When does a company need to be liquidated in the UAE?

March 4, 2024

There are two primary reasons that may necessitate company liquidation in the UAE:

  1. The initial objective for establishing the company has been accomplished, rendering the entity redundant.
  2. The company is deemed insolvent.

Even in situations where outstanding debts are absent, it is strongly recommended to undergo a formal company liquidation process for an entity that has fulfilled its purpose, rather than allowing the trade license to expire passively.

The process of formally liquidating a company involves several essential procedures. Neglecting these steps can potentially result in various penalties and the potential ‘blacklisting’ of the company, along with its directors and shareholders, by UAE government authorities. Such actions could subsequently impact their participation in other business ventures or impair their ability to establish future companies.

The process of company liquidation is subject to variation based on the following three distinct criteria:

  1. The nature of ownership

Sole proprietorships or sole establishments must initiate the process of canceling their business license by submitting an application to the appropriate Department of Economic Development. In addition, they need to secure all pertinent clearances from the following entities:

  • Ministry of Human Resources and Emiratization
  • Directorate of Residency and Foreigners Affairs
  • Relevant water and electricity authorities
  • The lessor

However, in cases where the legal structure of the business falls under any of the following categories, the engagement of a liquidator is mandatory:

  • General Partnership
  • Limited Liability Company
  • Simple Limited Partnership
  • Public Joint Stock Company
  • Private Joint Stock Company
  • The method of liquidation

Voluntary Company Liquidations in the UAE.

In the realm of voluntary company liquidations, shareholders hold the option to initiate the liquidation process for a financially sound company, while in the case of an insolvent company, directors possess the authority to halt ongoing operations and commence asset liquidation with the aim of fulfilling creditor obligations.

Compulsory company Liquidations If a company’s debts are not paid on time, its creditors may request the courts to liquidate the company in order for them to collect their dues. The courts may decide to force a company to liquidate and sell its assets in order to pay outstanding debt.

Mandatory Company Liquidations

When a company falls behind in settling its debts within the stipulated timeframe, its creditors possess the right to petition the courts for the company’s liquidation, enabling them to recover the amounts owed to them. In response, the judicial authorities may opt to compel the company into liquidation, mandating the sale of its assets to satisfy outstanding debts.

  • The registered jurisdiction, whether it be Mainland UAE or a Free Zone.

In UAE Free Zones, there’s no standard need to appoint a company liquidator. The steps for closing a Free Zone Company depend on the rules of the specific Free Zone Authority where the company is registered. To close a Free Zone company, you need to inform the Free Zone Authority in advance, and they will announce the closure. You’ll also need to get permission from utility companies and other relevant government or Free Zone departments. After completing the required paperwork, you’ll need to cancel employees’ visas and work permits and close bank accounts. Finally, you’ll receive an official termination letter from the Free Zone Authority.

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