Business owners often have to make difficult and overwhelming decisions and one of the biggest ones is whether to close their company. This decision is generally made after a review of the
sustainability as well as the profitability of the business.
What is Company Liquidation?
Company liquidation in Dubai is the process of bringing a company to an end and distributing its assets to the claimants. When a company is insolvent it cannot pay its obligations when they are due. Business Liquidation usually occurs when a company has some valid reasons to not continue its business. So, a company might consider liquidating; which basically means turning business assets into cash.
In our blog we are going to cover:
- A Major Reason for Liquidation of a Company
- What Happens When a Company Goes into Liquidation
- Different Types of Company Liquidation
- Effects of Business Liquidation
Reason for Liquidation of a Company
One of the major reasons a company would choose to liquidate is insolvency in which it reaches a point where it is not able to make essential payments to settle its liabilities. Liquidation can be forced (involuntarily) by the court or it can be done voluntarily. When a business is a solvent, it can still be controlled by the directors of the company however if it is insolvent, it needs to be put under the control of a liquidator who then deals with all the aspects of liquidation and deregistering your company.
What Happens When a Company Goes into Liquidation?
When a Company Goes into Liquidation, the Following Things Occur:
- The status of the company changes to liquidation.
- All the trading of the company is halted and the staff is dispersed from their duties.
- The powers of the director end and they are no longer able to access business accounts.
- The assets are sold to the remaining creditors that the business owes.
- Any remaining amount after all the payments to the creditors is then distributed amongst any shareholders.
- Finally, after the process is complete the name of the company is removed from the registrar of companies and ceases to exist, also known as dissolution (the final process in business liquidation).
What are the different Types of Liquidation?
There are three different circumstances under which a company can be sent into liquidation. For each type of liquidation which is outlined below, there is a specific process that must be followed.
- Members’ voluntary liquidation
- Creditors' voluntary liquidation
- Compulsory liquidation
1. Members’ voluntary liquidation
When business liquidation is undertaken for other reasons than insolvency, and the company is still able to make payments but feels it’s time to close or wind down, this is termed voluntary liquidation.
Read more - Understanding Voluntary liquidation in UAE
2. Creditors' voluntary liquidation
Creditors Involuntary liquidation involves a company choosing to wind its operations or bring the company to an end voluntarily. This could be due to months of financial distress involving the inability to achieve a successful turnaround.
3. Compulsory liquidation
In compulsory liquidation, the company is completely insolvent and the director directly applies to the court to request the implementation of the liquidation process. This is done so that the
outstanding debt the company owes can be recovered. Since liquidating a company involves all assets to be sold and distributed among creditors, the creditors may petition for a company’s liquidation in order to get what they are owed.
Although most commonly it is the creditor who’s a petitioner, this is not always the case as shareholders or any other parties can also petition for a company liquidation if they have a legitimate
reason for doing so.
Your company is at risk of compulsory liquidation if it fits any of the below criteria:
- The total debts and liabilities surpass the value of all assets
- Insolvency, i.e., can’t pay its debts when due.
- Failure to re-register the company as a private or public company
- Not undertaken a trade within the established time of incorporation.
What Are the Effects of a Company Liquidation?
- Control of all company’s unsecured assets is with the liquidator and these assets are sold to repay the creditors.
- All share transfers become void after the beginning of the company liquidation process.
- The distribution of any property becomes void after the commencement of the liquidation process.
- The civil proceeding is suspended from the date of the court order until the appointment of a final liquidator.
- Business can only be carried out if it is for the purpose of completing the liquidation process
- The company cannot dispose of any assets anymore.
Company Liquidation Services in UAE
Businesses have to consult with a company liquidator to figure out the most appropriate action to take for liquidation. At Farahat & Co, our expert liquidators have years of experience and the
expertise needed in providing valuable advice to clients on what to expect from the process and all other essential information. If you are looking for help with the liquidation of your company or you wish to know how a liquidator in UAE can help, contact our team for a free initial consultation today!