Dissolution, or liquidation, of a company, is the process through which the company and its operations are brought to an end.
Also referred to as “winding up”, dissolution of a company could be:
- voluntary, for reasons such as bankruptcy, wherein the shareholders of a company agree upon the dissolution, or
- compulsory, such as in furtherance of a court order, wherein one of the shareholders may apply for dissolution without the consent of the others, or a creditor to the company may initiate the procedure.
The main purpose of dissolving a company is to determine its assets and pay the outstanding debts against the company.
- Dissolution as per the Company Laws in the UAE
In the UAE, companies can be dissolved either through a resolution by its shareholders or through an order of the court. If the Memorandum of Association of the company provides for the method of dissolution, it will be dissolved accordingly. However, if the MOA is silent on how the company is to be dissolved, then the provisions of Federal Decree-Law No. 32 of 2021 On Commercial Companies will apply.
Applicability: Before understanding the process of liquidation as per this law, it must be noted that, as per Article 3 of the Commercial Companies Law, its provisions apply only to the companies established in the UAE. Free Zone companies having their own legislations for liquidation are exempted from the application of this law, under Article 5. As regards foreign companies, the provisions will be applicable to those which have their head office, or branch office established in the UAE.
Usually, a liquidator is appointed on behalf of the company, which carries out the whole process of dissolution.
Here is what will happen when a company is dissolved as per the Commercial Companies Law:
- The authority of the managers or the board of directors will be terminated (Article 315)
- A liquidator will be appointed for determining the assets of the company (Article 316)
- Any liabilities on the company will become immediately payable (Article 324)
- Upon payment of debts, the assets of the company will be divided among the partners (Article 333)
Authority: Even though the managers or the board of directors will no longer hold authority of the company, they may still manage the company affairs, and be considered in the capacity of a liquidator vis-à-vis third parties, till a liquidator is appointed. The extent of management will be determined by the liquidator upon his appointment.
Liabilities: Any debts that the company had before commencement of the liquidation process, will become immediately payable once liquidation is affected. These debts are given priority over any other debts, and will be settled from the company’s funds, as under Article 325 of the Law.
Liquidator: The most important part in the dissolution of a company is played by a liquidator, or liquidators, if there are more than one. If the dissolution is being carried out voluntarily, the liquidator is to be appointed by the partners, under Article 316 of the Law. Whereas, if dissolution is following a court order, then the court itself will determine the method of liquidation and also appoint the liquidator. An auditor of the company cannot carry out liquidation for that company, or cannot be someone who has audited the accounts of the company within the last five years.
Following are the duties of a liquidator as laid down under the law:
- Once appointed, the liquidator will prepare an inventory of the assets and liabilities of the company, under Article 320 of the law. He will prepare a detailed list of such assets and liabilities along with a balance sheet for the company, and get it signed by the managers/chairman.
- Article 322 states that the liquidator is required to take measures in order to maintain the assets and debts of the company, collect debts from third parties and get them deposited in the bank accounts of the company for the purpose of liquidation.
- As per Article 323 of the law, the liquidator is required to represent the company before the courts, pay the outstanding debts, sell the assets or movables of the company, and do any other act as may be necessary for the purpose of liquidation.
- The liquidator is also supposed to notify the creditors to the company of the liquidation, as well as for the submission of their claims, under Article 324 of the law.
- Article 328 stipulates that the liquidator is required to finish his tasks within the time frame afforded to him in the document of his appointment.
- While the liquidation is underway, the liquidator must submit an interim account of the process to the partners after every 3 months, under Article 329 of the law.
- Once the liquidation process is complete, Article 330 mandates the liquidator to submit a final account of the whole process. Completion of the process will be entered into the commercial register by the liquidator himself.
Damages to the company due to any mismanagement of affairs on part of the liquidator will be borne by him, and also those caused to third parties, as per Article 332 of the Commercial Companies Law. Deliberately causing damages to the company or its partners or shareholders will result in imprisonment of the liquidator, for a period ranging between 3 months to 3 years, and he could also be fined for almost AED 500,000, under Article 351. Further, if the liquidator commences new works during the liquidation, he will be liable for the same under Article 327 of the law.
If there is more than one liquidator, any decision taken must be unanimous, as stipulated under Article 317 of the law.
Liquidators shall be dismissed in the way they were appointed (Article 319).
Division of assets: When the claims on the company have been determined, Article 333 states that the partners can obtain an amount from the assets equal to the amount of their share, and the remaining balance will be divided proportional to their shares in the profits.
- Dissolution as per the Bankruptcy Laws in the UAE
Companies can also be liquidated if they are facing financial difficulties and need to declare bankruptcy, in which case they will be governed by the provisions of Federal Law No. 9 of 2016 On Bankruptcy. As per Article 2 of this law, the following companies are subject to its application:
- Companies subject to the Commercial Companies Law
- Companies not established as per the Commercial Companies Law and owned by the federal or local government, and them being subject to the Bankruptcy Law as per their legal documents
- Companies and establishments in the Free Zones which do not have their own legislation regarding insolvency and bankruptcy
- A person having the capacity of a merchant under this law
- Licensed civil companies of a professional nature
Applications for bankruptcy can be opened by the following:
- The company, if it is unable to pay its debts for a period of 30 working days after the due dates, due to its financial inability (Article 68)
- The creditor(s) to the company, provided their debt amount is not less than 100,000 dirhams (Article 69)
- The Public Prosecution, for public interest requirements, provided that it is proved that the company is insolvent (Article 72)
In addition to the above, applications for restructuring may also be opened by either the company itself or one of the creditors. Once an application has been opened in front of the competent court, it may either order for restructuring the company, or adjudication of the bankruptcy and liquidation of assets, as per Article 67 of the Bankruptcy Law. To carry out the procedures, the court may appoint one or more trustees, as per Article 82 of the law.
If the order is for bankruptcy, the court shall, under Article 124 of the law, order the liquidation of the company’s assets including but not limited to the following situations:
- Termination of preventive composition procedures under Article 64 of the Bankruptcy Law
- Application on behalf of the company acting in bad faith or intending to stall or escape the financial liabilities
- Restructuring procedures rendered inappropriate for the company
- Failure to reach majority on part of the creditors to the company in terms of restructuring
- Rejection of the restructuring plan by the court as per Article 109 of the law
- Invalidation or termination of the restructuring plan by the court according to Articles 117 and 118 of the law
- Dissolution of Companies in the Free Zones
For companies established in the UAE Free Zones, the process of liquidation may vary as per the free zone in which the company is situated, since some free zones are governed by the federal laws, while some have their own legislations for liquidation and insolvency. However, to initiate the process, a resolution passed by the shareholders of such companies is the mandatory initial step, and to carry out liquidation, only the liquidators authorized and registered in the free zones for such purposes may be appointed.
The relevant free zone authority will also need to be notified of the dissolution of the company, by submitting a cancellation request, along with the resolution for liquidation. Once the request is approved and the notice of termination is sent, the process of dissolution will commence. When the company is discharged of all its liabilities, the free zone authority will issue a clearance certificate for the company.
The entire procedure of dissolving a company can be quite confounding, but it can always be simplified if you have the right business lawyers to guide you. It is advised to seek legal help and understand the obligations you are required to fulfill in this regard, before winding up your business in the UAE.