As soon as you realize that your business is insolvent, it's imperative for you to speak with a certified insolvency practitioner in the UAE to know your responsibilities and rights. Being insolvent in UAE doesn't mean it's the end for your business. There are several options like formal company restructuring. Of course, it is possible for it to lead to company liquidation as well.
Typically, when a company claims that it’s insolvent with the help of a licensed corporate insolvency expert, the following happens:
- Debts of the company will cease from increasing, which should begin as soon as it’s aware that it has become insolvent.
- A business won't be able to simply pay off guarantees with the sale of its assets in order to reduce debts while creditors are neglected as this can cause even more complications.
- Assets of the company can’t be transferred to a business that’s newly formed as there can be potential severe implications to the company owners personally.
- The employees will be regarded as the company's preferential creditors.
- The local tax authorities are to be paid off and contacted in order to manage the situation.
- Although shareholders are the owners of a company, company directors are expected to ensure accounts are all filed and taxes are paid.
- Limited liability companies in UAE are completely separate entities on their own right and they have their own sets of rules and regulations. When a business becomes insolvent, all of its actions should be directed towards the best interests of the creditors. Failure in doing so will result to serious financial penalties.
You may want to know: 7 Tell-tale Signs of Insolvency in Business
What are the options of an insolvent business in UAE?
The UAE Law (No 19) of 2019 related to insolvency for UAE corporate entities support those that are facing anticipated or existing financial difficulties which make them unable in settling their debts. The local legislation helps businesses by providing the following options to insolvent businesses:
The initial view that a court takes with a company’s claim of insolvency is to determine whether or not a business can be restructured in order for it to settle all of its liabilities and eventually become profitable again. A company insolvency and liquidation expert will be appointed by the local court in order to assess the financial position of business, compile a full list of the company creditors, and determine whether it can be restructured to profit once more. A plan presented to a judge will require a company's approval and approval of majority of the company’s creditors. The appointed professional will implement a restructuring plan with the expert taking an executive role.
If the local courts and the company deems formal restructuring not feasible. A judgment will be issued declaring a company bankrupt. An order will be issued as well to liquidate the assets of the company. A declaration for corporate liquidation and bankruptcy will be issued for various scenarios. This includes when approval of creditors isn’t attained for a restructuring plan. When a company applies for bankruptcy and it’s seen to be acting in bad faith will also result to the issuance of a bankruptcy declaration. The local courts may also order an insolvent company to liquidate if formal restructuring fails or has become impossible to achieve in the opinion of the court.
As soon as company bankruptcy is declared, a company liquidator appointed by the local court will arrange for the company liquidation. The assets of the company will be sold and the proceeds will be distributed to the company creditors. Any balance will be distributed among the company shareholders.
You should know: How Does Liquidation Work for Insolvent Companies?
Are there different kinds of creditors?
The UAE Insolvency Law distinguishes between normal unsecured creditors and privileged creditors. A privileged creditor of a company is a creditor with a privileged debt like judicial expense or fee, any amount that is owed to a government authority, and any amount that is owed to an employee for benefit or salary.
A privileged creditor is the first to be paid when a company carries out its plan in settling debts to creditors. Unsecured creditors won’t be paid until all debts to privileged creditors are satisfied.
Also you may be interested in : What You Should Know About UAE Insolvency Process
Seasoned Company Liquidators in UAE
The UAE legislation on company insolvency protects companies from legal prosecution as it's decriminalized financial obligations of an insolvent business. An insolvent company is often given the opportunity in working, being productive, and providing the chance to repay creditors.
An expert has to be sought in the enforcement of a plan to restructure or liquidate a business. At Farahat & Co, our team of corporate insolvency practitioners in the UAE empathize with company administration in distress by providing advice and guidance on how to navigate the process of claiming company insolvency.
If you want to discuss with our experts regarding your situation, call us now!