How Does Liquidation Work for Insolvent Companies?

What Is Liquidation?

Simply put, liquidation is the process of putting an end to a business, it will no longer trade or operate. Through this process, assets are sold to pay off debts and shareholders, and to settle outstanding salaries owed to employees.

This typically happens when a company is found to be insolvent, insolvency being the state of being unable to pay debts as they fall due over a sustained period.

Also check: Company Liquidation / Bankruptcy / Insolvency

Types of Liquidation

There are two kinds of liquidation, voluntary and compulsory, explained below:

Voluntary Liquidation

This occurs when the owner or shareholders of a company decide the business is no longer fit to continue operating. Choosing voluntary liquidation reduces the risk of being forced into liquidation or facing accusations of mismanagement.

The owner or shareholders hold a meeting with creditors, deciding which liquidator will handle the process and agreeing on the terms for asset distribution.

Compulsory Liquidation

This kind of liquidation follows a court order, most commonly requested by creditors seeking to have a company liquidated. This typically happens where a business has repeatedly failed to pay its debts. It’s called compulsory because the decision to liquidate doesn’t come from the owner or shareholders, it’s ordered by the court itself.

Must check: Mainland Company Liquidation Services

Liquidation Procedure in the UAE

The liquidation process generally follows four core steps:

1. Appointing a Liquidator. At a shareholder meeting, the parties agree on which liquidator will handle the process, along with the terms governing debt settlement and asset division.
2. Collection of Assets. The appointed liquidator records and collects the company’s assets, selling them where necessary and gathering the resulting proceeds.
3. Paying Off Debts and Dividing Surplus. Proceeds are used to pay creditors first, with any remaining surplus divided among shareholders according to the agreed terms.
4. Formal Dissolution. Once these steps are complete, the company is formally dissolved through the required legal documentation.

What Should Be Done Before Going Through Liquidation

Collection of Outstanding Payments

The company should ensure any outstanding accounts receivable are collected before liquidation proceeds. While collection should happen promptly, this doesn’t need to involve announcing the closure prematurely, continued follow-up through calls and emails to demand payment is generally sufficient.

Completion of Pending Work

Clients should be informed of the business closure, and pending jobs or projects should genuinely be completed where possible, to avoid potential legal disputes. Where certain outstanding work genuinely can’t be completed in time, refunding the affected clients is the appropriate alternative.

Employee Notice and Final Payments

Employees should be given proper notice consistent with their employment contracts and UAE Labour Law, Federal Decree-Law No. 33 of 2021, rather than notified only at the last possible moment. Beyond being a legal obligation, this gives employees a genuine opportunity to seek new employment. All final entitlements need to be settled correctly, including outstanding salary, accrued leave, and end of service gratuity calculated per the applicable formula. Business owners who maintain open, transparent communication with their team throughout the closure process generally navigate this stage considerably more smoothly, and with far less legal exposure, than those who attempt to delay notification strategically.

See also: VAT Deregistration Services in UAE

VAT and Corporate Tax Deregistration

Completing the commercial liquidation process doesn’t automatically close out a company’s tax registrations. A separate VAT deregistration application must be filed with the Federal Tax Authority, generally within 20 business days of ceasing taxable supplies, and a final Corporate Tax return covering the period up to cessation of business is generally still required under Federal Decree-Law No. 47 of 2022. Financial records must be retained for 7 years from the end of the relevant tax period, regardless of the company’s dissolved status. These tax deregistration steps should be treated as running in parallel with, not automatically resolved by, the commercial liquidation process.

Liquidators That Can Assist You

Although liquidation follows only four general steps, these need to be handled by a regulated company liquidator. Different jurisdictions within the UAE require different documentation before a company’s complete deregistration is finalized.

Experienced liquidators can offer genuine insight into how a liquidation actually proceeds in practice, based on hands-on experience handling similar cases.

Frequently Asked Questions (FAQs)

How Farahat & Co. Can Help

Farahat & Co., established in 1985 with a team of regulated liquidators, provides company liquidation services, including compliant employee settlement guidance and VAT/Corporate Tax deregistration support.

Contact Farahat & Co. today to discuss your company liquidation requirements.