Liquidation is a formal insolvency procedure in which a company is brought to an end (also often termed ‘winding up’ or ‘closing’ a company); all of its assets are liquidated and the proceeds from the sale of assets are used to settle debts, pay expenses and transfer any remaining balance to shareholders of the company.
Once a company is liquidated it will cease doing business and employing people. On liquidation, a company’s business licence is revoked, its name is removed from the Trade Registry and the entity is considered to have ceased to exist.
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Why is liquidation required?
There are two principal reasons why the liquidation of a company may be necessary in the UAE:
- The original purpose for setting up of the company is fulfilled and the entity is no longer required;
- The company is considered to be insolvent.
Types of liquidation
- Voluntary Liquidations – Shareholders of a company may elect to liquidate a solvent company or the directors of an insolvent company may choose to cease further trading and liquidate its assets in order to pay its creditors.
- Compulsory Liquidations: If a company’s debts are not paid on time, creditors may request the courts to liquidate the company in order for them to collect their dues. The courts may decide to force a company to liquidate and sell its assets in order to pay outstanding debt.
Even if there are no debts to be paid to creditors, it is highly advisable to formally liquidate a company rather than simply allowing your trade licence to expire. There are a number of procedures to be completed when formally liquidating a company. Ignoring these may attract various penalties and could also result in the ‘blacklisting’ of company, as well as its directors and shareholders, by government authorities in UAE. This may impact on their involvement in other businesses or damage their ability to set up another company in future.
A liquidator is a UAE-registered agent or a firm, typically a chartered accountancy or audit firm, that is assigned to act on behalf of the company to sell its assets in order to generate cash to discharge any outstanding liabilities. A liquidator may be appointed by shareholders via resolution or may be appointed by the courts in the case of compulsory liquidation. Once appointed, the liquidator will issue an official letter of acceptance at the initial stage. Once all its duties are completed, they will prepare a statement of affairs and the liquidator’s report, which are essential to finalise the liquidation process.
The liquidation process in the UAE
The liquidation process will vary depending on the following three criteria:
- The type of ownership
- The type of liquidation
- The jurisdiction of registration, whether mainland Emirates or free trade zone.
In general, however, the formal process of liquidation in Dubai, Abu Dhabi and the rest of the UAE is as follows:
- Preparation and approval of shareholders’ resolution of dissolution. The resolution must be attested by Notary Public in the case of Limited Liability Companies (LLCs) registered in the UAE. If the shareholders are not available in the UAE, then the resolution must first be notarised and attested at the relevant UAE embassy and then attested at the UAE Ministry of Foreign Affairs and Ministry of Justice. Free zone companies do generally require attestation by Notary Public.
- Appointment of a liquidator and collection of an official acceptance letter from the liquidator;
- Submission of the shareholders’ resolution, along with mandatory documents and required fees, to the relevant licensing authority, including:
- Copy of the company’s Trade Licence
- Copy of the company’s Memorandum of Association
- Powers of Attorney (if any)
- Copies of passport / Emirates ID for all partners, owners and shareholders
- Deregistration application form.
- Once a provisional liquidation certificate is issued, the company can proceed to publish a notice of liquidation in a public newspaper, in English as well as Arabic (two to four notices may be required depending upon the registered authority);
- A notice period of up to 45 days may be required (depending upon the jurisdiction of registration);
- During the notice period, the following actions can be undertaken.
- Cancellation of work permits and visas for all employees and partners
- Clearance letter from Immigration Department
- Clearance letter from Labour Department
- Clearance letters from utilities companies – water, electricity and telecoms
- Clearance letter from leasing entity (landlord)
- Clearance letter from Road & Transport Authority (RTA) for any registered vehicles
- Clearance letter from Federal Customs Authority (FCA)
- Bank account closure letter
- VAT de-registration and VAT clearance letter from FTA
- Once the notice period is over, the liquidator can prepare the Liquidation Report.
- The completed Report with all the accompanying documentation should then be submitted to the relevant Authority along with the required cancellation fees.
- The Authority will review the submission and, if approved, will issue a ‘Licence Cancellation Certificate’.
How can Protax help?
The liquidation process can be lengthy and costly because companies must liaise with a number of external parties/authorities to arrange everything in a timely manner. Missing out any step or document will cause unnecessary delay and complication. Protax offers liquidation services for all UAE entities – LLCs, free zone companies and offshore companies – from a complete liquidation to assisting with a part or parts of the process, as required by the client.