Liquidation can be defined as the winding up of a Company by selling off its assets to convert them into cash to pay off the firms unsecured creditors. The secured creditors take control of the respective pledged assets upon obtaining foreclosure orders. Any remaining amount is distributed among the shareholders in proportion to their shareholdings. It is an event that usually occurs when a company is insolvent, meaning it cannot pay its obligations when they come due.
Types of Liquidations
There are Two type of liquidations ;
- Voluntary Liquidation
- Mandatory Liquidation
Voluntary Liquidation:
In case of voluntary liquidation, the owners or shareholders of the firm decide that to close and wind up the Company as they do not have enough funds to pay off their creditors and other liabilities.
Mandatory Liquidation:
In case of mandatory liquidation, the liquidation order is put forward by the courts. It is not in the will of an owner or shareholders to liquidate their company. This usually occurs when a company fails to pay creditors multiple times. Because of this, creditors can file a request for the liquidation of a company.
Responsibilities and Functions of a Liquidator
To liquidate a company in the UAE, appointing a liquidator is mandatory.
- The liquidator appointed during the company’s liquidation process will represent the company in any legal proceedings or litigation that may arise.
- The liquidator is responsible for selling the company’s assets to pay off its outstanding debts.
- Some debts are given priority and are settled before others, such as unpaid employee salaries.
- After all debts are cleared, any remaining funds will be distributed to the shareholders or the company owner.
- If the funds generated from selling the company’s assets are not enough to cover the debts, the shortfall will be deducted from the shareholders’ capital.
- The liquidator must prepare a Statement of Affairs and a Liquidation Report after completing all required procedures.
- The liquidator is also responsible for requesting the removal of the company from the Commercial Register.
Essential Documents for Company Liquidation in the UAE
- Copy of the license
- Memorandum of Association
- Power of Attorney
- Letter from Labour and Immigration department that there are no visas.
- Passport copies of all shareholders, along with Emirates ID’s
- Shareholder’s Resolution to Liquidate the Company
- Statement of Affairs and Liquidation Report
- Application for deregistration
Liquidation Process Steps
Free Zone Company:
In the case of a free zone Company, the procedure is slightly different and involves the following steps:
- Every free zone in the UAE has a portal. The Company intending to liquidate must notify the free zone by applying on the member portal.
- The free zone will file a final Company termination letter, and the Company will be liquidated.
- After submission of the application, they need to publish the notice in a local newspaper.
- Once they have notified the respective free zone, they need to submit their application for termination of the Company.
- A letter is to be obtained from the Labor and Immigration Department that there are no visas.
Mainland Company
- Shareholders resolution confirming the liquidation of the Company. This would usually be in the form of the minutes of the meeting which is held by the shareholders in which they decide on the liquidation of the Company and appointment of the liquidators for the same.
- An acceptance letter from the liquidators accepting their appointment.
- Application for cancellation of the Company from the Department of Economic Development (DED)
- Receive a liquidation certificate from the Department of Economic Development (DED) once the above steps are completed.
- Once the liquidation certificate is received from the Department of Economic Development (DED), the Company has to publish a notice of liquidation in two local newspapers.
- After the notice has been published, there is a notice period of 45 days for the debtors to submit their claims (if any).
- The Company must then cancel its firm card with the Ministry of Human Resources and Emiratization.
- Once the notice period of 45 days is over, the Company must submit the following documents:
- A declaration stating that all parties have no objection relating to the liquidation of the Company
- Approval would be required from other government agencies for the cancellation of the Company’s license.
- Cancellation of the foreign partner’s visas which are sponsored by the Company.
- The last step is to pay the Department of Economic Development (DED) fee, and the company will be successfully liquidated.
Handling Bank Accounts, Employee Contracts, Utilities, and Services During Liquidation
In all cases, the Company will need to cancel the employees’ visas and their work permits. Dubai portal explains that this requires coordination with both Department of Naturalizations and Residency and the Ministry of Human Resources and Emiratization.
As per the UAE’s Labor Law, employers are required to give their employees a two-month paid notice period before terminating their contracts. In many cases, employees can keep their residency visas until the company’s trade license runs out. Then, the company needs to cancel utilities and telecommunication services and close all its bank accounts. Collect a NOC from the utilities providing company and bank closure confirmation for processing the closure.
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