The liquidation of a company usually signifies the end of that company’s trading history. Many companies in the UAE, and their owners are interested to know if they can continue trading as a business while their business has entered into liquidation. This question does not have a straightforward ‘yes’ or ‘no’ answer.
We will discuss what the UAE laws say about this subject, any exceptions that may apply to this situation, and how to mitigate uncertainty or barriers that may arise when completing a timely, complete and compliant liquidation process.
Understanding Company Liquidation In UAE
Liquidation is how a business is legally closed as it has completed all its business activities. During Liquidation, the company’s assets are sold to pay off creditors, and any remaining funds are shared with shareholders.
Analysis: Liquidation is a controlled way of ending the existence of a business, to ensure that the interests of employees, creditors and shareholders are protected. Disputes can be reduced if a company goes through this regulated process and all parties are made accountable at the end of the Liquidation process.
Regulatory Authorities: The liquidating process is regulated by various government departments in the UAE, including the Ministry of Economy (MOE) and the Department of Economic Development (DED). The regulatory authorities must ensure that all procedural requirements to liquidate and dissolve a company have been met before a company can be dissolved. In addition, the regulations impose obligations and liabilities upon business owners. An owner may also wish to remove themselves as a registered business owner and thus eliminate any potential future legal and/or financial obligations as a business owner.
Final Objective: To legally dissolve the business, and to complete all documents, if necessary, for all current and pending obligations owed by the business, so all current and pending obligations to all relevant parties have been fulfilled as legally documented. Liquidation is the final process by which a business can be completely dissolved after all current business activity has ceased, and all relevant parties are satisfied with the completion of the dissolution.
Can A Company Continue To Trade During Liquidation?
Usually, once a business goes into liquidation, they cannot do business anymore. However, there are instances in which some limited trading can occur.
- General rule: Trading must stop immediately when liquidation commences, as the company is no longer generating profits or focusing on profits but rather the closing down of the business and settling all debts. So, in other words, a company that is liquidated will not incur new liabilities which would negatively impact their creditors and/or stakeholders.
- Exceptions: In limited instances, if limited trading would facilitate the process of liquidating the business, the liquidator can give transcriptional written permission to allow a company to conduct limited trading (e.g., selling off the company’s existing inventory or completing orders that were placed prior to liquidation). All limited trade activity must be documented and approved in writing prior to any trading taking place.
- Legal Implications: Trading beyond authorized limits can have severe legal and regulatory repercussions, such as possible monetary penalties and individual accountability/liability for directors. In certain instances, trading in excess of authorized limits may also result in disqualification from being appointed as a director of companies in the future.
Legal Implications Of Trading During Liquidation
UAE commercial law views trading conducted while a company is in the liquidation phase as an egregious violation of the law.
- Traded Without Authority: Trading activity executed after the company enters liquidation without approval from the liquidator may be classified as fraudulent trading and, therefore, may subject the company’s directors or shareholders to criminal prosecution.
- Liability: If a director engages in trading activity during the company’s liquidation, they may be found personally liable for any company’s debts arising after liquidation, which means personal financial assets are subject to use to satisfy the company’s debt obligations.
- Regulatory Action: Violators will be subject to regulatory action or prohibitions, as well as the possibility of being fined or permanently barred from executing commercial activities within the UAE’s jurisdiction. Any activity related to post-liquidation is considered to be against the spirit of the liquidation process and is consequently subject to regulatory scrutiny.
Role Of The Liquidator In The Process
A liquidator will play an important role in the company liquidation process.
- Formally Appointed – The liquidator is a formally appointed person who sells assets, settles liabilities and distributes funds fairly between the company and its creditors.
- Legally Required Reports – Liquidators must submit periodic reports about the called off company’s liquidation process to the relevant authorities in the UAE. If these reports are not submitted on time, this will delay the final deregistration of the Company.
- Final Certificate of Dissolution – After all necessary actions have been completed in the liquidation process, the liquidator must provide a final report and certificate. This final report proves that the Company has been officially dissolved.
Factors That Affect The Liquidation Timeline
Liquidation can be affected by several factors, affecting how quickly liquidation can occur.
- Size and Structure – Generally speaking, larger companies with more diversified assets or more property will take longer to liquidate than smaller companies due to the greater number of parties involved in liquidating a company and hence more documents, approvals and valuations required.
- Outstanding Liabilities – Items such as loans, unreimbursed employee hours, or unpaid taxes that exist prior to liquidating a company may delay the liquidation process. The company will be approved for liquidation faster when the company has taken care of all outstanding issues before seeking approval for liquidation.
- Authorities Approvals – Every jurisdiction (UAE Mainland and Freezone) has its own clearance process for the dissolution of a company. Delays in these jurisdictions are common when there are issues with legibility or when the necessary approvals were not obtained from all affected parties.
Common Challenges During Liquidation
Liquidating a company can present several legal, administrative, and practical hurdles that cannot be avoided, even if carefully planned.
- Document Management: With respect to documentation, some examples of documentation obstacles to liquidating a company may include missing or outdated registration documents, and/or either no record of taxes filed and/or no record of a trade license. Prior to filing for liquidation, a pre-liquidation audit will assist in determining that all documentation is in compliance.
- Creditors: Creditors that have not received their debt payments, or multiple creditors who have conflicting priorities regarding payment may cause delays in finalizing the liquidation of a company. It is best to maintain open communication with your creditors and to agree to reach an understanding or settlement with each creditor.
- Valuation of Assets: The liquidation of a company’s assets can be a challenge when it comes time to sell those assets at fair market value. Involving a qualified valuer will promote transparency and help to obtain maximum value for the assets being sold.
How To Speed Up The Liquidation Process
Business can cut down the time taken by an organization to dissolve its business in the United Arab Emirates (UAE) by:
- Contracting with an Experienced Liquidator: Choose a liquidating company that has experience in completing successful liquidations within the UAE. The liquidator will have experience coordinating with the relevant agencies and therefore; be able to inform all parties quickly with minimal errors in documentation.
- Provide Necessary Documents in Advance: Have all “no objection” (NOC) letters from relevant government agencies before starting the liquidation process. This will eliminate bottlenecks and speed up NOC approvals.
- Maintain Open Communication: Be sure to communicate with all parties (government agencies, employees and creditors) throughout the entire liquidation process. Keeping all parties informed fosters a sense of trust in all parties involved.
Conclusion
So, can a company in liquidation still trade in UAE? Generally not, with certain limited exceptions where liquidators can give approval. It is very important that you follow UAE liquidation regulations to avoid running into problems when closing down your company, incurring penalties, and damaging your record for future business.
Are you trying to find the right way of winding up your company in UAE? Xpert Advisory provides a full range of services to assist with a smooth and compliant liquidation process. Our team will assist during every step, from documentation to filings, and ensure you are compliant with UAE’s liquidation regulations.
In addition, we can provide advice on how to minimize the costs associated with liquidating your company, while expediting the overall process. Contact us today and let us take care of the intricacies of liquidating your business in the UAE, allowing you to concentrate on your next undertaking!
FAQ
- Is it possible for a Company to continue Trading, while being Liquidated?
Liquidated companies are prohibited from engaging in any of their current trading activities; however, they may conduct certain approved activities (eg. Selling assets and collecting debts) as long as they have received written permission from the liquidator. A director who permits the company to conduct unauthorised trading can be held personally liable for the company’s debts and incur penalties for breaching company law.
- Who is Responsible for the Liquidation Procedure in the United Arab Emirates?
In the United Arab Emirates, the liquidation process is conducted by an appointed liquidator, and the appointed liquidator is responsible for managing the liquidation process. The liquidator has the responsibility to liquidate all assets and settle all debts of the company, while ensuring that the liquidator complies with the laws of the United Arab Emirates. In the UAE, the liquidator will act as a neutral party, ensuring that all parties who have a vested interest in the company have been treated fairly throughout the liquidation process.
- How Long Will it Take to Liquidate a Company in the UAE?
Generally, it will take 2-3 months to liquidate a company in the UAE; however, the time taken will depend on the size of the company and its outstanding financial obligations. Companies that have fully documented their financial obligations and have settled all of their liabilities will be able to complete the liquidation process much quicker than companies that have incomplete records or unpaid liabilities.
Free zone companies will also usually be able to complete the liquidation process faster than mainland companies due to different, less complex liquidation procedures.
