17 Jul 2012

WINDING UP FOREIGN COMPANIES IN THE UAE

Authored by: Rana El Husseini

WINDING UP FOREIGN COMPANIES IN THE UAE

In the wake of the economic crisis many investors have abandoned their businesses, belongings, and liquidated bank accounts, leaving behind unpaid debts to creditors and employees. Foreign entities that have not satisfied all formal closure and deregistration procedures are liable for non compliance with the deregistration requirements as set out by the licensing authorities, and could face civil and criminal liabilities.
 
This article sets general guidelines regarding proper closure of foreign companies, branches and representative offices:
 
In Brief:

  • The investor must satisfy the de-registration requirements set by the government authorities.
  • The government authorities will not de-register the foreign company unless they ensure that the investor has fulfilled its contractual obligations and liabilities towards third parties and paid the de-registration and cancellation fees.
  • Public announcement of the investor’s willingness to close the business and notifying the creditors of the investor’s intention to de-register the foreign company and liquidate the assets is required by law.
  • Failure to comply with the de-registration requirements would attract penalties on the investor and could result in calling of the bond or bank guarantee that was deposited in favour of government authorities upon setting up the entity.

Articles 313 to 316 of the Commercial Companies Law (CCL) permit foreign companies from opening branches or representative offices within the UAE which may be wholly owned by foreigners.
 
In addition to the CCL that regulates the form of legal entities which would be established in the UAE, some guidelines have been published regarding licensing procedures of branches and offices of entities located in the free zones and abroad to govern the setting up, re-registration, mergers and acquisitions of such entities as well as the change of information registered in the official records of the entities and the deregistration of such entities.
 
The guidelines define the “Entity” as the foreign entity established abroad or within a UAE free Zone. As for “Office”, it encompasses representative office, regional liaison office, management office, banking representation office and scheduled international airlines office.
 
Conditions to be satisfied prior to de-registration
 
An Entity wholly owned by foreign investors can commence its activity in the UAE upon obtaining a commercial licence from the licensing authorities in the UAE. The licensing authorities require approval from the management of the parent company to establish a presence in the UAE, submission of documents relating to the bona fide existence of the parent company as well as the credentials of the future general manager of the Office to be established in the UAE, in addition to other requirements which may vary according to the legal form of the Office and its activities.
 
The Entity must have a local agent who would be a UAE national or a corporate entity wholly owned by UAE nationals. The relationship between the Entity and the local agent is a contractual relationship pursuant to the execution of a national agency agreement. The national agent will not have any managerial authority with respect to the Entity and the Office. The role of the local agent is to assist with the obtaining and renewal of the Office’s licenses and enables the Office’s  employees to obtain residence visas and live and work in the UAE. The local agent cannot create any binding obligations on the Entity or otherwise commit the Entity and cannot intervene in any of the Entity’s affairs. The Office will be an extension of the parent company or Entity which remains responsible for any liabilities of the Office operating in the UAE. Therefore, the parent company is required to submit a bank guarantee that covers any liabilities of the Office and an undertaking to be fully liable for the Office’s operations in the UAE.
 
If the parent company decides to close its business in the UAE, an application must be submitted to the Ministry of Economy (MOE) or its office in the concerned Emirate. The Application must be approved by the administrative body at the parent company and submitted by the representatives of the foreign entity in the UAE.
 
The original registration certificate of the Office, issued by the MOE at the setting up or the renewed registration certificate, must be valid at the time of applying before the MOE for de-registration of the entity, otherwise the applicant will have to pay renewal fee and delay penalties.
 
Furthermore closing the Office requires the termination of the national agency agreement and notifying the creditors and employees of the Office of its intention to close its business in the UAE. The Office must also pay the employees’ wages and settle their entitlements, fulfill its contractual obligations with third parties including amongst others the termination of the lease agreement in respect of the Office’s’ premises and settle any outstanding debts.
 
Summary of de-registration process and time involved
 
The licensing authorities require the submission of the entity’s original licenses, an approval from the parent company on de-registration of the Entity located in the UAE and an authorization from the parent company to the entity’s representatives to take the necessary measures for closing the business in the UAE.
 
Initially supporting documents are submitted to the MOE along with application forms and a request for de-registering the Office. Once all the paperwork is filed and examined, the MOE advertises the parent company's intention to de-register the Office. Creditors may contest the winding-up of the entity within 30 days from the publication of an advertisement in two daily Arabic newspapers. If no objections have been reported during this period towards the de-registration of the Office, the MOE announces the de-registration of the Office and instructs the relevant bank to release the bank guarantee which has been deposited upon the setting up of the Office in favor of the MOE.
 
The second phase of the de-registration process involves the cancellation of the commercial licence with the Department of Economic Development (DED) in the relevant Emirate. The Office‘s representative (the Applicant) submits an application to the DED for the cancellation of the commercial licence along with the supporting documents.
 
The DED will verify if the Office has settled all the employees’ entitlements and has cancelled their employment visas. The DED will also examine if the Office has paid the public utilities charges and ensures that the national agency agreement has been terminated. Once the DED confirms the compliance of the Office with all the cancellation formalities the DED will issue a certificate to confirm the cancellation of the commercial licence.
 
The time frame to complete the de-registration of the Office and the cancellation of the licence would approximately be two months if it appears that no objections have been reported towards the de-registration.
 
Conclusion
 
Some investors have mistakenly believed that leaving the country to escape any obligations which has arisen of the conduct of their business in the UAE can solve the problem of their non-operating business. It should be noted however, that failing to properly de-register the business and leaving unpaid debts could result in calling of the bank guarantee that was deposited with the MOE upon setting up the entity, and the investor may be prohibited from leaving or re-entering the UAE. This can result in investors finding themselves black-listed and they may also incur civil liabilities (and in some cases criminal liabilities) for failing to meet the obligations prescribed by law.
  
Closure of business needs to be formally carried out with the DED and the MOE, taking into account the slight variations in procedures, which exist between the Emirates and the various free zones.