Liquidation is the process in accounting by which a company is brought to an end. The company's assets and property are redistributed. Liquidation is carried out according to the clauses of the company's memorandum of association, and if the latter is devoid of the provisions of liquidation, then the provisions contained in companies law must be followed.
There are two types of company liquidation, voluntary/compulsory liquidation and winding up/liquidation by the court.
It may either be compulsory liquidation (also known as a creditors' liquidation or receivership following bankruptcy, which may result in the court establishing a "liquidation trust") or voluntary liquidation (also known as a shareholders' liquidation, although some voluntary liquidations are controlled by creditors).
Voluntary liquidation is a method of winding up a business. This will take place if a valid shareholder's resolution is passed by the company's shareholders or creditors. An official liquidator must be chosen at the shareholder meeting. Such liquidation may also be called compulsory liquidation.
Winding up by the Court
When a company's financial mechanism fails, the company is in financial hardship and/or insolvent, and it is unable to pay its debts, the company may ask the court for winding up. The process is usually initiated by the creditor of the company but maybe even at the behest of a company director or shareholder with a petition to close down the company. The assets of a firm are realized and distributed to the company's creditors under this court-based procedure. This has the effect of a compulsory winding-up, which is carried out in accordance with the law, particularly in circumstances where the firm is unable to fulfil its liabilities/debts. The assets and liabilities of the company are thoroughly examined in this type of dissolution. A liquidator is appointed by the court once an application for winding up is filed with the court and an order is issued to that effect. The liquidator will take over control of the company. The liquidator manages and sells the company's assets in order to pay off the company's debts. The firm's name will be removed from the register of companies after the sale of assets, and the company will be said to have been wound up.
Meanwhile, Articles from (306) to (326) of the UAE Companies Law regulate the issue of company liquidation and its procedures; such articles organize liquidation procedures for companies that:
· Its partners did not agree on the method of liquidation when they dissolved the company.
· There is no specific method for liquidation in its memorandum of association other than what is stipulated in the law
The company's managers remain in charge of the company's management until a liquidator is appointed and they are considered as liquidators vis-à-vis third parties, and liquidation procedures have begun when a liquidator is appointed to conduct liquidation procedures.
Article 310 stipulates that a decision to appoint a liquidator must be issued in one of the following ways:
· Court order.
· Partner agreement.
· Resolution of the general assembly.
The second procedure of liquidation, after appointing the liquidator and registering the decision of his appointment in the commercial registry, the liquidator shall make an inventory of the company's funds, rights, and obligations, and the company's managers shall hand him all the papers and documents necessary for that.
The third procedure of liquidation is for the liquidator to draw up a detailed list of the company's rights, obligations and budget. This list shall be signed by the company's managers or the chairman of its board of directors. The liquidator shall also write a book in which all liquidation works shall be recorded.
The liquidator must do all that is necessary to preserve the company's money and rights, collect what it has with others, and deposit the amounts he receives in a bank for the company's account under liquidation as soon as they are received.
Later on, the liquidator sends registered books to all the company's creditors announcing them of its liquidation and giving them at least forty-five days to submit their applications. The liquidation shall be announced in two widely spread local newspapers. All debts of the company shall be forfeited as soon as the liquidation business is opened.
If the company's funds are not sufficient for the settlement of debts, the liquidator shall pay the debts according to the proportion of the debts. It prioritizes privileged debts over others.
If there are debts whose creditors have not submitted requests for collection. The liquidator deposits these debts in the treasury of the court. As for the disputed debts, sufficient funds or guarantees may be deposited in the court treasury, or the completion of the liquidation may be postponed until the disputes relating to these debts are resolved.
In conclusion, liquidation is the process of redistributing a company's assets and property. Voluntary or compulsory liquidation and winding up by the court are the two types of company liquidation. Liquidation is carried out in accordance with the company's memorandum of association's provisions. Other than what is stated in the legislation, there is no specific mechanism for liquidation in its memorandum of association. If there are any disputed debts, the court treasury may accept sufficient funds or guarantees to finalize the company's liquidation.