So many brands and companies come and go in the world of finance and between the fluctuations of success and failure, we begin to familiarize themselves with new legal and commercial terms. We hear phrases such as “the liquidation of a company” or “the bankruptcy of a company”. These phrases can often be confusing since most people assume bankruptcy and liquidation are the same concept? So, what is the difference between the two terms and what are the similarities? What is the legal procedure each case? These are the questions which we will consider.
Reasons for Liquidating a Company
Businesses and companies falter for many reasons and, accordingly, when the losses suffered reach a certain threshold, that the business or company cannot continue trading. If for example the partners/owners of a business cannot reach agreement amongst themselves regarding the future of the business, the best solution would be to terminate the partnership and liquidate the business.
The liquidation would then be conducted in accordance with the partnership agreement and the provisions of the Companies Act. Once an agreement is reached to liquidate the company, this decision or resolution must be recorded in the company’s public commercial register and followed by publication in two widely circulated local newspapers, one of which must be an English newspaper. The publication must announce the liquidation as well as the name of the liquidator appointed to finalise the liquidation process. Once the liquidation is finalised the liquidator will submit a request to delete the company’s registration from the commercial registry.
But the process is not always that simple, especially if the company that is the subject of the liquidation continues to trade and perform its commercial activities. In such situations, the professional, legal, technical burdens and responsibilities placed on both the liquidator and directors, partners or managers increase dramatically.
Types of companies in terms of UAE Company law
There are different types of companies that require a Company liquidator in order to dissolve them and cancel their licenses in the UAE, namely:
Joint Liability Company (General Partnership)
Consist of two or more natural persons who are partners and jointly responsible for the obligations of the company.
Simple Commandite Company (Simple Limited Partnership)
Consists of one or more joint partners (who are jointly and severally liable for the obligations of the company and have the capacity of traders) and one or more silent partners not liable for the obligations of the company other than to the extent of their shares in the capital of the company. The Silent Partners may not be traders.
Limited Liability Company
A Limited Liability Company is a company where the number of partners is at least two but does not exceed fifty. A partner shall be liable only to the extent of its share in the capital of the company.
A single natural or corporate person may incorporate and hold a Limited Liability Company. The holder of shares within the company will not be responsible for the obligations of the company other than as set out in its Memorandum of Association.
Public Joint Stock Company
A Public Joint Stock Company is a company whose capital is divided into equal and negotiable shares. The founders shall subscribe to a portion of the shares whilst the other shares are offered to the public under a public subscription. A shareholder shall be liable only to the extent of his share in the capital of the company.
Private Joint Stock Company
These types of companies have at least two shareholders, but no more than two hundred. The company’s capital is divided into shares of equal nominal value. There are no shares offered for public subscription. A shareholder shall be liable only to the extent of his shareholding in the capital of the company.
Legally Accepted Reasons for Dissolution and Liquidation of a Company
- The issuance of a decision by the legal majority to dissolve and liquidate the company.
- Where the company suffered losses that led to the loss of the company’s funds or more than half of the company’s capital.
- The issuance of a court ruling to dissolve, liquidate or bankrupt the company.
According to Article 298 of the Federal Law UAE No. 2 of 2015 on Commercial Companies:
- The Court may liquidate a Joint Liability Company or Simple Commandite Company upon a partner’s request should it have justifiable reasons to do so.
- If the reasons for the liquidation arise as a result of the acts of a partner, the Court may make a ruling to expel him from the company.
- Any condition preventing a partner from approaching the Court to request the liquidation of the company shall be deemed void from the outset.
The Stages of Liquidation of a Company
First Stage: Informing the Commercial Registry / Department of Economic Development of the dissolution and liquidation order, whether by a decision by the partners or pursuant to a court ruling. In turn, the register will be amended to reflect that the company has been placed under liquidation. The Commercial Registry Department will simultaneously issue a permit to publish details of the liquidation of the company in the relevant newspapers. This is a compulsory procedure, whether the liquidation is agreed between the parties or by court order.
Second Stage: This stage is related to practical procedural aspects, which are usually refer to the functions of the liquidator, for example, representing the company under liquidation before the judiciary and before all other official or unofficial bodies, announcing creditors and debtors, collecting company dues from others, sale of fixed assets. Once all the company’s assets have been liquidated, the liquidator will proceed to pay the company’s debts and obligations. In the event that the company has legal matters pending before the courts, the liquidator must wait for these matters to be finalised, and then act in accordance with the rulings made by the court.
Third Stage: This is the final stage where, once the liquidation is finalised, the liquidator or the company director will submit a request to the commercial register, attaching the liquidator’s report, to remove the company’s registration from the record and issue a certificate confirming such removal.
Responsibilities of the Liquidator
The liquidator like Farahat & Co. must open a liquidation account in which all financial transactions related to liquidation are recorded. The liquidator must also retain all supporting financial documents. Once the liquidation is finalised, the liquidator must issue a final report, “the liquidation report” and also submit a copy of the report with the competent authority, in this case the commercial register, and to the partners/owners of the company. The final liquidation report is not the only report issued during the course of the liquidation; the UAE Companies Law requires the liquidator to provide the owners of the company with a report every three months whilst the liquidation is in progress.
Furthermore, the liquidator may be subject to criminal or civil legal liability or both in the event that he mismanages the company’s funds under liquidation or fails to adequately perform his duties as a liquidator.
Liquidation of the Free Zone Company
The requirements and procedures for liquidating a free zone company are largely similar to those outside the free zone.
The free zone regulations in the UAE oblige the company to appoint a liquidator in the event that the owners decide to liquidate it. The owners are further obliged to submit a written undertaking that they are responsible for any debts or claims that may arise once the company is liquidated. However, none of this is required in terms of a company liquidated outside the free zone.
Bankruptcy Law in the UAE
The (Bankruptcy) Law promulgated by Federal Decree No. 9 of 2016 regulates matters of bankruptcy within the UAE, defining the legal tools necessary to restructure the debtor’s business, and provides various mechanisms of avoiding bankruptcy cases and liquidation of the debtor’s assets. These mechanisms include:
- Financial reorganizations that take place outside the courts.
- Bankruptcy-proof reconciliation.
- Financial restructuring.
- Access to new loan options in accordance with the conditions specified by law.
The law further makes provision for the formation of a permanent committee called the Financial Reorganization Committee; whose tasks include:
- Supervising the management of financial reorganization procedures that take place outside the framework of the courts.
- Appointing experts in financial reorganization matters.
- The creation and maintenance of an electronic registry for persons against whom bankruptcy judgments are issued.