What is Company Liquidation and its Process
14

Aug 2019

A lot of hard work and planning goes into setting up of a company. It is necessary for the management to put in the time and effort in the incorporation process so that the company can have the correct start. But even after this many companies have to face the end which can be caused due to a number of reasons. These reasons can range from factors like change in the business environment, a shift in customer preferences, technological advancements, present business environment etc. which have a huge impact on the business. If these factors are not taken into consideration, the company might have to liquidate all its assets.

What does one mean by Liquidation?

If a company has taken too many debts and is unable to repay them the company will have to shut down, but the people still want their money back. So the management will liquidate all its assets and liabilities, which means that the assets of the company are used to settle all the liabilities of the company. Liquidation of the company is the last resort that should be used by the management to repay all the debts of the company.

All the assets of the company such as land, raw materials, stock, machinery etc. are sold off to a potential buyer and the money obtained from this transaction is then used to repay the creditors. This selling of the inventory, raw materials and assets of the company will disband the company, and the company will not be able to do any business in the future.

Reasons for Liquidation

There are many reasons which can give birth to a scenario where company liquidation becomes very important such as:

  • The company is unable to pay the debts on time
  • The company fails to do any trading for a long time since the incorporation
  • The company is making continued losses

As soon as the above symptoms appear in the company, the company must conduct an audit which will allow to uncover and understand the cause of such loss.

Types of Liquidation

There are mainly two different types of liquidation which a company can go through. These two types of liquidation are:

  1. Compulsory Liquidation

This is a type of liquidation that needs to be performed by the Board of Directors of the company. The lenders must provide reliable and admissible proof that the company is unable to repay the loans of the lenders. After examining if the court agrees with the lenders, the Board of Directors has to sell off the assets of the company to pay back the required amount.

This type of Liquidation is mandated by a superior authority and is ordered only if there is no other way in which the company can repay the creditors.

  1. Voluntary Liquidation

In this approach of liquidation, the board of directors have an in-depth discussion regarding the profits of the company. If the company is unable to generate benefits, the board of directors will opt for the liquidation of the company and the sale of the assets. In case of no losses but very fewer profits, the money generated from the transaction is distributed among the owners and the various shareholders.

Voluntary liquidation will help the businesses to save face and in many cases to start anew.

Process of Company Liquidation

Just like setting up a company, liquidation of a company also has its process which needs to be followed. Not following the proper procedure will hamper the business more. The process is given below:

  1. Appoint a Liquidator

The board of directors must appoint a liquidator who will oversee all the liquidation work and will also decide the priorities of distributing the cash received after selling off all the assets of the company.

  1. Board Resolution

The Board of Directors of the company will have to formally release a resolution stating the name and address of the appointed liquidator. The liquidator can now not provide its services to any other company.

  1. Print Decision of Hiring a Liquidator in Two Newspapers

The Board of Directors must also publish the news of the appointment of the liquidator and the address of the said liquidator in two of the local newspapers so that the word about the liquidation of the business is spread across the area.

  1. Take Claims of Creditors

After the announcement in the newspapers, the liquidator must announce a time frame in which all creditors may make a claim or any opposition against the company. Any other third party also has the right to make any objections to the liquidation process in the given time frame.

Just in case the time limit is not appropriate, the liquidator has the power to extend the time limit.

  1. Issuing of the Liquidation Report

After the completion of making all the claims by the creditors, the liquidator will dispense with the duties. When the complete liquidation process has been done, a liquidation report is issued by the liquidator to all the shareholders and other participating parties.

  1. Final Closure

When all the liquidation work is finished, the liquidator must submit an application of company deregistration with a copy of the liquidator’s report to the registrar office. After the approval of the application, the company registrar will issue a certificate which will finally disband the company.

For more details on the company, liquidation Read Your Guide to Company Liquidation in the UAE

Documents Required for Liquidation

The complete process of liquidation required certain documents. Below are the documents that should be kept at the ready:

  1. Copy of the licence to open a business in a specific Industry
  2. Power of Attorney
  3. Articles and Memorandum of Association of the Company
  4. Copy of the Emirates ID
  5. Copy of the passport of the Shareholders
  6. Resolutions are taken by the shareholders
  7. Deregistration Form

The board of directors should keep the documents as mentioned above, ready for a smooth and easy liquidation process.

Company liquidation may be a very complicated process in the company to be liquidated a big one and has many shareholders. In such a case, it is always advisable that you take the help of a consulting firm that will help in the liquidation process in the UAE. One such accounting and auditing firm - JAXA Chartered Accountants.

JAXA will not only help in the liquidation of the company but will also help you to establish a new company and also provide management consultancy services so that the company does not face any problems in the future. For more details on the various services offered, contact us – we’d be happy to help.