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COMPANY LIQUIDATION

The United Arab Emirates is a vibrant business region with numerous commercial hubs and free zones that encourage commerce. Companies and investors from all over the world come here to start businesses and seek for new chances. New businesses are constantly being developed in an environment that is so conducive to doing business. However, this does not imply that every business in the UAE is successful.

A company's survival and success are determined by a variety of factors. Many firms fail as a result of their inability to keep up with these variables. A failed company can soon become a liability for its proprietor. When a business isn't operating well, you can't just shut it down. There is a formal procedure for closing a company, just as there is for founding one. Liquidation is the term for this practise, and it is very essential in the UAE.

Liquidating a business can be done for a variety of reasons. Disconnecting the phone and closing the door isn't enough. There are legal obligations in place to ensure that all parties involved are treated fairly and that mandatory fees, as well as dues and liabilities, are paid. It is also critical in the UAE that UAE citizens are not treated unfairly when a business is liquidated. There are rules in existence that control the liquidation of businesses. Penalties may be imposed if the rules are not followed.

Although the UAE government's proactive stimulus measures have been successful in limiting the pandemic's impact, some businesses have been affected. Cashflow issues forced companies like Sprii and Gulf Greetings Trading to close their operations in the UAE. Companies that decide to close their doors commonly file for voluntary liquidation in the UAE, which allows them to go gracefully by paying off their debts and other obligations. Regulatory compliance requirements such as VAT, Ultimate Beneficial Ownership (UBO), and Economic Substance Regulations (ESR) have made it important for businesses to plan ahead for their liquidation. Thus, we at Dhanguard pioneer at providing you with exemplary services and guidance to help you learn about every important information relating to Company Liquidation in United Arab Emirates. Do exempt few minutes to read the below mentioned information which has been carefully devised by our Experts to provide you up to the mark services.

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The main difference between Deregistration and Liquidation

Deregistration is not a legal term in the UAE, but it is a practical method used by some of the relevant licensing bodies in the various Emirates with the goal of cancelling a license and closing down a business. The advantage of deregistration is that it is a short process with fewer criteria than the liquidation process, which is the standard and only way for most licensing bodies to close down corporations under UAE law. As a result, it's critical to grasp the differences between the liquidation and deregistration processes, as well as the requirements for each.

Deregistration

The internal rules and instructions supplied by the relevant licensing agencies usually control the deregistration requirements. The following are the major prerequisites for deregistration in general:

  • The company must pass a resolution authorizing the termination of the license and its closure; permissions from necessary authorities (such as the telecommunications provider, SEWA, Emirates Post, and others) will be required; and the Memorandum of Association will be cancelled.
  • The authorities will issue a final certificate verifying the deregistration and termination of a company's license once the completed application (as mentioned above) is submitted with the deregistration payments.

Company Liquidation

When a corporation ends operations, all of the company's assets are dispersed to the company's shareholders after creditors and lenders have been paid. The process of liquidating a business, on the other hand, entails a lot more. The rules are in place to ensure that all parties engaged are treated equally and that no one party benefits at the expense of others.

Company liquidation can be-

  • voluntary (i.e., initiated by the owners) or
  • mandatory (i.e., mandated by the government) (where authorities force the business to cease operating).

Continuous losses, a bank call on a loan, or changes in the business environment that make the business unviable are all common reasons for voluntary liquidation. Creditors may request voluntary liquidation under certain circumstances.

Authorities may order a company's liquidation for a variety of reasons. When a firm's liquid finances are depleted, creditors are not paid, or the corporation violates established laws and regulations, the company will be compelled to liquidate. Ignoring the company liquidation requirements can result in serious consequences for firm owners and top executives, thus it's critical to stop operations appropriately. Designating a liquidator is the first step. The liquidator's responsibilities are outlined in government regulations, and only approved firms are permitted to serve as liquidators.

Company Liquidation Reasons

A corporate liquidation may be a suitable choice for a variety of reasons, the most prevalent of which are:

  • The overall debts and liabilities of your company exceed the total worth of your assets.
  • Your business has gone bankrupt.
  • For the first year after incorporation, your company has been unable to engage in any trading activity.
  • Your business isn't registered as a public or private entity.
  • Consistent losses resulting from company operations
  • Due to a lack of cashflow management, there has been a liquidity problem.

When a business begins to show signs of insolvency, an internal audit is advised. This can assist in elucidating the reasons for a company's bad performance. Internal auditors look into the inner workings of your firm and recommend areas for improvement. According to studies, firms with established internal audit departments are 10 times stronger than those without one.

Liquidation Process for Mainland Companies

Board Resolution

Companies in the UAE frequently go into liquidation after achieving their goal, reaching the end of their term, or losing their assets. Liquidation is a highly simplified process that requires corporations to comply with the necessary licensing bodies' laws. The shareholders formally commence the liquidation process by passing a board resolution after deciding to wind up the firm.

Review of Due Taxes

The board of directors must appoint a liquidator through a resolution. The company liquidator, usually a reputable audit firm with appropriate experience in the UAE, will oversee the entire liquidation process. The board's powers are terminated after the liquidator submits a confirmation letter and assumes control of the company's liquidation process.

Liquidator's appointment

Liquidation notification

The announcement of the liquidation must be published in two local newspapers. The purpose of the newspaper notice is to provide debtors a 45-day grace period from the date of publication to submit their claims.

De-registration of VAT

To properly complete the liquidation process, VAT-registered businesses must file for de-registration. Companies must file for de-registration within 20 business days after becoming eligible for the process, according to the Federal Tax Authority. If a company fails to de-register its VAT account within the specified time, a fine of AED 10,000 would be applied.

Unfortunately, failing to register for VAT de-registration is a regular mistake made by companies in liquidation, resulting in delays in the winding up process.

Close your subsidiaries and branches

Before the board resolution is passed, shareholders must verify that the company's branches and subsidiaries are shuttered. Because a board decision is required for branch liquidation, it becomes difficult for management to shut down subsidiaries and branches once the parent business is liquidated.

UBO register submission

The Ultimate Beneficial Ownership (UBO) disclosure requirements have finally been implemented in the UAE. Companies are required to keep a Real Beneficiary Register under UBO requirements (RBR). The liquidator must send an accurate copy of the revised UBO register to the registrar within 30 days of the liquidator's appointment for companies in liquidation.

Economic Substance Regulations (ESR)

If a company is classed as 'relevant activity' [banking, insurance, investment fund management, lease finance, shipping, holding company, Intellectual Property (IP), distribution and service centers], it must comply with the Economic Substance Regulations (ESR). The liquidator should ensure that the entity is satisfying its ESR duties throughout the liquidation process. For any period during which it engages in a relevant activity and earns relevant money, the company in liquidation must guarantee that ESR standards are met.

Liquidation report submission

The official liquidator will submit the liquidation report to the licensing authority at the end of the company liquidation process in the UAE. Before submitting the report, the liquidator should double-check that the company has closed allof its bank accounts and that all of its employees' visas have been revoked. The signature of the shareholder/director must be included in the financial statement if the report comprises the financial statement from the previous financial year.

Liquidation Process for Freezone Companies

There are three types of closures for free zone businesses:

Summary Winding Up

When a firm has no outstanding liabilities or is capable of paying off all liabilities within the next six months, it can be wound up.

Creditor Winding Up

This occurs when a corporation passes a resolution for winding up, which is followed by a creditors' meeting.

Bankruptcy

Under the UAE's Commercial Transaction Law 18/1993, the court can carry out this form.

  1. A business closure in a free zone also entails alerting the local authorities. This can be done through the internet portal of any free zone. When a company termination application is filed, the company director's duties, authorities, and responsibilities are also terminated. An announcement will be published in a local newspaper after this application has been verified. Following that, the company's final termination will begin, including with the issuance of termination letters.
  2. If your company is based in the Jebel Ali Free Zone (JAFZA), you must submit a winding-up notification to the authorities three months before you start the winding-up process. Every free zone has its own set of criteria for closing a business.
  3. All free zones have a requirement for cancelling visas issued on your company's behalf. Employers must also provide their employees with a two-month notice period (with salary) and gratuity payment before terminating their contracts. This is in conformity with UAE labour legislation. Employees can keep their visas as long as the business's trade license is valid.
  4. Companies must collect applicable NOCs from utility providers and telecommunication services after they have taken care of all of this. They can proceed with the business closure once they have completed all of these stages.

Documents required for Liquidation Procedure

You must first have things in order before beginning the liquidation procedure. You'll need the following documents on hand:

  1. a copy of your company's license You must first renew your business license if it has expired before you can begin the process.
  2. An MOA (Memorandum of Association) that includes a copy of all amendments made.
  3. Attorney-in-Fact (if there is any)
  4. Copies of all shareholders' passports are available.
  5. Copies of the emirates' identification cards
  6. Resolution of the shareholders
  7. Application for deregistration

Is it required to liquidate in the UAE if there are no outstanding debts?

Even if there are no debts owed to creditors, properly liquidating a firm rather than merely letting your trade license expire is highly recommended. When a corporation is formally liquidated, there are a number of procedures that must be followed. Ignoring these may result in a variety of sanctions, as well as the 'blacklisting' of the firm, its directors, and shareholders by UAE government authorities. This could have an impact on their involvement in other firms or their capacity to start a new business in the future.

The Liquidation Audit

A liquidation audit is performed for a variety of reasons. It is critical that all of the Company's assets are accounted for whenever a liquidation of the Company is required, regardless of the reason. Discovering and listing all of the Company's liabilities is just as critical. A liquidation audit report will identify the Company's assets and liabilities and should eliminate any creditors' objections. All of the Company's assets are converted to cash and disbursed to creditors or assigned to other Company obligations as the liquidation proceeds. The manner the assets are allocated is governed by specific rules. It is critical that the liquidator has access to all pertinent information. The liquidation audit ensures that the data is correct and complete.

Following the completion of a company's liquidation, a post-liquidation audit may be conducted to ensure that all assets were appropriately appraised and dispersed. This post-liquidation audit report will assist creditors in understanding what happened and how the funds they received (if any) from the liquidation were calculated. This report will lower the likelihood of a creditor questioning the liquidator's activities.

Why is a Liquidation Audit necessary?

Liquidation audits are required before any company can be closed in Dubai or any of the Free Zones in Dubai. Dubai Economic Department (DED), Jebel Ali Free Zone Authority (JAFZA), Dubai Airport Free Zone Authority (DAFZA), Dubai Multi Commodities Center (DMCC), and Dubai Silicon Oasis (DSO) all require liquidation audit in their respective authority regions whenever a Company is closing its operations and canceling its license. Abu Dhabi, Sharjah, Hamriyah Free Zone, and SAIF Zone also have regulations concerning Company liquidation and for liquidation audits very similar to other regions within UAE. For up-to-date information on liquidation audit, an authorized UAE Audit Firm can be contacted to determine the actual requirements for a specific region.

How can Dhanguard Help?

Because corporations must coordinate with a variety of external parties/authorities in order to complete the process in a timely manner, the liquidation process can be time-consuming and costly. Any step or document that is overlooked will add additional time and complexity to the process. Dhanguard provides liquidation services for all UAE entities, including LLCs, free zone firms, and offshore companies, ranging from a full liquidation to assisting with a section or parts of the process, depending on the client's needs.

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Company Liquidation in UAE FAQs

  • What is Company Liquidation?

    Liquidation is a formal insolvency operation in which a corporation is wound up (sometimes known as 'winding up' or 'closing' a firm); all of its assets are liquidated, and the proceeds are used to repay debts, pay expenditures, and distribute any residual balance to the company's owners. When a company is liquidated, it stops doing business and no longer employs employees. The business license of a company is cancelled upon liquidation, its name is deleted from the Trade Registry, and the firm is deemed to have ceased to exist.

  • How long do Companies remain under liquidation?

    There is no legal limit on how long a company may be liquidated. A company's full liquidation normally takes six to 24 months from start to finish. Of course, it depends on the state of your business and the type of liquidation you're pursuing.

  • Is it possible to prosecute a Company that is in the process of being liquidated?

    Following his appointment, the Liquidator or Provisional Liquidator becomes the Company's Liquidator. He is then given the authority to represent the Company as if he were a member of the Board of Directors. Apart from the Directors, the Company is also subject to legal action under several statutes.