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Creditor’s Rights During Liquidation

With the ongoing frauds investments always pose a risk of losing all your savings. There have been many cases wherein and individual after investing in some company later finds out that the company has vanished or is liquidated. Also it appears that many Real Estate Buyers or individuals/companies dealing with companies in the UAE are discouraged to initiate legal proceedings against a company that went to or under liquidation.

It often happens that the concerned parties are worried with the method that will be required to be complied with in order to be added with the list of Creditors and whether litigation or arbitration, as may be provided for in the Agreement between the parties, permit such method of recovery of the debt owed.

The answer to this dilemma is found in Commercial Companies Law (CCL). The CCL permits for a claim to be referred to the court or arbitration to recover a debt from a company under liquidation. Unlike insolvency where court actions shall cease, court actions can be filed or can be continued with in case of liquidation (Article 691 of the UAE Commercial Code). The UAE Commercial Companies Law No. 8 of 1984 (“CCL”) states that immediately upon its dissolution the company shall be considered to be in liquidation. During the liquidation period it shall retain its corporate personality to the extent required for the liquidation formalities. The authority of the managers or the board of directors shall cease with the dissolution of the company. The company institution shall continue to exist during the liquidation period, and their authorities shall be limited to liquidation business that is not within the authority of the liquidators. The liquidator shall perform all the required liquidation functions, particularly to represent the company before the courts of law, settle the company debts and sell its movable assets or real estate by auction or any other method unless the document appointing the liquidator stipulates that the sale should be performed in a specific method.

Thus, as a matter of law, when the company is dissolved and liquidated, the company conserves its corporate body during the liquidation process and the liquidators represent the company under liquidation before the court of law.

Thus, as only the representatives of the company change, no extinction of the corporate body occurs before the liquidation completion and closure. There is neither assignment nor transfer of any agreement that intervenes between the company and the liquidators to consider the latter as a party to court or arbitration proceedings.

As to the appropriate method of recovery of a debt it is commonly found in the agreement between the parties, namely a clause stipulated the method of solving a dispute. Such method is complimentary to any other method of a debt recovery available to the creditor under the Law.

This means that a creditor can either follow the rules provided for a debt recovery at the CCL or initiate arbitration or court proceedings. Any other interpretation to the contrary shall be deemed as undue limitation of a constitutional right to litigate. The creditors can always contact lawyers and take the appropriate legal action against the debtor company.

The debtor may insist that the creditor should not or did not submit a formal claim to the Company’s liquidators and as such shall be responsible for the costs of arbitration or litigation. However, there are certain procedures the liquidators shall have to comply with. The UAE Companies Law No. 8 of 1984 states that the purpose of liquidation is to ensure that all the company’s affairs have been dealt with properly. This involves:

• Ensuring all company contracts are completed;
• Transferred or otherwise brought to an end;
• Ceasing the company’s business;
• Settling any legal disputes;
• Selling any assets;
• Collecting in money owed to the company;
• Distributing any funds to creditors and returning share capital to the shareholders.

The Company in liquidation or its liquidators shall formally and as required by the law to contact the creditors in order to review their claims that they may have against the Company under liquidation and to invite them to present their claims in the liquidation. However, even if the liquidators failed to formally notify creditors of the liquidation in 2 local newspapers, the liquidators shall nevertheless make all reasonable provisions to pay all claims and obligations, including all contingent, conditional or un-matured contractual claims known to it at the time of liquidation. Provisions also need to be made as reasonably likely to be sufficient to provide compensation for any claim against the debtor company.

Thus, the liquidation proceedings do not affect the rights and claims that the creditors may have under the Agreement(s) with the debtor company as the arbitration or litigation proceedings are necessary in order to preserve the claims of the creditors and the repayment of the same by the liquidators to the creditors.

Therefore, the creditors can always enforce their rights to be paid the amount due to them by the company under liquidation through the Dubai Courts. For further details as to how to go about with the legal procedures for debt collection one must consult lawyers.

For legal advice regarding the subject, please call +971 4 4221944, or call 800-LAWYER (529937).

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