Introduction:
Liquidation, also known as winding up, is the process of dissolving a company, settling its liabilities, and distributing its remaining assets to shareholders. In the UAE, companies incorporated in areas in the UAE which are not free zones (the “Mainland UAE”) and in financial free zones such as the Dubai International Financial Centre (the “DIFC”) operate under different legal frameworks, and the liquidation processes vary accordingly. Below is a comparative overview of the liquidation process for a limited liability company in Mainland UAE versus DIFC.
Legal Framework:
Mainland UAE:
In situations where the limited liability company’s constitution is silent, the liquidation process in mainland UAE becomes subject to the Federal Decree-Law No. 32 of 2021 on Commercial Companies and the UAE Bankruptcy Law (Federal Decree-Law No. 51 of 2023).
DIFC:
In situations where the limited liability company’s constitution is silent, Companies incorporated in the DIFC fall under the jurisdiction of DIFC Companies Law (DIFC Law No. 5 of 2018) and the DIFC Insolvency Law (DIFC Law No. 1 of 2019). The DIFC has its own legal framework, court system, and procedures, modeled after common law principles, making the liquidation process more distinct from the mainland.
Types of Liquidation:
Mainland UAE:
The liquidation of an LLC in the mainland can be:
- Voluntary Liquidation: Initiated by shareholders when the company is solvent.
- Compulsory Liquidation: Ordered by the court when the company is insolvent or fails to meet its financial obligations.
DIFC:
Similarly, in DIFC, the liquidation can be:
- Voluntary Liquidation: Initiated by shareholders or the board of directors, where the company is solvent.
- Compulsory Liquidation: Initiated by creditors or shareholders through the DIFC Courts when the company is insolvent.
In this article we look at the process of undertaking voluntary liquidation.
The Procedure of Voluntary Liquidation:
Mainland UAE:
- The company must pass a shareholder’s resolution (the “Resolution”) to dissolve the Company and to appoint the Liquidator to carry out the liquidation process.[1] The Resolution must also state the name of the Liquidator.
- The Resolution is to be notarized at the public notary. The notary public requires the presence of all the company’s shareholders as reflected in the company’s license, even if the company’s memorandum of association does not require unanimous decision and provides a specific majority.
- The Liquidator will then undertake the following:
- notify the relevant authorities, namely the Department of Economy and Tourism (the “DET”) by filing the Resolution and obtaining all other necessary documentation to carry-out the liquidation;
- publish a notice of the liquidation in two local daily newspapers in Arabic, giving creditors at least forty-five (45) days from the date of the notice to bring forth their claims;
- settle of the Company’s liabilities to any creditors;
- prepare a final account of liquidation and submit it to the shareholders of the Company;
- distribute the Company’s remaining assets;
- cancel of the visas of the Company’s employees;
- finalizing the liquidation process by submitting the required liquidation documents to the DET and deregistering the Company’s license from the DET’s register.
DIFC:
- The company must pass a special resolution approving the voluntary winding up of the Company by the shareholders and initiating the winding up process;
- The directors of the company must then prepare a statutory declaration of solvency;[2]
- The company must send notification to the relevant authorities, for example DFSA if the company is DFSA regulated, and third parties by publishing an advertisement.
[1] The appointed liquidator must possess an accountant registration certificate. The appointed liquidator must not be an auditor of the Company nor have audited its accounts in the five (5) years immediately preceding his appointment.
[2] Article 59 of the DIFC Insolvency Law: It is a declaration by the directors of the company that they have made full inquiry into the company’s affairs and that they are of the opinion that the company will be able to pay its debts fully within a period not exceeding 12 months from the commencement of the winding up. - Appointing a DIFC approved, one or more, liquidator to perform the following steps:[3]
- Prepare the liquidator’s report;
- Prepare the final accounts.
5. The company must then settle its administrative affairs (paying bills, cancelling employee visa, etc.);
6.The company must submit an online service request through its DIFC Portal to formalize the process.
Estimated Fees and Timeline:
Mainland UAE:
The administrative fees involved in finalizing the dissolution process is estimated to approximately be a minimum of AED 5,000 for the DET fees and the Ministry of Human Resources and Emiratisation. You must also consider the fees chargeable by the liquidator and fees for the NOCs from the applicable authorities.
The dissolution process is estimated to take a period of two (2) months to be finalized depending on the speed and efficiency at which documents are prepared and procedures are executed.
DIFC:
Although DIFC does not have any administrative fees for winding up the Company, there is a charge of USD 100 for the issuance of the confirmation of appointment of liquidator certificate. Further, there will be other miscellaneous costs such as the fees chargeable by the Liquidator and fees for settling the Company’s administrative affairs.
The timeline for the winding up process will depend on the speed at which the required documents are prepared and submitted to be reviewed by the DIFC Authority (DIFCA) and then the time required for DIFCA’s review.
Conclusion
The process of voluntary liquidation for limited liability companies in Mainland UAE and DIFC follows a similar overall structure, but key differences arise due to the distinct legal frameworks governing each jurisdiction. In Mainland UAE, the liquidation process is heavily governed by Federal Decree-Law No. 32 of 2021 and is more reliant on public authorities such as the DET, with a greater emphasis on local administrative processes such as newspaper publications and obtaining various governmental approvals. The timeline and fees involved in the Mainland process are also contingent on the speed of documentation and the coordination with the respective authorities.
[3] The Liquidator must be listed as an approved liquidator on the DIFC website. For the list of approved liquidators, please go to Insolvency practitioners and official liquidators (difc.ae).
In contrast, the DIFC liquidation process operates under a more streamlined and common law-based system, making it potentially quicker and more efficient, especially for international entities. However, while the DIFC’s process may involve fewer administrative hurdles, the appointment of approved liquidators and coordination with relevant authorities such as DFSA (if regulated) still require careful attention.
Ultimately, when deciding to incorporate a company, businesses should evaluate the requirements of both jurisdictions when related to liquidation, as each offers advantages based on the company’s structure, regulatory obligations, and specific needs. Understanding the nuances of each jurisdiction’s liquidation framework can help mitigate risks, streamline the process, and ensure compliance with the respective regulatory authorities.
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