Liquidation is a formal insolvency procedure in which a company is brought to an end. In the process, all of the company assets are liquidated and the proceeds from the assets sale are used to settle debts, pay expenses and transfer any remaining balance to the company shareholders. Once a company is liquidated, it will stop its business activity and employing people. On liquidation, a company’s business licence is revoked and its name is removed from the trade registry. Also the business entity is considered to have ceased to exist.
Liquidation is a way to reduce the losses of a company that does not have the liquidity of funds to operate. Liquidity issues can arise from the firm’s inability to pay creditors or when the firm is suffering from a deep crisis. An expired company may still be liable for debts and obligations, even if it is not working. Liquidation ensures that all outstanding liabilities are settled, so that the owners and directors are not held responsible for any claims in the future.
If an LLC, a branch of an LLC, a free zone company, an offshore company, or a sole establishment stops to operate, the firm’s licenses must be cancelled and the assets must be divided amongst its shareholders and creditors accordingly. Under the UAE Commercial Companies law, it is a legal requirement for companies to undergo liquidation processes upon expiration or termination. Failure to do so can result in legal penalties and fines.
Liquidation allows for the well-organized distribution of any remaining assets of the company. This includes property, cash, and equipment. This makes sure that that all creditors and shareholders are treated in a fair manner, and any remaining assets are distributed according to the law. Liquidation is the final step in the cessation of a business. It allows the owners to move on to other business ventures.
The reasons for liquidation can be different. It can be due to the expiry of license or duration mentioned in the articles of incorporation or association. The liquidation can also due to the completion of the objective for which the company was established.
There are mainly two types of liquidations for insolvent companies– compulsory liquidation and creditor’s voluntary liquidation (CVL).
The procedure for cancelling a license is different for sole proprietorships (single shareholder companies), and companies with multiple shareholders. For sole proprietorships, cancellation must be applied via licensing authority and all the clearances must be acquired from various departments depending on the activity.
It is important to liquidate the shares of the companies, collect the existing debts and pay the creditors before finalizing with the licensing authority.
The below mentioned company legal forms need to appoint a liquidator to carry out the liquidation process in the UAE.
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