Liquidation of company is a 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. 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.
A major reason why a business would choose to liquidate their assets is due to insolvency. Insolvency essentially means that a business reaches a point where it is not able to make necessary payments to settle liabilities.
You may be forced to consider liquidation because your company is no longer solvent. If the company remains solvent, it can still be controlled by the directors of the company; however, when it is insolvent, the company can be placed in the control of a company liquidator who will then deal with the aspects of the liquidation or winding up or deregistration of company.
If the company is deemed insolvent, any remaining assets will be sold in order to pay off any remaining creditors. Any amount remaining after all necessary payments have been made is then distributed amongst any shareholders.
You may interested to know- How Does Liquidation Work for Insolvent Companies?
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.
1. Members’ voluntary liquidation
In some cases, a business owner might choose to discontinue the company for various reasons other than insolvency. In this case, the business is still able to make payments on time, but it is the choice of the business owner(s) or partner(s) to wind up.
Find out more info: Understanding Voluntary liquidation in UAE
2. Creditors voluntary liquidation
Creditors’ voluntary liquidation is an insolvency procedure wherein the creditors of the insolvent company choose to bring the company to an end voluntarily and wind its operations up. This process is initiated voluntarily and it often follows many months of distress financially when a successful turnaround isn’t possible or has been extinguished.
3. Compulsory liquidation
For compulsory liquidation, the company is completely unable to make payments to its debts and the director applies directly to the court to request that the liquidation process is implemented. The main reason behind this act would be to recover the outstanding debt the company owes. This may happen because it is a part of the liquidation process for all the company’s assets to be sold and this money distributed amongst outstanding creditors. In case, if the creditors have reason to believe that a company has valuable assets, petitioning for its liquidation may seem like the best chance of recovering the money they are owed.
Although the petitioner is often a creditor, this is not always the case. Shareholders or any other interested party can present to the court as long as they have a legitimate reason for doing so. Company directors can also legally approach for a petition to have the company wound up, but this is usually handled through a voluntary liquidation instead. If your company fits more than one of the following criteria, then it could be at risk of being forced into compulsory liquidation in UAE:
- Total debts and liabilities exceed the value of all assets
- Not able to pay debts as and when they become due
- Failure to re-register as a public or private company.
- Not commenced a trade within the established time of incorporation.
Outcomes of liquidation
What are mentioned below are some possible outcomes of a company in liquidation.
- A liquidator is appointed when a company has entered into liquidation. The liquidator takes control of all the company’s unsecured assets which are sold to repay the creditors.
- Trading companies are usually closed down but sometimes they may continue to trade for a short time to fulfil the remaining liabilities.
- When liquidation is complete, the company is removed from the companies’ registrar.
- All share transfers after the commencement of the liquidation process are void.
- Disposition of any property after commencement of the liquidation position is void.
- The civil proceeding is suspended from the date of the court order until the appointment of a final liquidator.
- The only business that can be carried out is for purposes of completing the liquidation process.
- The company cannot dispose of its assets anymore.
Find more info: What are the Roles and Duties of a Liquidator?
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 provide 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.