The dawn of 2015 showcased significant developments in the United Arab Emirates when Federal Law Number 2 of 2015 (the Companies Law). This statute amended the major portion of the law governing legal entities in the country’s mainland. The Companies Law has also focused on the provisions of liquidation which we will shed light on, but first, we will demonstrate the main reasons of liquidating a company as per the said law. The lawmakers of the country have strived to simplify the process of liquidation of a company with the view to ensure that all the parties have an equitable share in the entity’s assets. It is not strange to deem an organization desolated and initiate the process of liquidation if the purpose of the company has been full filled. If all or most of the company’s funds are utilized or spent and; the remaining funds cannot be used for investment anymore, all partners of the business (or the quorum) agreed that the term of the company has expired or a Court has issued an order to dissolute the company. The Court of Cassation in Commercial Cassation Case Number 381/2008 stated that ‘if any of the dissolution events arises, the steps shall follow the liquidation of the company and distribution of the money among the shareholders which cannot be distributed unless and until the dissolution and liquidation process concludes.'
Any business would undergo managerial turmoil when one of its partners passes away. However, could this be the sole reason to liquidate a company per the Companies Law? Unless mentioned in the articles of association of the limited liability company, all shares of the deceased partner shall be duly transferred to the successors only if the limited liability company consists of more than one shareholder. On the other hand, a single person company would dissolve due to the death of its only shareholder unless and until the successors declared their consent to resume the activities of the company within six months.
Although, if a company has been inactive then the competent authority may indicate that their trade name shall be crossed off the commercial register within three months unless they provide a valid reason. However, if the notified company fails to prove to the authority that it is duly active or provide good cause for being inactive, then the governing body has the right to raise the matter to the Court.
At the outset, the representative of the company must notify the Department of Economic Development (the DED) and all other related authorities with the reasons for dissolution and liquidation of the business. The authorities accordingly will note the 'dissolution' at the commercial register and further inform the company of any documentation or legal formalities at that stage. The dissolution should be published in two local newspapers in English and Arabic to provide an opportunity to the public to be aware of the decision and protect their personal interests if any. Further, the partners of the company should appoint a liquidator and determine the manner of liquidation notwithstanding that no partner shall be entitled to his shares from the capital of the entity until all debts get settled.
It is important to note that the powers of the management, board of directors who represent the company shall end from the date of appointing the liquidator(s), or to the limit where the liquidator(s) finds it necessary to keep the works of liquidation in order. The liquidator(s) can be appointed by:
A partner’s resolution framed in the general assembly should mention the name(s) of the Liquidators, a method of liquidation and fees of liquidator(s); provided that they are not the current auditor of the company or has audited the company in the last five years. This element succors the principle of equity since the liquidators who are appointed would be neutral towards the company and hence ensure that all the debts paid off before the partners receive their piece of the cake. However, as mentioned earlier, the Court will also have a hand in dissolution and appointing the liquidator if has been company inactive or its activities are in violation of the law. In such a case, the Court will name the liquidator(s) and method of liquidation and liquidators fees. Further, the partners may dismiss the liquidator(s) by passing a resolution in the general assembly of the company or vide a court order. However, such decisions get registered in the commercial register in the department of economic development.
The Process of Liquidating
A liquidator will be the representative of the company to the public and the Court. The liquidator will bear the responsibility to settle all remaining debts of the company and sell its movable and immovable assets in auctions or; in any manner unless is it agreed in the partners’ resolution or Court order to sell such assets in a set way. The process of liquidation of a company includes:-
A liquidator shall make an inventory list for all, company’s money, assets and liabilities and the manager or board should handover money, accounts, documents, and ledgers to the liquidator and cooperate with any information or datum related to the company.
Assets and Liabilities
The liquidator has to prepare a detailed list setting out all available amounts, budget and current liabilities of the company which must be signed by the manager or board. He should also present to the partners every three months a statement of liquidation and reveal to the partners any information related to the matter. Once the process is concluded, the liquidator must submit his final report of liquidation to be approved by the partners or Court. After obtaining the approval, accordingly the liquidator will – within seven days- notify the partners by publication to receive their entitlements within 21 days. All the shares will be stored with the Cort’s treasury if the partners fail to collect their shares.
Interests of Company
A proper liquidator will always protect the entity's assets, money and rights availed as per law and will place the money which he receives from the account of the company and most importantly duly settle its liabilities against third parties.
Settlement of Debts
The monies of the business shall be distributed among its partners according to the shares only after clearing all dues and debts. It is to be noted that all due dates of liabilities shall relinquish upon the dissolution of the company. With this, the liquidator shall duly notify the creditors with the commencement of liquidation in two local newspapers published in both English and Arabic. In all circumstances, the publication must include an invitation to the creditors to present their claims in a grace period of not less than 45 days. Once the creditors submit their request and if it’s shown that the available amount cannot cover the entire debts then the liquidator, in this case, shall settle according to the percentage of liabilities without prejudice to the priority creditors. In the event where the creditor(s) are in dispute over the debt then the liquidator will have to put the amount of the debt in the court’s treasury. Otherwise, all debts will get settled with the creditors, and such settlement gets notarized before the notary public.
The term of the liquidation gets determined in writing by the partner of the company or the Court. Such duration cannot extend unless with a Court order or partners resolution provided that the liquidator must explain the reasons to delay the liquidation. Further, the court would not entertain any suit against the liquidator, partners, and managers, members of the board and auditors of a liquidated company if three years has elapsed since the liquidation of the entity's business.
It is imperative for partners of a company to comprehend the exact time when a corporation must liquidate to avoid further costs and losses. The Court of Cassation in Commercial Cassation Number 70 of 2007 said that companies that seek liquidation should register in the commercial register. However, the process of liquidation ultimately depends upon the liquidator(s) and even the court in case the company has been deemed to be inactive. Therefore, enterprises that intend to liquidate themselves should employ a law form that houses a dedicated corporate and commercial team which provides bespoke legal advice.
Note: This article dates back before the enactment of the new UAE Bankruptcy Law (Law Number 9 of 2016). To read the developments contained in the new UAE Bankruptcy Law, please read our publication prepared jointly by STA's team of lawyers in Dubai and lawyers in Abu Dhabi here.