Why authorities reject company liquidation applications in the UAE has become a major concern for business owners who want to close a company and move on. Most people think that liquidating a company is easy, just submit a cancellation request and that’s it. However, in the UAE, companies are now required to follow more strict legal processes prior to having their application for liquidating a company approved by the authorities. Recent amendments made by the Federal Decree Law No. 51 of 2023 concerning financial restructuring and bankruptcy place a greater emphasis on compliance and proper documentation.
Many applications will fail due to unresolved tax issues, employee obligations not being met and not submitting proper documentation. Many times courts will deny requests for liquidation when companies do not have clearly identifiable assets available for liquidation. Therefore, business owners must prepare well for liquidation, settle unpaid obligations, and be able to provide clear evidence of full compliance with all legal requirements prior to filing for liquidation in the UAE.
Key Rejection Risks at a Glance
- No Identifiable Assets
When there are no substantial assets available to liquidate, the courts will refuse applications.
- Unresolved Taxation Matters
An incomplete form related to VAT or failure to deregister from the companies registry can delay the process.
- Incomplete Records
Financial statements along with notarized minutes of annual meetings of shareholders are typically required.
- Pending Employment Issues
If there are any outstanding visa or gratuity issues or if there are labour disputes, final cancellation will not be able to be completed.
Understanding Company Liquidation in the UAE
Company liquidations are legally defined terms for a company that winds up or ceases operations. The process of liquidation will eventually result in settling any outstanding debts prior to transferring any remaining assets and cancelling the company’s various licenses and registrations. In the UAE, the process typically requires the companies to secure approvals from their respective licensing authorities, tax authorities, banks and other governmental entities before formally dissolution of the subject company.
Why Authorities Reject Liquidation Applications
There are many reasons why authorities may reject a company’s application for liquidation, including an inability to meet legal, financial or administrative requirements. The primary purpose of the rule is to protect creditors, employees, shareholders, and the public interest. A denial of an application does not always mean that a company will not be able to liquidate. But generally it means the applicant has not met all of their obligations and will have to re-organise their application prior to being able to proceed with the liquidation process.
Problems with the “Empty Shell”
A primary factor for denial of applications for restoration of companies is the lack of tangible assets. A series of courts in Dubai have recently stated that if a corporation does not possess any assets that can be liquidated or distributed, the court may refuse to grant an application for liquidation of that company. The related court will expect that a genuine liquidation process will take place. Merely being an inactive corporation with no assets and no ability to conduct business may be insufficient.
Failure to Deregister for VAT and Corporate Tax
The Federal Tax Authority has a key role in the liquidations process as companies have to settle their tax liabilities and deregister from VAT and Corporate Taxes if they exist. Authorities commonly reject applications for deregistration from VAT and Corporate Taxes when there are still outstanding tax obligations or if the company has not deregistered.
Common Tax Issues
- Unpaid VAT liabilities
- Outstanding Corporate Tax Obligations
- Missing Tax Deregistration Applications
- Unfiled Tax Returns
Incomplete Financial Records
The regulatory agencies require companies to submit complete and accurate up-to-date financial records to evaluate if they would qualify for a bankruptcy discharge. Under the bankruptcy code, applicants must provide a complete set of financial statements and supporting documentation. The lack of supporting documentation creates an impediment to assessing a company’s financial position by regulators, creditors and the court.
Typical Documents Required
- Financial Statements
- Accounting Records
- Bank Statements
- Listing of Assets and Liabilities
Missing Shareholder Resolution
In the liquidation of a company, a notarized shareholder resolution may need to be submitted. As such, a notarized resolution from company owners stating their concurrence with the company’s dissolution and completing the assignment of a liquidator will be required. Applications will also be rejected if a notarized resolution is not included or is improperly made incomplete.
Outstanding Employee and Visa Matters
Oftentimes, businesses will experience some difficulty meeting their labor requirements, such as having to cancel an employee’s visa and issues regarding unsettled labour disputes before the authorities can issue an employee or business;s final cancellation. The absence of an employee’s visa or pending labour issues can lead to delays in going through the liquidation process.
Key employment checks
- Cancelled Job Visa
- Final Salary
- Severance Pay
- Resolving labour Disputes
Other Practical Reasons for Rejection
There are also other potential issues that could prevent a company from being granted permission to liquidate. For example, unresolved licensing issues, unpaid government fees, inability to properly notify creditors, and discrepancies between a business corporate records. The documentation submitted as part of the liquidation application are all possible reasons why a liquidation application might be rejected. Regulators generally expect that a business corporate records will be consistent between all of the various authorities that will be involved in the liquidation process.
The Role of the Liquidator
In many cases, the person handling the process of liquidating a corporation is a licensed liquidator. A licensed liquidator reviews the corporation’s financial situation, creates reports, pays off debts owed to creditors and coordinates with authorities. When seeking a liquidator, choosing one with experience can minimize the risk of making mistakes during the process that could prevent the liquidation process from happening.
Court Led Liquidation vs Voluntary Liquidation
Within the UAE legal framework, there is a distinction between voluntary liquidation by shareholders and those conducted through the courts. In court led proceedings, there is a higher degree of documentation necessary to comply with the procedural rules outlined in the Bankruptcy Law. Although voluntary liquidations will have the need for clearances and approvals, they will likely be less complex for companies not involved in any significant dispute.
Consequences of Rejection
When an application is rejected, there could be considerable delays and increased expenses for an organization. In addition, if an authority suspects any type of fraud, concealed assets, improper transfers prior to the liquidation process, management can expect a heightened level of scrutiny. Re-filing, obtaining additional approvals and seeking more professional assistance for correcting deficiencies will result in additional financial obligations.
How to Reduce the Risk of Rejection
Review all Tax Obligations
Pay all of your value added tax (VAT) and corporate taxes before you begin liquidating.
Prepare Complete Financial Records
Have up-to-date, accurate financial statements, ;ledgers, and supporting documents.
Obtain a Proper Shareholder Resolution
Use a notarized shareholder’s resolution that authorises the liquidator and states that the company will liquidate.
Resolve Employee Issues Early
Cancel all visas, pay all liabilities, and finish all employee matters prior to submitting the form.
Maintain evidence of assets
Maintain documentation supporting the company’s ability to liquidate assets.
Use qualified professionals
Engage competent liquidators, accountants and attorneys who understand the procedures in the UAE.
A Practical Liquidation Checklist
Before filling make sure to follow the below:
- Review Corporate Records
- Prepare Financial Statements
- Settle Taxes and Apply for Deregistration
- Resolve Employee Matters
- Cancel Visas and Permits
- Notify Creditors where required
- Obtain a Notarized Shareholder Resolution
- Appoint a Liquidator if required
Conclusion
Why authorities reject company liquidation applications in the UAE often comes down to compliance failures rather than the decision to close a business. Companies will be at high risk of having liquidated applications rejected if they do not properly de-register for tax purposes, provide complete documentation and resolve any unpaid employee entitlements. Business owners will have a much smoother experience undertaking their liquidation and avoid expensive delays if they prepare their documentation carefully, resolve outstanding debts, and comply with the requirements.
