The Common Error of some investors regarding the termination of the company without any Legal Liabilities

abdelaziz Managing Partner

A limited liability company ("LLC") is considered one of the most common forms of the companies in the United Arab Emirates ("UAE") and the most incorporated ones, where the liability of a partner is limited to his capital share only.

Accordingly, the partners are not responsible for the company’s obligations except for the shares they have therein regardless of their own money and without any joint liability. This is because the financial liability of the company is separated from that of each partner. Hence, the creditors of the company may not raise any claim against the LLC partners.

Therefore, most of the investors prefer this form of companies to protect their own money. UAE Commercial Companies Law No. 2 of the year 2015 specifies the general reasons for the termination of the company. Article No. 295 thereof provides the following reasons:

  1. The expiration of the term specified in the memorandum or articles of association unless the term is renewed pursuant to the rules set out in the memorandum or articles of association of the company.
  2. The end of the object for which the company has been incorporated.
  3. The loss of all or most of the funds of the company so that the remaining cannot be effectively invested.
  4. The merge as per the law.
  5. If the partners unanimously decide to terminate the company unless the memorandum of the company provides for certain majority.
  6. The issuance of a court judgment to wind up the company.

Unfortunately, it is recently noted that the only procedure taken by some investors (who are mostly directors of these companies) in case of any reason of the company termination is that they do not renew the commercial license or the lease agreement of the head office of the company, without consulting the legal methods prescribed by the law. Further, they do not appoint an auditor for the company accounts or maintain any financial reports or balance sheets that clearly show the profits and losses of the company.

This is all based on the consideration that the partners have no legal liabilities except for the share they have in the capital regardless of their own money. Also, the other partners do not care about the accumulating debts of the company as the responsibility is assumed by the director of the company. It is better for the investors to avoid any legal responsibility that the partners are called for an (extraordinary) general assembly and the partners agree to wind up the company and appoint a liquidator who will legally liquidate the company in accordance with the memorandum of association thereof and the provisions of the law and distribute the remaining funds to the partners, each as per his share. The director shall handover to the appointed liquidator all the funds, accounts, books and documents of the company.

The liquidator is required to prepare a list of the funds, liabilities and balance sheets of the company and to collect what is necessary to maintain the funds and rights of the company. The liquidator is also required to notify all the creditors of the company by registered letters of the commence of liquidation procedure. All these legal procedures provide protection for the investor and the director of the limited liability company before the judicial authorities should any proceedings be initiated before the court against the company. All these procedures may save the time and provide the proper legal protection to the investor, who is a director in the limited liability company.

Finally, the investor must not only satisfy the terms and conditions required for the incorporation of the limited liability company without referring to the legal consultants specialized in this field, so as not to be exposed at a later stage to real legal risks.

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