Insolvency referred to a business’ state when it is no longer able to settle all of its outstanding payments. In such case, the expenditure of the business can’t be cover anymore by its revenue. It can happen as a business happens to make a wrong investment, made mistakes with the calculation of prices, and misjudged the business risk. But, general market changes and economic crises may also drive businesses into insolvency.
As for liquidation in UAE, it is the process taken to bring a business to an end and redistribute property and other assets of the business.
Reasons for Businesses to Undergo Liquidation in UAE
The insolvency of a business can be due to the combination of both external and internal factors. The internal factors can include planning mistakes, the production costs being estimated less, insufficient funding, and the company expanding too quickly. And important internal procedures of the business being organized poorly or manipulated.
For the external factors which lead a business to consider undertaking company liquidation in Dubai, UAE, a business may go bankrupt even when it is not at fault. An example is the COVID-19 pandemic which brought about an economic crisis. Another reason a business may be insolvent which is an external factor is the business partners. Or important customers becoming insolvent with outstanding claims not settled adequately.
This often has a high impact on businesses that are highly dependent on their subcontractors or raw material imports like manufacturing and construction.
You may want to know: How Does Liquidation Work for Insolvent Companies?
How is a Business Considered Bankrupt?
There are signs of a business that is heading for bankruptcy. If a business is now requiring private contributions regularly from private funds’ business owners. Then it is likely to be having financial problems. Also, if a company’s payments have been delayed for a longer period of time and savings of the business are quickly being depleted for personnel costs and new acquisitions, those are clear indications a business will soon be bankrupt.
Officially, businesses in UAE won’t be considered insolvent if insolvent proceedings haven’t been initiated. In order to this, a company liquidation in UAE must be called for. The expert will provide an application and provide proof of undertaking the company liquidation process in Dubai with a valid reason. This may be:
- The company can no longer meet all of its payment obligations;
- Amount of existing debts and liabilities of the company exceed the amount of the company’s total assets; or
- The business isn’t expected to meet payment obligations as soon as they are due
Tips for Preventing Company Liquidation or Insolvency
The looming possibility of company liquidation doesn’t' have to result in proceedings. Negotiations with creditors can help in avoiding insolvency.
Take note: consult with a company liquidator in UAE first to know the best route the business should take.
The best ways in avoiding company liquidation include the following:
- The cancellation of debts (through installments or total amount)
- Payment deadlines’ extension
- Agreement on payments put on an installment basis
- Inclusion of partners who are able to make private contributions to the business
Agreement for installment basis payments will be useful for businesses who are only experiencing payment problems temporarily and are expecting their situation to see improvements shortly. But, in any case, it’s absolutely important for a business owner to deal with the financial difficulties of a business as soon as possible. There is a need to explore all solutions possible.
If a company’s managing director ignores difficulties in payment for too long, then you as the business owner would be held liable. There is also the change of the business’ managing director deliberately concealing the financial problems of the business. Remember that if proceedings for company liquidation in UAE aren’t filed at the correct time, a business can get fined or even punished with imprisonment.
Read More: 7 Tell-tale Signs of Insolvency in Business
The standard process of Company Liquidation in UAE
Company Liquidation in Dubai, UAE will include several steps which are regulated strictly by local authorities. Please consult with a company liquidator in UAE in order to make sure you are fully compliant of the regulations while undertaking company liquidation.
- Recognition of the company liquidation process – as soon as creditors and debtors consider the requirements for company liquidation fulfilled, they’re able to send an application for the liquidation process to start. All applications are examined by a competent judge or court-appointed experts. The courts will examine whether the applicant has enough money in financing the debt settlement required in company liquidation. If all necessary conditions aren’t met for company liquidation, then an opening decision will be issued publicly.
- Appointment of company liquidator – when insolvency proceedings have been publicly announced, the next step is the appointment of a company liquidator in UAE. The expert will be directing and supervising the necessary steps in completing the insolvency proceedings. The same person will also coordinate with business owners so all parties involved with the process can benefit. A company liquidator will try to secure as well as preserve the assets of a business. The company liquidator will determine the exact debt burden of the business, including its insolvency assets.
- Distribution of company assets – all existing contracts of a liquidating business will be reviewed. The company liquidator will examine resulting obligations and decide together with contracting parties whether contractual services may be provided or contracts dissolved.
