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Methods and Types of Liquidation of Companies in UAE

Many reasons lead to the liquidation of companies, and what leads to multiple types of liquidation of companies, some of which are related to the company’s articles of incorporation, related to the will of its owners, and what is compulsory by the force of law, and the texts of the commercial company’s law of 2021 are responsible for explaining the method of liquidation in terms of paying the company’s debts.  In return, it collects its rights and also distributes all of the final profits or losses to the partners after stating its rights and duties, unless there is a clear and specific agreement regarding liquidation.

What is the Meaning of Corporate Liquidation?

Companies go through two basic phases. The first is its life with the decision to establish it and the second is its expiration. During the phase of its expiry, there is the phase of dissolution of the company, which is concerned with ending its commercial operations, then the phase of liquidation as a set of procedures related to dissolution. The legal personality of the company remains in place during the liquidation period in the form in which it can sell its assets, collect its debts, and pay its obligations.  Towards creditors and partners, and upon completion of the liquidation stage, the company expires, and thus the company loses its legal personality, that is, it loses its independent legal personality, its independent financial liability, and no longer has any legal consideration.

However, it is worth noting that partnership is not a condition, and there are various types of companies, for example, the one-person company, which is a new type of company that was regulated by the Federal Companies Law referred to above, according to Article No. 71, second paragraph, regarding the establishment of a one-person limited liability company.

Judicial jurisprudence in Dubai has stated that, although a commercial company carries out its activity without registering it in the company’s registry and declaring its incorporation, it exists in relation to others as a company with its legal personality and financial liability independent of its partners, and the partners are jointly responsible among themselves for the actions carried out by its manager.  Or one of the partners in his capacity.

What is Liquidation?

The liquidation process requires carrying out highly sensitive accounting matters, such as final accounts, financial statements, and special liquidation books in which the sale of assets and assets, the payment of debts owed by the company and their collection to the company, and the profits and losses that result from liquidation can be defined as (a set of legal procedures carried out by one or more people)  “The liquidator” comes after the termination of the company’s commercial activity (the company’s dissolution stage). It includes clarifying the rights, duties, and assets of the company, the process of paying debts, collecting and receiving its rights from others in preparation for dividing its properties, and finally distributing each of the final profits or losses to the partners.

According to Article 314: The liquidator does what is necessary to preserve the company’s funds and rights, collects what is owed to others, and deposits the amounts he receives in a bank for the account of the company under liquidation immediately upon receipt.  Thus, he is not an agent for the partners or the company's creditors but rather derives his authority from the liquidation decision, which states the extent of his powers to complete the liquidation process.

What are the Types of Liquidation?

Two types of liquidation can be distinguished in terms of will:

1. Forced Liquidation:

By decision of the court competent to oversee the aforementioned provisions of the Companies Law, this often happens when the company’s financial situation becomes unstable as a result of a financial crisis or its commercial activity falters in a way that prevents it from fulfilling its obligations. One of the partners may submit a petition to the court, or the company’s creditors may submit a request to collect debts.  What is owed to them is the responsibility of the company, and here we are faced with a case of liquidation due to bankruptcy. The person conducting the liquidation procedures is called the “bankruptcy trustee.”

Cases in Which the Company is Forcibly Liquidated:

  • The company lost more than three-quarters of its subscribed capital without increasing its capital.
  • If the company commits serious violations of local law regulations or its founding charter.
  • Its commercial activity has been stopped unjustifiably for one year or more.

2. Consensual Liquidation:

By decision of the General Assembly of the company and under its auspices, this must be done in accordance with the rules specified by the shareholder partners in the company’s founding charter and by issuing an official decision from them, provided that the following is stated in the decision:

  • Liquidation method: The legal procedures followed in one form or another for liquidation in government departments differ depending on the legal form of the company.
  • Nominating the liquidator. It is permissible to have multiple liquidators, but their decisions are taken unanimously.
  • Determine the liquidator’s fees, on pain of the court setting a similar fee for him.
  • The method of selling the company’s assets. To sell by public auction, he must be given the authority to do so in his appointment decision, provided that selling all the company’s assets at once requires the approval of the partners or the general assembly.
  • The time frame for periodic reports.
  • The liquidator is authorized to represent the company before others, and he bears professional responsibility toward others for any damages arising from his management of the liquidation file.
  • Determine the period of liquidation. The court shall set a period for liquidation when the period is not stated in the decision to appoint it.
  • Submitting the final account upon completion of the liquidation work.

Farahat & CO has liquidation experts who have extensive legal and accounting experience in liquidating companies, and all your inquiries will be answered with pleasure.

Types of Liquidation in Terms of Time Period

 1. Quick Liquidation:

Its procedures are carried out in one batch or in short successive stages, during which the company’s assets are sold and the company’s debts are collected, and at the same time the process of repaying debts and distributing partners’ rights takes place directly.

2. Slow Liquidation:

The period to complete its procedures may take a long time, often due to the failure to sell assets or the difficulty of collecting debts owed to the company, so the liquidator takes time to delay the sale, thus preventing the occurrence of serious losses due to liquidation.

Who Appoints the Liquidator?

The liquidator is appointed by a judicial ruling or by the partners in the company’s articles of incorporation or at the beginning of the company’s dissolution phase or the decision of the company’s general assembly, and it is the liquidator’s responsibility to inform the commercial registry of his appointment decision.

The Companies Law, by Article 306 and up to Article 326 thereof, handles the issue of liquidation of companies through the nomination of the liquidator and the general steps and stages in two cases.

  • The first: If the terms of the company’s articles of incorporation do not mention a specific method that differs from the procedures contained in the law.
  • Second: When the partners do not agree on a specific liquidation method when they terminate the company’s activity at the stage of dissolving the company

What are the Reasons for Liquidation?

The Most Common Reasons for Liquidation:

  • The expiration of the period stipulated in the company contract, if it is specified.
  • The expiration of the purpose or purpose for which the company was established or the absolute impossibility of implementing it.
  • Loss or damage to the entire capital or in such a way that the company is unable to continue.
  • The company's successive losses confirm its inability to continue.
  • The company lost more than half of its capital as a joint stock company.
  • One partner acquires all the partners’ shares to become the sole owner. Then the legal body of the company turns into a limited liability company.
  • Issuance of a judicial ruling to dissolve the company for any reason.
  • The merger of the company into another company results in the dissolution of the two merged companies and the creation of a new company.
  • The partners unanimously agree to liquidate the company

Special Reasons for Liquidation:

  • Bankruptcy or insolvency of one of the partners.
  • departure of one of the partners when the company consists of three or more partners.
  • The death of one of the partners without any evidence indicates the permissibility of continuity with the heirs replacing their deceased in the company.
  • Announcing the decision to quarantine one of the partners.

*However, these reasons do not preclude the possibility of the remaining partners agreeing on their continuation alone in the company, and this agreement shall be effective between them directly. As for third parties, for its effectiveness, it must be published in the commercial registry.

Read More: Process of Cancellation of Company Registration for Liquidation

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.