidation refers to the formal process of winding up a company’s operations by selling off assets to pay creditors and fulfil other financial obligations. This process in the mainland UAE is governed by Federal Decree-Law No. 32 of 2021 on Commercial Companies, hereinafter referred to as Commercial Companies Law. Company liquidation in the UAE entails settling a company’s financial responsibilities by legally dissolving a business. It is important to note that companies established in the UAE’s free zones do not fall under the Commercial Companies Law, as specified in Article 5 of the law.

In this blog, we will look at the process of company liquidation in the UAE, specifically in the UAE’s mainland.

A company can be terminated in the UAE for various reasons. Article 302 of the Commercial Companies Law provides six specific scenarios in which a company may be dissolved so that business operations can be closed in a fair and structured way. Below are these six given conditions:

• Expiration of the Term: If the term specified in the company’s Memorandum of Association (MOA) or Articles of Association (AOA) has ended, the company will be dissolved unless its term is renewed in accordance with the rules set out in these documents.
• Fulfilment of Purpose: When the objectives for which the company was established have been achieved, and there is no further purpose for its existence, the company may be dissolved.
• Depletion of Assets: If all or most of the company’s assets are depleted to the point where it is no longer possible to invest the remaining assets beneficially, dissolution can be pursued.
• Merger: The company may be dissolved through a merger with another entity in line with the provisions of the Commercial Companies Law. In this case, the original company ceases to exist as it becomes part of the merged entity.
• Unanimous Agreement: If all partners unanimously agree to terminate the company, it can be dissolved, unless the MOA specifies that a different majority is sufficient to make such a decision.
• Court Order: A company may also be dissolved if a court issues an order for its dissolution. This can happen for various reasons, including insolvency, legal violations, or other circumstances as deemed appropriate by the court.

In cases where a company ceases to conduct its business or is found to be violating the Commercial Companies Law or its Implementing Resolutions, the Ministry, the Securities and Commodities Authority (SCA), or the Competent Authority may intervene to initiate the deregistration process, giving a three-month notice. In this context, it is important to remember that even through Federal Law No. (2) of 2015 was repealed by the current Commercial Companies Law, the Executive Regulations and Resolutions of Federal Law No. (2) of 2015 will continue to remain in effect as per Article 363 of the Law.

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Company liquidation in the UAE can either be voluntary or compulsory. Voluntary liquidation, as described above, is the liquidation process that is initiated by the board of directors or the owners of the company. Compulsory liquidation, on the other hand, happens when a company is forced to liquidate by a court’s order.

If the company liquidation in the UAE is ordered by the court, then the court decides on the method and appoints a liquidator. The liquidator’s role remains even if a partner dies, becomes bankrupt, or is declared insolvent, so that the process of liquidation continues smoothly.

The liquidation process in the UAE involves two important stages as stated on the UAE government’s portal:

Stage 1:

1. Preparing notarised minutes of the General Assembly to confirm the company’s liquidation and appointing a liquidator.
2. Obtaining an official letter from a registered liquidator accepting the role.
3. Submitting an application for cancellation through the Department of Economic Development (DED) or other approved channels.
4. Receiving a liquidation certificate from the DED after submission.
5. Publishing a notice of liquidation in two local newspapers, allowing debtors grace period to submit claims.

Stage 2:

1. Submitting a declaration letter from the liquidator and partners to the DED stating that no objections were raised during the grace period by any parties.
2. Collecting necessary approvals from other government bodies to cancel the company’s licence.
3. Cancelling the company’s firm card with the Ministry of Human Resources and Emiratisation.
4. Cancelling visas for any foreign partners sponsored by the company through the General Directorate of Residency and Foreigners Affairs.

Once all required documents are submitted, the DED will determine the fees, and upon payment, the certificate of deregistration (cancellation) will be issued.

Annual General Meetings (AGMs) play an important role in ensuring transparency and accountability within the company, allowing shareholders to stay informed about the company’s performance and future plans. A DMCC company must hold Annual General Meetings (AGMs) within 18 months of registration and every 12 months after that. These meetings also provide shareholders the chance to review and approve financial statements, appoint or reappoint auditors, and make decisions that affect shareholder rights, such as amending the Articles of Association. In addition to AGMs, shareholders holding at least 10% of the company’s share capital can request an Extraordinary General Meeting (EGM), which must be organised by the directors or secretary within 60 business days. This gives minority shareholders the opportunity to raise urgent concerns and influence the company’s direction.

• General Partnership
• Limited Liability Company
• Simple Limited Partnership
• Public Joint Stock Company
• Private Joint Stock Company

Company liquidation in the UAE must be carried out by one or more liquidators who are appointed either by the partners or through a resolution by the General Assembly. The liquidator cannot be the company’s auditor at the time of appointment, and they must not have audited the company’s accounts in the five years prior.

The responsibilities of a liquidator, as outlined in the Commercial Companies Law, include:

• Inventory Check of Assets and Liabilities: On appointment, the liquidator must immediately conduct an inventory check of the company’s assets and liabilities, with assistance from the managers or chairman in providing accounts, ledgers, and necessary documents.
• Preservation of Company Assets: The liquidator must take all necessary steps to preserve the company’s assets and rights and collect any outstanding receivables from third parties.
• Deposit of Monies Collected: All collected funds must be deposited into a bank account specifically for the company in liquidation as soon as they are received.
• No Collection of Partner Payments: The liquidator cannot request partners to pay any outstanding amounts on their shares unless it is required for the liquidation process, ensuring fair treatment of all partners.
• Notice of Liquidation to the Creditors: The liquidator is responsible for notifying the creditors to present their claims. This notice is required to be published in two newspapers, one of which must be in Arabic, that give creditors at least 30 days of notice to present claims, as per Article 324 of the Commercial Companies Law.
• Representation in Court: The liquidator has the authority to represent the company before the courts during the liquidation process.
• Payment of Debts: The liquidator is responsible for paying off the company’s debts.
• Sale of Assets: The liquidator must sell the company’s movable and immovable assets, either via public auction or other means. However, the liquidator cannot sell all of the company’s assets at once without prior permission from the partners or General Assembly.
• Preparation of a List of Assets and Liabilities: The liquidator must prepare a detailed list of the company’s assets and liabilities, along with a balance sheet, and sign it with the managers or chairman.
• Transaction Record Keeping: The liquidator is responsible for maintaining a record of all transactions related to the liquidation process.

The liquidator is responsible for completing company liquidation in the UAE within the timeframe specified in their appointment document. If no timeframe is provided, any partner can request the court to set a liquidation period. Liquidating a business involves several important steps as mentioned above. For example, in Mainland Dubai, the liquidation process includes settling debts, taxes, and employee benefits, cancelling visas and work permits, closing bank accounts, and obtaining clearance certificates from various government authorities.

The time required for liquidation depends on the company’s size and legal structure. According to Article 328 of the Commercial Companies Law, the liquidation period can only be extended by a partners’ resolution or a Special Resolution of the General Assembly, after reviewing the liquidator’s report on the delay. If the court set the liquidation period, it cannot be extended without the court’s approval.

Throughout the process of company liquidation in the UAE, the liquidator must keep all partners informed by submitting quarterly statements on the liquidation activities. Once the General Assembly approves the liquidation accounts, the liquidator, similar to notifying the creditors, must issue notification to all partners within 21 days to collect their dues. This notice must be published in two daily newspapers, with at least one of them being in Arabic.

The liquidator holds significant responsibility, as they are liable for any mismanagement during the process of company liquidation in the UAE. If any third parties suffer losses due to errors made by the liquidator, they are also held accountable.  Once all debts are settled, the remaining assets of the company are distributed among the partners. First, each partner receives an amount equal to their initial capital contribution. Any leftover assets are then divided according to each partner’s profit share. If a partner does not claim their share, the liquidator must deposit it with the court treasury. In cases where the company’s remaining assets are not enough to cover the partners’ shares, the losses will be divided according to the previously agreed loss-sharing ratio.

Company liquidation in the UAE requires a thorough knowledge of the law, and the liquidator must be able to expertly navigate complex legal, financial, and procedural frameworks. Their role demands a comprehensive understanding of regulations, meticulous attention to detail, and effective stakeholder communication.

The range of functions that are involved in liquidating a company include document preparation, issuing legal notifications and newspaper advertisements, liaising with government departments, and preparing and submitting liquidation reports. Needless to say, the process is intricate and detailed and requires expertise for handling it efficiently. Ultimately, the liquidator’s ability to steer the process smoothly ensures that the company’s dissolution is conducted in full compliance with the law, safeguarding the interests of creditors and stakeholders alike.

Find out how AKW Consultants’ comprehensive liquidation services can help you navigate the complex process of liquidating your company smoothly.