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Voluntary Liquidation in UAE | A Comprehensive Guide

In the fast-paced world of business, companies occasionally find themselves in situations where the best course of action is to dissolve the company. One way to achieve this is through Voluntary Liquidation in the UAE, a legal process that enables businesses to wind up their operations in a systematic manner. This article aims to explain the process of Voluntary Liquidation and provide insights into the nuances of Company Liquidation in the UAE.

Understanding Voluntary Liquidation in UAE

Voluntary Liquidation, also known as voluntary winding up or members' voluntary liquidation, refers to the deliberate decision made by a company's shareholders to close the business. This process is initiated when the business is solvent, meaning it can pay off its debts. In the context of the UAE, the country offers a well-defined legal framework for the voluntary winding up of a company.

Also read: Reasons behind the liquidation of companies in Dubai

Types of Voluntary Liquidation

In the UAE, there are two primary types of Voluntary Liquidation:

  1. Members' Voluntary Liquidation (MVL): This type of voluntary liquidation is initiated when the company is financially stable, and its directors and shareholders decide to close it. In MVL, the company's assets are sufficient to pay off all its debts and obligations, ensuring a smooth and orderly closure.
  2. Creditors' Voluntary Liquidation (CVL): CVL is chosen when a company is unable to pay its debts as they become due. In this case, the decision to liquidate is usually initiated by the company's directors, but it is primarily driven by financial strain and the inability to meet obligations. The liquidation process aims to maximize creditor satisfaction and allocate the available assets fairly.

Process of Voluntary Liquidation in UAE

Step 1: Determine the Type of Liquidation

Members voluntary liquidation

A member voluntary liquidation is a process that enables shareholders to appoint a Liquidator to formally close down a solvent company. A can only take place if the directors of the company make a formal declaration for voluntary liquidation.

Creditors voluntary liquidation

If the company turns to be insolvent the liquidator will call a meeting of creditors and the liquidation becomes creditors' voluntary liquidation. A Creditors’ Voluntary Liquidation is the liquidation of a company that cannot pay its debts as they fall due. The process is initiated by the directors of a company where the company’s liabilities exceed its assets and is insolvent.

When the company directors realize the company does not have a reasonable prospect of survival, they are obliged by the Company’s Act to put the company into liquidation. The company can nominate an authorized person as a liquidator. It must call a meeting of creditors to discuss the financial details of the company.

Step 2: Directors of the Company to Agree to Voluntary Liquidation

The next step is the directors of the Company need to agree that the Company is suitable for liquidation.

Step 3: Declaration of Solvency

The directors have to file the declaration of solvency with the registrar.

Step 4: Special Resolution

Directors have declared the company solvent, so the managing shareholder of the Company will pass a Special Resolution for liquidation.

Step 5 : Liquidator Consent

The Liquidator will sign a consent form (to be filed with the Registrar of Companies) notifying the Registrar of the appointment.

Step 6: Settlement of Claims

Any invoices and claims submitted to a Liquidator will be reviewed for authenticity. The liquidator will work with the Company’s various service providers to determine whether the submitted claim is genuine.

Step 7: Final Meeting

The liquidator will conduct a final meeting and present all necessary documents and confirmation for liquidation.

Key Steps in Voluntary Liquidation in UAE

  1. Board Resolution: The process begins with a board resolution, where the directors propose liquidation and obtain approval from the shareholders.
  2. Appointment of a Liquidator: An independent professional known as a liquidator is appointed to oversee the liquidation process. The liquidator plays a crucial role in ensuring that the company's assets are distributed correctly among creditors and shareholders.
  3. Notice to Creditors: A notice of liquidation is published to inform creditors and stakeholders about the company's intention to dissolve. Creditors are given a specific period to file their claims.
  4. Settlement of Debts: The Company settles its debts and obligations. The liquidator ensures that all outstanding payments are made using the company's assets.
  5. Distribution of Assets: After settling debts, the remaining assets are distributed among shareholders according to their ownership stakes in the company.

Benefits of Voluntary Liquidation

  1. Orderly Closure: Voluntary liquidation provides a structured and legal way to close the business, ensuring that all outstanding matters are resolved systematically.
  2. Creditor Satisfaction: Creditors are more likely to be satisfied as the process ensures their claims are settled appropriately.
  3. Legal Compliance: By following the legal procedures, the company and its directors demonstrate compliance with the law.

How Farahat & Co. Can Assist?

When a company decides on voluntary liquidation in the UAE, expert guidance is invaluable. Farahat & Co., a reputable firm with expertise in company liquidation, offers comprehensive assistance throughout the process. Their seasoned professionals understand the local laws and regulations, ensuring a smooth and efficient liquidation process for your business. Seeking assistance from experts like Farahat & Co. can make the process considerably easier.

Frequently Asked Questions (FAQs) 

Q1. Why Would a Company Opt for Voluntary Liquidation?

Companies opt for Voluntary Liquidation when they decide to cease operations in a systematic and legally compliant manner. This can occur due to various reasons such as the completion of a project, changes in market conditions, or a strategic decision to dissolve the business.

Q2. What Are the Key Steps Involved in Voluntary Liquidation in UAE?

The key steps in Voluntary Liquidation include initiating the process through a board resolution, appointing a liquidator to oversee the process, giving notice to creditors, settling debts and obligations, and finally, distributing the remaining assets among shareholders according to their stakes in the company.

Q3. How Does a Company Settle Its Debts During Voluntary Liquidation?

During Voluntary Liquidation, the appointed liquidator assesses the company's outstanding debts and ensures that these obligations are settled using the company’s assets. Creditors are paid off systematically, and any remaining funds are distributed among shareholders.

Q4. What Role Does a Liquidator Play in the Voluntary Liquidation Process?

A liquidator is a professional appointed to oversee the Voluntary Liquidation process. Their role is crucial in settling the company's debts, distributing assets, ensuring legal compliance, and managing the entire process according to the laws and regulations of the UAE.

Q5. How Can Farahat & Co. Assist in Voluntary Liquidation?

Farahat & Co. provides expert assistance in Voluntary Liquidation in the UAE. Their experienced professionals understand the local legal framework and guide businesses through the process. They assist in initiating the liquidation process, settling debts, ensuring compliance, and managing all aspects of the dissolution, making the process considerably smoother for the company involved.

Q6. Is Voluntary Liquidation Suitable for Insolvent Companies?

No, Voluntary Liquidation is specifically designed for solvent companies, meaning those that can pay off their debts. If a company is insolvent (unable to pay its debts), it may need to consider other legal processes, such as compulsory liquidation, to resolve its financial obligations. Voluntary Liquidation is suitable for companies that are financially stable and want to close their operations voluntarily.

Q7: How Long Does the Voluntary Liquidation Process Typically Take?

The duration of Voluntary Liquidation can vary based on the complexity of the company's structure, the amount of outstanding debts, and the cooperation of creditors. On average, the process can take several months to complete. Timely and accurate cooperation from all parties involved can expedite the process.

Q8: What Happens to Employees During Voluntary Liquidation?

Employee rights and entitlements are a priority during Voluntary Liquidation. Employees are typically entitled to their pending salaries, end-of-service benefits, and other dues. The company, under the guidance of the liquidator, ensures that these payments are made by labor laws before the business is officially closed.

Shahnaz Kaushar is a senior Trademark and Intellectual Property (IP) Expert. She has handled some of the firm’s complex, high-profile cases – many involving the protection of trademark and IP rights.