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Is Company Liquidation beneficial to your business?

Businesses all over the world are on a drive to uncover new opportunities and tackle long-standing challenges. Companies invest in resources such as workers, infrastructure, and so on as part of their growth strategy. Companies use a variety of methods to fund the resources they use. They confront problems daily, and occasionally, businesses fail to meet their debt obligations to creditors and file for bankruptcy. The company’s debt can be paid off in a variety of ways, including creditor rehabilitation, debt restructuring, or corporate liquidation.

Company Liquidation

Liquidation is a legal procedure in which a debt-ridden company shuts down operations and sells its physical and digital assets to pay creditors and fulfill other commitments. Liquidation is typically used as a final resort for businesses that are unable to continue operating. Liquidation can occur for a variety of reasons, including insolvency – particularly if the company is unable to repay its obligations or is unwilling to continue operations in the country, among others.

The Federal Law No. 2 of 2015 on Commercial Companies (commonly known as the “2015 Law”) governs the liquidation of companies in the UAE. As long as the company’s Memorandum of Association or Articles of Association specify unique terms or provisions that contradict the 2015 Law on Commercial Companies at the time of formation, the liquidation procedure shall default to the rules of the 2015 law.

When it is determined that a business can no longer operate, it is usually liquidated. The liquidation process entails winding up and entirely shutting down a business, as well as clearing any outstanding debts. The corporation ceases to exist in the eyes of the court once the liquidation process is completed. In the case of debt-ridden businesses, the liquidation process entails selling the company’s underperforming items at prices that are typically significantly lower than the costs incurred by the corporation. After all, creditors have been paid from the asset sale proceeds, any remaining funds are given to the company’s shareholders.

Types of Company Liquidations

In the UAE, the inability to pay one’s debts isn’t the only basis for a company’s liquidation. Liquidation occurs for a variety of reasons, both within and external to the company. The following are examples of business liquidations:

1. Voluntary Liquidation

It is described as a liquidation that is not prompted by a financial crisis. The company’s present owner(s)/shareholders freely decide on liquidation (s).

2. Creditors' Voluntary Liquidation

When the board of directors determines that the firm is at risk of defaulting on creditor obligations, the company is voluntarily liquidated. In this instance, the company’s shareholders vote to dissolve the corporation if 75% of the members agree with the management plan.

3. Compulsory Liquidation

It is required by the law. Compulsory liquidation is when a court orders a corporation to shut down operations and close down because it can’t pay its debts.

Significance of Company Liquidation

  • The assets of the corporation will be converted into cash through company liquidation. The cash allows the company to repay its investors, shareholders, and other external borrowers.
  • The business is liquidated when the business license expires or the period specified in the Memorandum of Understanding and articles of incorporation or association has expired.
  • The goal for which the firm was founded is accomplished, and the company is liquidated. Different aims, such as monetary advantages or personal aspirations, can be included in the objective.
  • Due to numerous conflicts between the participants, a joint enterprise is liquidated. The assets of the corporation will be handled by the articles of incorporation.
  • Businesses are liquidated in a given country when the tax regime changes or when the new law takes effect that could represent a serious threat to the company’s activities.

How Can We Help?

The method and procedure for liquidating a business are complicated, time-consuming, and regulated. Before organizing a liquidation, it is recommended that business owners get counsel and support from skilled professionals.

With offices across the United Arab Emirates, Alya Auditors has extensive experience advising businesses and aiding them with company liquidations. Our professionals, who have a thorough understanding of the 2015 law governing corporate liquidation, can assist you with all elements of the process. To learn more, please contact us.