Published October 2018
Following the growing trend of companies participating in acquisitions and corporate restructurings, the rigorous procedure resulting from liquidation becomes incumbent to fully understand before a company’s directors and shareholders propose to walk through this route.
Liquidation is a process of winding up the affairs of a company. It can be done either voluntarily by the company for the purposes of a merger, acquisition and corporate restructuring or through an order of the court, in the case of insolvency. The laws of the United Arab Emirates (UAE) in respect of factors triggering the liquidation of a limited liability company (LLC) are deemed to be stringent and applications are processed by the Department of Economic Development of the emirate of Dubai (Economic Department). A LLC must therefore exhaust the procedural requirements set out below before they can officially wind up their business and properly cancel their trade license. For the purposes of this article we will be focusing on LLC’s incorporated through the Economic Department. Furthermore, we shall not be considering the application for bankruptcy which involves separate procedures and the involvement of local courts.
Highlights of the Procedure
The first step towards winding up a LLC is the presentation of a winding up proposal by the company’s board of directors to the shareholders. In a case where the company is incurring losses of more than fifty percent (50%) of its share capital, it is obligatory upon the board of directors to propose liquidation. Similarly, in the event where more than seventy five percent (75%) of the company’s capital is invested and has resulted in a loss, the law allows shareholders holding only twenty five percent (25%) of the company’s share capital to pass the resolution in favour of liquidation. In addition, if there is a dispute between shareholders with regards to winding up of the company, the law permits a shareholder (or more) of the said company to file a petition of winding up at the relevant court of law in the emirate of Dubai, which then decides whether or not to liquidate the company in its discretion.
Before the shareholders voluntarily resolve for liquidation, they must discuss and finalise the route of liquidation to be implemented and most importantly, shareholders must appoint a liquidator to manage the entire process of liquidation. A liquidator is an authorised individual or entity who conducts and leads the process of winding up of the company. The liquidator must be a professionally qualified insolvency practitioner, who is appointed through the shareholders’ resolution that determines their decision of liquidation and must be duly executed in the presence of a notary public. Subsequently, the liquidator will prepare a formal letter of acceptance of the offer from the company.
Application to the Department of Economic Development of Dubai
Alongside the original notarised shareholders’ resolution and the letter of acceptance of the liquidator, a company is required to submit an application form for cancellation of registration duly signed by the authorised representative(s) of the company, together with specimen signatures of the company’s director(s) and/ or manager(s). These are accompanied by the original trade license of the company and its commercial registration certificate. In most instances the Economic Department also requests for a letter from the landlord of the property leased as the registered office address, confirming the end of the lease tenure or early termination of the lease agreement.
Upon a satisfactory application, the Economic Department will issue a notice outlining that the company is entering into liquidation, identifying the liquidator and inviting any claim(s) against the company to be made to the Economic Department within a period of forty five (45) days (the notice period). This notice is required to be published in two (2) leading newspapers in the emirate of Dubai, one of which must be an Arabic newspaper.
Payment of Debt and Distribution of Assets
After lapse of the notice period, the liquidator begins repayment of all debts owed to the company followed by a letter sent to the creditors of the company informing them of liquidation. This letter must be sent to every creditor of the company via registered mail and acts as an invitation for the creditors to surface any claim(s) they may have in respect of the company. In the event that there are no claims lodged by any parties, a declaration letter is prepared by the liquidator confirming that no objection has been commenced during the said period and the company can proceed to finalise liquidation. All the residual assets (if any) of the company are distributed among its shareholders in accordance with the amount of capital contributed upon incorporation. At the end of the distribution if there are any surplus assets, these are distributed according to the share of profits outlined in the company’s constitution, shareholders’ agreement or similar document.
The liquidator is obliged to make an application to the Ministry of Human Resources and Emiratisation for the cancellation of the firm’s licence. This automatically results in the Directorate of Residency and Foreign Affairs revoking of every UAE residence visa the said company has sponsored. As such, all the employees sponsored by the company must either find a new job or exit the country within the timeframe prescribed to them upon cancellation of their residence visas. Great importance is placed on the settlement of the employees’ dues and cancellation of their visas, as employees are often regarded as the primary creditors.
Payment for the services provided by the liquidator is released after drafting final accounts of liquidation, approved and certified by the shareholders of the company. All the above-mentioned documents and approvals obtained are submitted to the Economic Department for a final check, who verify the authenticity of the procedure and record a certificate of deregistration for the company. The process can be both time-consuming and costly however if not properly undertaken, a company’s license cannot be properly and efficiently cancelled. Simply allowing a licence to lapse does not constitute the cancellation of a license or the winding down of the company.
A key point to note is that before commencing the liquidation procedure the board of directors must inform shareholders of the company that the process is extensive and can last for a long period if it is not rightly managed. Therefore, the decision of which liquidator to appoint must be exercised with great caution and detailed legal advice should be sought prior to commencing such a process.
Ziad Choueiri, Partner (firstname.lastname@example.org)
Muqadassa Sachedina, Intern
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