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Article on Deregistration

Company Deregistration in the UAE

When a company is no longer operational, its formal existence sooner or later also comes to an end. In other words, the company’s business licence and all permits associated with are deregistered. Although the concept of ‘deregistration’ is only rudimentarily stipulated under UAE laws and regulations, it is considered a mandatory step toward avoiding legal issues and penalties in the UAE. This process could be straightforward, however, understanding its features and potential implications is critical to ensure a smooth end of a company´s legal status, irrespective of the reason behind its closure. This article will outline potential grounds for company closure and deregistration, the process and necessary steps of deregistration and the legal consequences which may arise in the event that a company fails to comply with such requirements. Finally, countermeasures will be set out in an effort to protect a prospective claimant against a defendant exploiting such procedures.

Potential Grounds for Company Closure

Company closure and liquidation may be voluntary or involuntary.

Voluntary closure

Company closures mostly happen by choice. A voluntary closure is when the company’s shareholder(s) choose to terminate their business and appoint a liquidator by a shareholders’ resolution, due to reasons such as expiry of its fixed duration, achievement of the company’s establishment purpose, merger with another company, continuous business losses or inability of the company to pay its debts.

In this case, it is important for companies to be aware of the full procedure and requirements to easily terminate their business in the UAE (see below).

Involuntary closure

Companies may sometimes be required to terminate their activities and be forcefully liquidated by court order. In other words, companies may have their assets liquidated as a result of a litigation procedure and their license cancelled.

Such forceful action may occur when a company commits a serious offence against the law, such as a debtor acting in bad faith or to evade financial obligations, or the company’s involvement in money laundering or if a creditor applies for its liquidation. It may either take place at the judges’ own initiative (mainly in criminal matters) or through a request by a creditor.

Deregistration Requirements and Procedure (Particularly for Voluntary Closure)

Requirements of deregistration vary from one licensing authority to another, depending whether the company was incorporated in the UAE mainland (in which case the governing authority would be the Department of Economic Development (DED) of the relevant Emirate), or in one of the UAE free zones (where such procedures would be governed by the particular free zone authority), but also on the form of the company.

Nonetheless, there are some requirements that most deregistrations need to comply with, namely:

  • Termination of the company’s Memorandum of Association;
  • Notarised shareholder resolution for the dissolution of the company, and the appointment of a registered liquidator (except for sole proprietorships);
  • Clearances from the relevant authorities (including Ministry of Human Resources and Emiratisation, Directorate of Residency and Foreigners Affairs, Federal Tax Authority, relevant water and electricity authorities, leasing entity, telecommunication authorities, etc.);
  • Publication in two local daily newspapers (one of which must be published in Arabic) acknowledging the commencement of the liquidation process, and notifying interested third parties to submit their objections within a grace period of 45 days from the date of announcement.

In order to deregister a mainland company, the liquidation must be initiated in accordance with the UAE Federal Law No. 2 of 2015 (‘Commercial Companies Law’). A declaration letter by the appointed liquidator and a no-objection letter from the company’s shareholders must be submitted to the DED. Furthermore, a cancellation application form, clearances, the two publications and a liquidation report prepared by the liquidator must be submitted to the DED. Next, a declaration letter from the liquidator and shareholders indicating no objection from any other parties within the 45-day grace period is requested by the DED, and any other required cancellation approvals must be collected from the relevant governmental authorities. As soon as this is cleared, the company must cancel its establishment card and any shareholder/ employee visas which are sponsored by the company, and close its bank accounts. Upon submission of the aforementioned documents, a final approval can be issued and a ‘Certificate of Cancellation’ is issued upon payment.

Potential Legal Consequences

Although companies often attempt to skip the deregistration process by simply not renewing their licence upon its expiry, it is important to be mindful of the implications that such omission would bring into effect. Failure to deregister a company may lead to fines and penalties by various authorities. For instance, if a company that is subject to tax in the UAE fails to cancel its licence and its tax file with the Federal Tax Authority, taxes along with penalties for not paying them and not filing a return would continue to accumulate on the company. Moreover, it is important to carry out the deregistration procedure as to ensure that all shareholders’ liabilities regarding debts are completely cleared and do not become cause for any future legal disputes. Also, blocks in the system of the Ministry of Human Resources and Emiratisation would be imposed if a license is not renewed or cancelled which would affect and potentially block registered signatories’ other companies´ labour files.

Company Dissolution: A Potential Way to Slip out the Backdoor?

Below we consider the implications of self-deregistration by a company which is faced with threatened litigation proceedings, the consequence of this being that the company potentially escapes any or all liability, by slipping out the back door.

Not with standing the requirement of registration of the company´s dissolution in the commercial register and its publication in two local daily newspapers, the simplicity of the deregistration process leaves it open to any company, potentially as way to escape contentious litigation, transferring its assets and then applying for deregistration. Pursuant to Article 305 of the Commercial Companies Law, the dissolution of a company has probative force before third parties as of the date of such registration.

During the deregistration process, in the case where there are still assets held within the company, these assets will be liquidated by the appointed liquidator. However, if the assets have been sold before deregistration, the claimant will face major issues in any litigation proceedings.

Nevertheless, there are certain protective measures in place to prevent parties from escaping litigation by deregistering a company. One option is to hold directors and shareholders of the company personally liable for mismanagement, as pursuant to Article 303 of the Commercial Companies Law the liability of directors and shareholders in such company that is being cancelled from the Register shall remain to be effective as if the company had not been dissolved. Also, such directors would be held liable under the UAE´s insolvency laws and the UAE Penal Code (Federal Law no. 3 of 1987). That being said, such process is quite costly as it requires instituting a case against such a director(s).

Another way of prevention is that a claimant should take steps such as applying to the court for preliminary injunctions against the license (blocking, e.g. a cancellation or a change in the shareholders), the bank accounts and vehicles registered in the name of the company and regularly checking for deregistration notifications. That will ensure that backdoors are locked for a defendant attempting a deregistration to escape litigation.

Summary

Deregistration may take place through shareholders’ decision for various reasons, but may also happen by means of forceful action via court order. For a voluntary deregistration, there are many requirements to be fulfilled by a company in order to guarantee zero liability of its shareholders in the future and full compliance with the UAE authorities’ policies. Finally, especially during these times, claimants must take measures against parties avoiding litigation and execution by deregistering a company.

If you have any questions or require any advice or legal assistance regarding the above, please contact Mr. Bandar Shanneik (bandar@daburon-partners.com).

Daburon & Partners Legal Consultants LLP

Email: info@daburon-partners.com

Tel.: +971 2 6948655

Web: www.daburon-partners.com

Address: Office 2404, 24th Floor Al Sila Tower - Abu Dhabi Global Market Square - Abu Dhabi, UAE

Daburon & Partners Legal Consultants LLP is a boutique law firm providing comprehensive legal advice to international companies acting in the UAE. Our lawyers have been advising in Abu Dhabi for more than 10 years. With a team of Western-trained and experienced lawyers, we develop economically sensible and tailor-made solutions for our clients in German, Arabic, English and French. The firm's clients include medium-sized and large local and international (especially German and Austrian) companies.

Our German-speaking lawyers are the officially appointed legal advisors of the Austrian and Swiss embassies in Abu Dhabi.

Practicing for more than a decade in the UAE, we have acquired in-depth experience of the UAE s legal system ́s often daunting intricacies, and at the same we have gained a thorough understanding of our clients’ businesses within the UAE & Gulf market. By combining legal knowledge and commercial expertise we can best advise our clients in their day-to-day legal affairs and strategic legal planning and we can help them to bridge the legal and cultural divide between them and their counterparties inside and outside of court.

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Disclaimer

The contents of this article have been carefully prepared as per the authors' current knowledge. No liability is assumed for the correctness and completeness of the content or for changes in the meantime.

© 2020 Reprinting, in whole or in part, and any type of reproduction and distribution are only permitted with the express consent of the authors.

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