No goodbyes are easy, and bidding farewell to a business venture is no exception. However, just like any parting moment, it’s a time when the precision of thought and clarity of mind becomes paramount. By following the legal process meticulously, one can ensure an orchestrated conclusion, minimizing the unseen challenges. This farewell or winding up of a company in legal terms is known as liquidation.
What is Company Liquidation?
Liquidation of company, otherwise known as winding up or dissolution, refers to the process of closing down a company and distributing its assets among creditors or shareholders. There are various reasons why a company might undergo liquidation, including financial insolvency, the completion of a specific project or purpose, or a strategic decision by the company’s owners to cease operations. The particular procedures for liquidation can vary based on the legal jurisdiction, the type of company, and the reasons for liquidation.
Liquidation is a legal process that marks the end of the company’s existence as a business entity. Following the formalities is essential whether closing a sole proprietorship or dissolving a shareholding company.
The General Company Liquidation Process in UAE:
Liquidation of company can be initiated voluntarily by the company’s shareholders or creditors or involuntarily through a court order. During the liquidation process in UAE, a liquidator is appointed to oversee the distribution of assets and settlement of liabilities. The goal is to ensure a fair and orderly distribution of the company’s resources, and any remaining funds or assets are distributed among the shareholders or used to settle outstanding debts.
Federal Laws: The Foundation of Liquidation
Federal Law No. 2 of 2015 commercial companies law is the backbone of the liquidation process in UAE. This legislation provides detailed articles of rules and regulations for the existence of a company in the UAE. Hence, this also has regulations for liquidation of Mainland companies registered with the Department of Economic Development (DED) in their Emirate.
Regional Variations: Emirate-Specific Guidelines
While the federal laws are pan UAE, the UAE’s legal system allows the Emirate to have specific variations, particularly for their jurisdiction. Each Emirate has its own Department of Economic Development, adding a layer of intricacy to the liquidation process.
The general framework outlined in the UAE Commercial Companies Law and relevant regulations is followed by all Emirates. Over this, there may be some administrative and procedural differences between each Emirate:
1. Dubai:
Dubai Economic Department (DED): The DED is the main authority supervising the Dubai Business arena. The specific procedures for liquidation can vary based on the legal jurisdiction, the type of company, and the reasons for liquidation.
2. Abu Dhabi:
Abu Dhabi Department of Economic Development (ADDED): Similar to Dubai, Abu Dhabi’s liquidation process involves applying to the ADDED. Clearance certificates and approvals from government entities may be required. Details and applications for licence cancellation can be found on Abu Dhabi’s TAMM digital platform.
3. Sharjah:
Sharjah Economic Development Department (SEDD): Companies in Sharjah go through the liquidation process under the supervision of the SEDD. Clearances from utility providers and other relevant entities are usually required.
4. Other Emirates:
Each Emirate has its own economic department overseeing business activities, and the liquidation process is generally conducted in coordination with these departments. It is best to identify the particular department and their regulations to proceed further with the company liquidation process in UAE.
Importance of License Cancellation:
The requirement to cancel a business license upon closure holds paramount importance. It informs relevant government entities about the cessation of your business operations and helps avoid accumulated fines and penalties associated with an unrenewed license. Thus, protecting goodwill and business reputation becomes a wise strategic move for future business ventures.
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Formalities for Cancelling Business Licenses:
Cancelling a business license in the UAE depends on the type of company.
For establishments and sole proprietorships, the process is relatively straightforward:
An application for cancellation needs to be submitted to the Department of Economic Development (DED) along with clearances from various authorities such as the Ministry of Human Resources and Emiratisation, Directorate of Residency and Foreigners Affairs, water and electricity authorities, and the leasing entity.
For companies with shares, the process is more intricate:
You must first liquidate shares, debt collection, and creditor payment before finalizing with the DED.
Companies Requiring a Liquidator:
Certain legal forms of companies must appoint a liquidator, such as General Partnerships, Limited Liability Companies, Simple Limited Partnerships, Public Joint Stock Companies, and Private Joint Stock Companies.
Steps to Dissolve Companies (Except Civil Companies):
The liquidation process in UAE involves two stages:
Stage 1:
1. Prepare notarized minutes of the general assembly confirming company liquidation and the appointment of a liquidator.
2. Obtain an official letter from a registered liquidator accepting the duty.
3. Apply for cancellation through the DED or other approved channels.
4. DED issues a liquidation certificate.
5. Publish a notice of liquidation in two local newspapers, providing debtors a 45-day grace period to submit claims.
Stage 2:
1. Submit to DED a declaration letter of no objection from the liquidator and partners during the grace period.
2. Collect required approvals from other government bodies.
3. Cancel the firm card at the Ministry of Human Resources and Emiratisation.
4. Cancel foreign partners’ visas at the General Directorate of Residency & Foreigners Affairs.
5. Submit documents for final cancellation approval from DED.
The Mainland Liquidation Process in UAE:
Liquidation process in UAE mainland involves several crucial steps. You must follow the local regulations set by the respective departments. One of the initial steps is holding a general assembly meeting where shareholders must pass a resolution approving the liquidation. Subsequently, a liquidator is appointed, and the company’s assets are evaluated.
The Dubai emphasis:
As mentioned, The Dubai Department of Economic Development (DED) oversees and approves the liquidation of company.
The guidelines set by DED are as follows:
1. The DED must approve the company’s decision to liquidate. This involves submitting a formal application, financial statements, and relevant documents.
2. The company must notify its creditors about the impending liquidation, allowing them to assert their claims.
3. Clearances from various government authorities, including the Federal Tax Authority and the Ministry of Human Resources and Emiratisation, are necessary before liquidation.
4. The company must settle all outstanding debts and liabilities, ensuring that the liquidation plan pays creditors.
5. After settling debts, the remaining assets are distributed among shareholders. Any surplus is typically distributed in proportion to their shareholding.
6. The final step involves cancelling all licenses and permits associated with the business, officially marking the conclusion of the company’s existence.
Required documents for cancellation of license in Dubai are:
- The proof of the board’s decision to cancel, write off, or liquidate the company.
- Decision for company de-registration from the Ministry of Economy (for locally registered companies).
- Report from the auditor.
- Original publications in advertising newspapers.
- Final budget of the company.
Freezing a Business License in the UAE: An Alternate Move
Opting to freeze your business license instead of liquidation of a company can be a judicious choice. The Dubai Department of Economic Development facilitates this option for mainland companies, allowing them to freeze a trade license for up to three years. This approach enables business owners facing challenges to temporarily halt operations without resorting to complete termination.
However, The freezing of business licenses comes with certain conditions:
- Mainland companies can freeze their licenses for up to three years, while sole proprietorships registered in the DED can freeze for one year.
- During the frozen license period, the business cannot conduct any operations. However, the owner or shareholder of the frozen license has the flexibility to establish a new company in the UAE by applying for a fresh permit under their name.
- Timely renewal is crucial to avoid non-renewal fines, with penalty rates varying across Emirates and Free Zones.
- A license that remains unrenewed for five consecutive years faces automatic cancellation.
Important specifics on liquidation process in UAE: Response to FAQs
1. Specific approvals needed for cancelling private shareholding companies involve obtaining approval from the Ministry of Economy.
2. Cancelling public shareholding companies requires the Securities and Commodities Authority’s decision.
3. Closing civil works companies involves various steps, including filling out the required cancellation form, cancelling the firm card, cancelling foreign partners’ visas, and obtaining necessary approvals.
4. Sole proprietorship cancellation requires a no-objection letter from the Ministry of Human Resources and Emiratisation and residence cancellation proof for non-Gulf nationals.
5. Conditions for freezing a license include providing a letter from the company or institution requesting temporary cessation, a letter from the Ministry of Human Resources and Emiratisation indicating the absence of sponsored individuals, and a report from the inspection division in DED.
Conclusion:
The company liquidation process is a challenging task but a layer of work that must be systematically cleared step by step. As overwhelming as this may seem, remember, help is close by. Each Emirate’s online portal provides information and support to understand the liquidation process in UAE better. To strategically help you understand the nuances of company liquidation and provide end-to-end solutions, we at Nair and Nelliyatt are just a call away.
