UAE Company Closing? What You Need to Know About Liquidation

Company liquidations in the UAE have become a focal point of interest, spurred by high-profile cases involving companies like Marka PJSC and Arabtec Holding. Understanding these cases necessitates a solid grasp of the context and procedures surrounding corporate dissolutions in the UAE, especially considering a recent significant update to the legal framework.

High-Profile Liquidations

Arabtec Holding: Arabtec Holding, a major construction firm, announced its liquidation in 2020 due to unsustainable finances. Despite involvement in landmark projects like the Burj Khalifa, Arabtec faced severe liquidity issues and mounting debts, ultimately leading to the winding down of operations and asset sales to repay creditors.

Marka PJSC: Another notable case involved Marka PJSC, a publicly listed retail company ordered into liquidation by the Dubai Court. The court held the company's directors personally liable for nearly AED 450 million in debts due to mismanagement and failure to provide necessary financial information during bankruptcy proceedings.

Liquidation Procedures in the UAE

The liquidation process remains categorized as either voluntary or compulsory, each with distinct steps and requirements:

Voluntary Liquidation:

• Resolution of Dissolution: Shareholders must approve and notarize a resolution to dissolve the company. This resolution should clearly state the reason for dissolution and appoint a Liquidator. Typically, a majority vote (over 50%) of shareholders is required.
• Appointment of a Liquidator: A qualified and licensed professional is chosen to oversee the liquidation process. The Liquidator is responsible for managing the company's assets, settling debts, and ultimately closing the business.
• Submission to Authorities: Necessary documents, including the resolution and Liquidator appointment, along with required fees, are submitted to the relevant licensing authority.
• Publication of Notice: A public notice announcing the company's liquidation is published in both Arabic and English newspapers. This notice informs creditors of the upcoming deadline to file their claims.
• Notice Period: A notice period, typically up to 45 days, is observed to allow creditors to submit claims against the company's remaining assets.
• Final Liquidation Report: Once all claims are settled and assets liquidated, the Liquidator prepares a final report summarizing the process. This report is submitted to the authorities for the issuance of a cancellation certificate, officially dissolving the company.

Compulsory Liquidation:

• Court Petition: Creditors can petition the court to force a company's liquidation if it fails to repay debts. The petition must demonstrate the company's insolvency and inability to meet its financial obligations.
• Appointment of a Liquidator: The court appoints a qualified Liquidator to manage the asset sales and debt repayment process.
• Asset Liquidation: The Liquidator sells the company's assets in a fair and transparent manner, with the proceeds used to pay off creditors according to a specific hierarchy established by UAE law.

A Revamped Legal and Practical Implications

Previously governed by Federal Law No. 18 of 1993 (Commercial Code) and Federal Law No. 2 of 2015 (Companies Law), the UAE's insolvency regime has undergone a significant update.

Federal Law No. 51 of 2023

Effective from May 1, 2024, Federal Law No. 51 of 2023 overhauls the UAE's insolvency framework. Among its key features is the introduction of the Financial Restructuring and Bankruptcy legislation, outlined in Federal Law Decree No. (51) of 2023. This new law repeals Federal Decree-Law No. 9 of 2016 on Bankruptcy and introduces several significant changes aimed at enhancing bankruptcy proceedings in the UAE.

Key Changes Introduced by Federal Law No. 51 of 2023:

• Preventive Settlement replaces Preventive Composition: A more user-friendly approach allowing debtors to continue commercial activities while settling debts through court-approved proposals with creditors. This provides an opportunity to avoid complete liquidation.
• Updated Definitions: The New Law expands and clarifies key concepts such as "Debtor's Assets" and "related parties" to ensure a clearer understanding of the legal framework.
• Enhanced Court Expertise: The court gains the power to retain experts and auditors to be part of the Bankruptcy Court, with their fees covered by the judiciary. This allows for more informed decision-making during bankruptcy proceedings.
• Expanded Liability: The concept of de facto companies' bankruptcy is introduced, extending liability provisions to de facto managers and enhancing accountability for board directors and managers in cases of financial mismanagement leading to insolvency.
• Revised Constraints on Debtor Actions: The New Law streamlines the process by introducing practical exceptions for debt repayment related to essential business needs. These exceptions, subject to court approval, can include Outstanding salaries and end-of-service benefits for employees. Costs associated with essential business materials required to maintain minimal operations.Necessary living expenses for the debtor, if applicable.

Free Zones

The liquidation process in Free Zones might still differ slightly from the mainland. Coordination with the respective Free Zone Authority and obtaining clearances and no-objection certificates before finalizing liquidation might still be required. Consulting with legal professionals specializing in Free Zone insolvency procedures is recommended for specific guidance.

Impact on Employees

During liquidation, employees face job loss and uncertainty about their financial entitlements. UAE labor laws prioritize employees by ensuring outstanding salaries and end-of-service benefits are settled before other creditors receive payment.

Financial Red Flags and Early Warning Signs

While the revised laws offer a more flexible framework for dealing with financial distress, understanding the red flags that might lead to liquidation is crucial. Here are some key indicators:

• Consistently declining revenues and profits: A sustained drop in income suggests an inability to cover operational costs, potentially leading to insolvency.
• Mounting debts and difficulty securing credit: If a company struggles to repay existing debts or is unable to obtain new financing, it may be a sign of severe financial strain.
• Cash flow problems and difficulty meeting day-to-day expenses: Inability to manage cash flow effectively can quickly cripple a company's ability to function.
• Poor asset management and inventory issues: Excessive inventory or mismanagement of assets can tie up valuable resources and hinder financial flexibility.
• Legal action from creditors: If creditors resort to legal action to recover debts, it signifies a serious financial breach and potential insolvency.

The liquidation of companies like Arabtec and Marka PJSC underscores the importance of sound financial management and adhering to the UAE's insolvency laws. The procedures, while detailed, ensure fair treatment of creditors, employees, and other stakeholders during the winding-up process. As the UAE continues to refine its insolvency framework, these cases serve as valuable learning points for businesses operating within the region. The recent changes introduced by Federal Law No. 51 of 2023 mark a positive step towards a more efficient and flexible approach to bankruptcy proceedings. These reforms can potentially benefit both businesses facing financial difficulties and creditors seeking to recover their dues.