What is liquidation?
Liquidation (also known as ‘winding up’) is a process by which a company is brought to an end. Its assets are liquidated and used to pay off any creditors and outstanding expenses. Any remaining amount is distributed among the company shareholders.
There are two types of liquidation: compulsory and voluntary.
This takes place when a company cannot afford to pay its debts and a creditor or creditors take legal action to recover the money owed. Instances where a company may be forced into compulsory liquidation include:
- If the company breaks the law or violates its articles of association
- If the company cannot fulfil its obligations: e.g., it cannot pay outstanding bills
- If the comp any is inactive for a year or more without justification
- If the company’s losses exceed 75% of its subscribed capital
This also occurs when a company is not able to pay its debts. However, the key difference is that the company’s directors make the decision to liquidate the company and pay off the debts before it is forced upon them by creditors. Motives for voluntary liquidation include:
- The company has reached the goals for which it was established, or those goals no longer exist
- If liquidation of the company is decided upon by the company shareholders
- The end of the predetermined operational period of the company is reached
In both of the above scenarios, liquidation is a result of the company being insolvent, meaning that it is unable to pay its bills when they are due and continuing to trade is not a realistic possibility.
Liquidation in the UAE
The process of liquidation in the UAE is distinct for mainland companies and free zone companies. However, in both cases you should first ensure that you have the following necessary documents:
- A copy of your trade licence. If this has expired, you must renew it before the process of liquidation can proceed.
- A Memorandum of Association (MOA)
- A Power of Attorney (if applicable)
- Copies of all the shareholder’s passports
- Copies of Emirates ID(s)
- The deregistration application form
Other tasks to be completed
The following are other issues which must be taken care of in advance of the liquidation process. The government allows a 45-day notice period for these tasks.
- Settle any outstanding utility and telecommunications bills
- Obtain a bank account closure letter
- Prepare a liquidation report
- Cancel any visas issued during the period of the current trade licence
When your company closes, it is important for all relevant government entities to know that you have ceased to trade so that you avoid incurring any fines or penalties when your trade licence is not renewed.
The following are the steps required to officially close a mainland company in the UAE. When following this process, it is necessary for all company partners to be available in the country or in their absence, their Power of Attorney, to sign the Shareholder Resolution to close the company.
The liquidation process can be more time-consuming for companies with multiple shareholders because shares must be liquidated and liabilities towards any partners or creditors must be released. Additionally, the following types of companies will require an official liquidator and liquidator report:
- General Partnership
- Limited Liability Company
- Simple Limited Partnership
- Public Joint Stock Company
- Private Joint Stock Company
- Step 1: Bank account closure
Any company bank accounts must be closed. When closing the account, you will need to request a Statement of Account for the last financial year (a requirement for the liquidators’ report) and official confirmation of closure of the bank account.
- Step 2: Immigration clearance
All active visas under the company sponsorship must be cancelled (including any dependent visas under any employees’ sponsorship).
- Step 3: Clearance from the Required Regulating Authority
Clearances must be obtained by the regulating authority in relation to the activity of the company, for example, if you would like to close down a trading company, a clearance letter should be requested from the Ministry of Customs and the Chamber of Commerce.
- Step Four: Third Party Clearance
All dues must be paid to the landlord for any commercial space the company is renting, and a clearance letter should be obtained. In addition, you will require a final bill from DEWA or ADDC etc and confirmation of terminated utilities services which are registered under the company name.
- Step Five: De-registration Publication
It is obligatory for a company to file a notification in a locally based newspaper/gazette publication which states that the company is in the process of liquidation. In Abu Dhabi this requires a 45-day period to allow any creditors to raise any issues before the liquidation is approved.
- Step Six: Company Assets
Any property under the company or shares held in other companies in the entity name must be sold or transferred. A proof of transfer or sale will be required for the Liquidators Report.
- Step Seven: Liquidators Report
This must be prepared by an approved auditing company who are licensed to prepare a Liquidators Report for the company.
- Step Eight: Confirmation Certificate
Upon completion of the above steps, you can apply for a Confirmation Certificate confirming the termination of the company licence and de-registration of the company.
Free Zone Company Liquidation
Terminating a free zone company can occur in three ways, depending on the Freezone authority rules. These are:
- Summary Winding up: This is permissible when a business has no outstanding debts and is able to pay all overheads for the next 6 months.
- Creditor Winding up: This follows the initiation of a summary winding up and the decision is taken by the directors or the liquidator that the company is unable to pay its liabilities within a 6-month period.
- Bankruptcy: This is carried out by the courts in accordance with the UAE’s Commercial Transaction Law 18/1993.
All free zones have their own requirements for company liquidation. However, in all cases, any visas attached to the company must be cancelled and all employees must be given a 2-month notice period and gratuity payment before the termination of their contracts.
If you need assistance with closing or liquidating your company in the UAE, or any other related company set up, restructuring, local partner or PRO support matter in Abu Dhabi, Dubai, the wider UAE, Oman, Qatar or Saudi Arabia, then please do get in touch with us on +971 (0)4 456 1761 for Dubai or +971 (0)2 448 5120 for Abu Dhabi, email us at firstname.lastname@example.org or complete the contact form below and we will be delighted to assist you.