Businesses worldwide work with a mission to find opportunities and solve problems persistent in the world. Along the journey to achieve growth, companies invest in resources that include employees, infrastructure etc. Companies find different means to finance the resources employed. They face challenges daily, and at times, companies fail to meet their debt obligations to their creditors and declare bankruptcy. The company's debt can be paid off using different means such as creditor rehabilitating the debtor, restructuring its current debts or company liquidation.
Liquidation can be defined as a legal process wherein a debt-laden business initiates to wind up the operations and sell its physical and digital assets to repay creditors and meet other obligations. Company liquidation will usually be taken as a last resort for companies that are not in a state to continue. The liquidation can be due to various reasons, including being insolvency – mainly if the business is not in a healthy state to repay its debts or unwilling to carry on the operations in the country, among other things.
In the UAE, the company liquidation process is very well established under Federal Law No. 2 of 2015 on Commercial Companies (also known as ‘2015 Law'). As long as the Memorandum of Association or Articles of Association of the company at the time of company incorporation specify special provisions or provisions that contradict the 2015 Law on Commercial Companies, the liquidation process by default should be executed under the provisions as set out under the 2015 law.
Businesses are usually liquidated when it is ascertained that they are not in a state to continue. The liquidation process involves winding up and completely shutting down a company's operations and clearing all the outstanding payments if any. Upon completing the liquidation process, the said company ceases to exist in the eyes of the court. In cases of debt-ridden companies, to clear the debt, the liquidation process involves selling the poor-performing goods of the company, usually at prices much lower than the cost incurred to the business. Once all the creditors are paid from the proceedings of the asset sale, any positive balance is then distributed among the company's shareholders.
Types of Company Liquidations
Inability to clear one's debt is not the only reason for Company Liquidation in the UAE. Businesses are liquidated due to various reasons, both internal and external to the business. The below are kinds of company liquidations;
It can be defined as liquidation that is not forced by an insolvency crisis. The liquidation is voluntarily decided by the company's current owner(s)/shareholder(s).
Creditors' Voluntary Liquidation
Voluntary liquidation occurs when the director/directors ascertain that the company may default on creditor payments. In this case, the company's shareholders decide by vote- if 75% of the members agree to the management proposal, the company is liquidated.
The court of law mandates it. Compulsory liquidation occurs by the court order for a business to shut its operations and close down when the company cannot repay its liabilities.
Significance of Company Liquidation
- Company liquidation will help turn the company's assets into cash. The cash, in turn, allows the business to pay off its investors, shareholders and other outside debtors.
- Business is liquidated upon the expiry of business license or duration mentioned in the Memorandum of Understanding and the articles of incorporation or association.
- Company liquidation happens upon the completion of the objective for which the company was established. The objective can include different goals like monetary benefits, personal goals etc.
- A joint venture is liquidated due to many differences between the partners. The assets of the company will be dealt with per articles of association.
- Businesses are liquidated in a particular country at the time of tax regime changes or due to new legislation coming into effect that may pose a severe challenge to the company's business operations.
The company liquidation process and procedure are complex, tiresome and statutory. It is advised that business owners seek advice and assistance from qualified professionals before planning the process of liquidation.
Jaxa Chartered Accountants, with a presence all over the United Arab Emirates, has years of experience in advising companies and assisting them in the process of company liquidations. Our experts with a clear understanding of the 2015 law dealing with company liquidation help with all related aspects. Please Contact Us to know more.