It is pertinent for any company established in the United Arab Emirates (UAE), that intends to shut down the business permanently, to dissolve the company as per the procedures provided by the laws governing establishment and dissolution of the companies. Further, every company incorporated in the UAE must register with the relevant government bodies for obtaining a license to run their business. Hence, to avoid unwanted fines and penalties upon the expired license, the company that intends to close the business shall notify the relevant authorities of the same and the reasons to do so, before the dissolution procedure begins. The method involved in the dissolution of the company depends and varies on the type of companies.
However, winding up a company is not a simple process. It involves various steps like settling the utility bills, obtaining clearances from relevant governmental departments, cancelling employment visas, paying off the debts, etc. Thus, this article shall discuss the provisions regulating the dissolution of a Limited Liability Company (LLC) and the steps involved in obtaining an LLC company’s official closure as a legal entity.
Federal Law Number 2 of 2015 on Commercial Companies (the Companies Law), is the governing legislation in UAE for all the aspects related to the companies established in UAE.
The provisions of the Companies Law provides the law regulating the formation of a company, types of company, obligations, requirements to set up companies, liquidation and termination of the companies, and other such vital aspects of companies intending to operate in UAE.
Article 295 of the Companies Law lays down the common grounds when a company can opt to dissolve as follows:
- If the company completes its term mentioned in the memorandum of association (MOA) or the articles of association (AOA) then it may opt to dissolve the company, except if such term was renewed as the per provisions specified in the MOA or AOA;
- Where the objective for which the entity was established cease to exist;
- If the company is facing financial challenges to run the business and there is no scope for any profitable growth, due to the loss of all or most of the assets of the company;
- If the company intends to opt for mergers in line with the provisions of this law;
- Where the company has been imposed with a judicial decree to close the company;
- If the partners mutually consent to end the term mentioned in the MOA or AOA of the company, unless a specific number of partner’s consent is required to dissolve the company is stated in the MOA of the company.
However, as per article 300 of the Companies Law, the following circumstances stated below may not be a reason for the dissolution of an LLC company, unless the MOA of the company provides otherwise:
- If one of the partners expires; or
- If one of the partners has to withdraw due to the order from the relevant court forbidding his continuity in the company as a partner; or
- If the partner goes bankrupt or insolvent.
Further, the share belonging to the partner will be passed on to his heirs.
Procedure for Dissolution of an LLC company:
The procedure for winding up of the LLC company can be initiated by the company’s board of directors, in cases, where the company has reached to the point of losses which is half of its issued capital (fifty Percent). The board of directors may summon for a general meeting with the partners to obtain the consent for the company’s dissolution. Further, where the losses have reached three-quarters of the capital (seventy-Five Percent), then the partners owning one-quarter of the capital (twenty-five percent) can order for the company’s closure. Whatever the case may be, a company can proceed with the company’s dissolution only after it has been agreed in the general assembly; which means a resolution should be passed by the shareholders (partners) of the company as to the dissolution of the company.
Resolution by the Partners (shareholders) as to Dissolution of the Company:
The partners shall pass a resolution agreeing for the winding up of the company. Further, the resolution shall also contain the procedure to be adopted for liquidation and even the liquidator‘s name. The partners shall not be entitled to a share of the company’s capital in the event of dissolution of the company until the debts are paid. In cases, where the MOA or AOA of the company has no provisions on the method of liquidation or the partners have not agreed on the liquidation method, then the provisions on liquidation as mentioned in the Companies Law shall be applicable.
Notify the Relevant Authorities and the Registrar about the reasons for the dissolution of the company:
The managers authorized to represent the company are required to notify the significant authorities and the registrar of the reasons for which dissolution is initiated. Thereafter, as per article 305 of the Companies Law, either the managers of the company or the chairman or the liquidator, as the case may be, shall mark dissolution in the commercial register with the competent authority. The dissolution shall be published in two widely used local newspapers, in which one of them shall be published in the Arabic language. The company’s dissolution only becomes effective post the date of such registration of dissolution of the company.
Role of Liquidator in Dissolution of the Company:
As per the provisions mentioned in the Companies Law, the appointment of liquidators by the partners is necessary in the event of dissolution of an LLC company. In cases where the partners have not agreed on the method of liquidation or the MOA of the company is silent on the process of liquidation to be adopted, then the provisions of this law on liquidation shall be applicable. When the company’s dissolution is initiated, it may lead to the ceasing of authority to run the business vested in the company’s manager or the board of directors. However, they may assume the role of liquidators and manage the company until a liquidator is appointed officially.
Further, the company’s management shall remain effective during the period of dissolution of the company, to the extent as deemed necessary by the liquidators for the process of carrying out the dissolution process. The appointed liquidator shall not be an active auditor of the company or a person who has done auditing of the company’s accounts for at least a period of five (5) years. In cases where the Competent Court has passed the dissolution, such Competent Court shall determine the liquidation method and appoint a liquidator. However, the liquidator shall not be liable to be removed, even if such liquidator is appointed by the partners, who have gone bankrupt, expired, or imposed with a judgement of interdiction. The provisions of this law also provide for the appointment of multiple liquidators. However, the multiple liquidators’ actions will be effective only if there is unanimous agreement among them. Further, the liquidator must enter the decision as to his appointment, the partners’ agreement as to the liquidation process to be adopted or any judgement issued regarding the dissolution of the company in the commercial register. The liquidator’s appointment and the method of liquidation adopted shall become effective against any third parties, from the date when such information has been entered into the commercial register.
Duties of the Liquidator:
- The liquidator is required to prepare the list of inventory of all the assets and liabilities of the company, pursuant to his appointment. For this purpose, the company’s manager shall provide the liquidator with all the relevant documents, assets and books of the company. Further, the liquidator may require the managers or the chairman of the company to sign the company’s balance sheet. The liquidator shall also maintain a book to enter the procedures adopted for liquidation.
- The liquidator shall strive to preserve the company’s rights and collect the debts owed to the company. The recovered debts shall immediately be deposited in a bank account of the company created for the purpose of liquidation.
- The liquidator shall act as the company’s representative for various purposes like to pay off the company’s debt, display the company’s movable assets, and the properties for public auction for sale. However, the liquidators are not allowed to sell all the company’s assets at once, without obtaining the shareholders’ consent or approval from the company’s general assembly.
- The liquidators are required to notify the creditors of the company about the dissolution of the company. The creditors become liable to promptly pay off all the outstanding amount to the company. For this purpose, the liquidator shall convey to the creditors via registered letters containing an acknowledgement of receipt stating the company’s commencement of dissolution and thereby inviting the creditors to bring forth their claims. This notice is required to be published in at least two local newspapers, where one shall be issued in the Arabic language. Further, the notice sent to the creditors shall also include the period to present their claims as at least forty-five (45) days from the date when the notice has been sent to the creditors.
- The liquidators are required to repay the debts owed by the company. If the creditors have failed to raise their claims, then the debts will be deposited in the competent court’s treasury.
The steps involved in the dissolution of an LLC company:
- The first step is to get the resolution passed by the partners of the company as to the dissolution of the company, appointment of liquidator and method of liquidation notarized at the notary public;
- Thereafter, the officially registered liquidator shall provide a letter of acceptance to assume the role of the liquidator and carry out all the essential duties;
- The next step is to apply for cancellation with the Department of Economic Development (DED). The application form shall be accompanied by the company’s original trade license and the company’s official commercial registration certificate. Further, the document shall be signed by authorized representatives of the company, along with the signs from the director of the company or its managers.
- Thereupon, if the DED is satisfied with the application submitted, it shall issue a certificate stating that the company is entering into liquidation (the liquidation certificate). The liquidation certificate shall also invite any existing claims against the company within a period of forty-five (45) days.
- The liquidation certificate is required to be published in at least two widely used local newspapers, in which one shall be issued in Arabic.
- Suppose no objection has surfaced from the creditors. In that case, the liquidator shall prepare a declaration letter stating that no objection has been raised during the notice period provided and that the company may carry out the liquidation process. The declaration letter shall be submitted to the DED.
- Thereafter, the liquidator must obtain a clearance certificate from the relevant governmental bodies like Ministry of Human Resources and Emiratisation, Ministry of Labor, Ministry of Immigration for the cancellation of the company’s license, cancellation of visas. Further, obtain a clearance certificate from Dubai Electricity & Water Authority (DEWA). All other such approvals required for obtaining a successful dissolution of the company.
- Thereafter, submit the obtained clearance certificates and other such essential documents to get a final cancellation.
- The DED will decide the fees, and upon paying the fees determined by the DED, the certificate of de-registration shall be issued by the DED.
- As per article 322 of the Companies Law, the liquidator must note in the commercial register with the competent authority about the completion of the liquidation process, as the completion of liquidation shall become active only after entering into the commercial register. Thereafter, the registration of the company shall be removed from the commercial register of the competent authority.