Introduction and Scope of this Article
The unprecedented financial crunch experienced globally has
forced many businesses to question their existing corporate
structures, and also to consider ways in which these structures can
be realigned with minimum cost, which has, in some cases,
necessitated winding up group companies.
As offshore companies have often been used in cross-border
transactions, they have recently been the subject of winding up
with shareholders wanting to do this involving minimum costs.
For offshore companies set up in the Jebel Ali Free Zone Authority
("JAFZA") the preferred mode, in most cases, has been the
summary winding up (also called Voluntary Winding up).
In the background of the recent desire to keep group structures to
the bare minimum in order to reduce costs, there can be several
reasons why shareholders might wish to summarily wind up a JAFZA
offshore company. A business may have run its course; the company
may be inactive (and therefore not serving any useful purpose); or
a shareholder may simply wish to receive his share of its assets.
Whatever the reason, one should know that the process of winding up
a company is not always a simple one and there are a number of
matters that should therefore be considered beforehand, so that
everything proceeds smoothly.
This article attempts to describe steps to be taken to summarily
wind up a JAFZA offshore company. It is recognized that this
Article may not address completely all the questions which may be
relevant in this regard as it is intended to provide a quick
insight into the subject matter covered: the article is designed as
a starting-point for a more detailed and comprehensive
consideration of the issues covered herein.
Governing Regulatory Regime
The concept of the offshore was first introduced in Dubai in late
2001 but it took concrete shape on January 15, 2003 when Jebel Ali
Free Zone Offshore Companies Regulations 2003 came into force.
Jebel Ali Free Zone Offshore Companies Regulations 2003 (the
"Regulations") laid down detailed rules and regulations
for offshore companies in JAFZA. The procedure which governs the
summary winding up of a Jebel Ali offshore company is set out in
Articles 70 to 79 of the Jebel Ali Offshore Regulations 2003.
The Regulations recognize three types of winding up and they
are:
- Summary winding up,
- Creditors' winding up which applies after the commencement of a summary winding up, where the directors or the liquidator form the opinion that the offshore company has liabilities which it will be unable to discharge in full within six months after the commencement of the winding up; and
- Winding up by the court under the UAE Commercial Transactions Law No. 18 of 1993 (Volume 5, Bankruptcy and Preventive Composition) and other applicable legislation.
Preconditions for Commencement of Summary Winding
up
A process that avoids supervision of court
In case of summary winding up, the entire process is done without
court supervision. When the winding up is complete, the relevant
documents are filed before the Registrar for obtaining the letter
of dissolution.
Circumstances in which a company can be wound up
summarily
The Regulations also set out certain circumstances in which a
company may be wound up summarily and they are:
- When the offshore company has no assets and no liabilities, or
- The offshore company has assets and no liabilities; or
- The offshore company is able to discharge its liabilities in full within six months after the commencement of the winding up which commences on the passing of shareholder(s) resolution for summary winding up.
Who can wind up the company?
A summary winding up may be done only by the members of the
offshore company. Article 18 of the Regulations defined the
"Members" term by (1) the incorporators of an offshore
company and (2) Every other person who agrees to become a
shareholder of an offshore company, and whose name is entered in
its register of members.
Statement of Solvency
To commence the procedure an offshore company has to pass the so
called Statement of Solvency for Summary Winding up. Article 71(2),
which is relevant in this regard states as follows:
"A statement of solvency shall be signed by each of the
directors and state that, having made full inquiry into the
offshore company's affairs, each of them is satisfied:
- That the offshore company has no assets and no liabilities; or
- That the offshore company has assets and no liabilities; or
- That the offshore company will be able to discharge its liabilities in full within six months after the commencement of the winding up, as the case may be."
Difference between the law and practice
In practice, the Offshore Registrar would normally require that the
statement of solvency be signed by all of the shareholders of the
offshore company (as opposed to the directors as provided for in
the law) or their duly authorized representatives.
Repercussions of summary winding up on directors of
company
Whether or not a company's directors are happy to allow their
company to be wound up, the process may have very serious
consequences for the directors involved. The three main areas that
company directors need to be aware of are summarised below:
- Freezing of Company Bank Accounts - Once a Summary Winding up
notice is advertised in the newspaper by the registrar, it is
assumed that this should be
identified by the company's bank. Normally the bank will automatically suspend the company's banking facilities until the winding up is either completed or terminated. Clearly, if banking facilities are suspended, this will make it very difficult to trade and cause serious disruption. There is normally no way to prevent this once a Summary Winding up has been issued. - Director Investigation - As well as disposing of the company's assets, the liquidator may, under Part 14 of the Regulations, request from the Registrar to appoint inspectors to investigate the affairs of the company and the activities of the company's directors to ensure that they have acted properly and according to their directors duties as prescribed in the Regulations. If the appointed Inspector believes that the directors are guilty of wrongful trading (trading while knowing that the company was insolvent) and pointed out this conclusion in his report to the Registrar, the director in default will be personally responsible for such liabilities of the offshore company as are incurred at the time of his wrongful acts 1 . In addition he might get banned from all current and future directorships for a period of time and he or she might risk being accused of committing an offence 2 . This procedure is commonly known as blacklisting. If blacklisted, a director in default will have to give up all other directorships that he or she currently holds.
- If company directors are found guilty of continuing to allow a business to trade while insolvent or with lack of cooperation with the appointed liquidator, they may become personally liable for committing an offence.
Steps Towards Summary Winding up
First – commencement, statement of solvency and
appointment of liquidator
As mentioned above, the offshore company has to pass a
Shareholder(s) Resolution calling for the commencement of the
Summary Winding up and shall include:
- A statement of the reason for Winding Up, and
- A statement of Insolvency, and
- A statement that the company is and will continue to be able to discharge or pay, provide for the payment of all claims, debts, liabilities and obligations in full, and
- A statement of the name and address of the appointed liquidator and the remuneration proposed to be paid to the liquidator.
If a statement is delivered that confirms that the offshore
company has assets and no liabilities the offshore company shall
forthwith proceed to distribute its assets among its members
according to their rights. In the event the statement provides that
the offshore company will be able to discharge its liabilities in
full within six months after the commencement of the winding up,
the assets of the offshore company shall be applied in satisfaction
of the offshore company's liabilities and, subject to that
application, shall be distributed as aforesaid.In both scenarios
appearing above, the appointed Liquidator will review all of the
company's assets and try to sell them to repay the
company's members or creditors as may the case be. The
company's assets are sold and the surplus, if any, shall be
distributed among the members, the liquidator, having made full
inquiry into the offshore company's affairs, shall apply to the
Registrar for the business to be dissolved through submitting a
statement that he is satisfied that the offshore company has no
assets and no liabilities. The company will not be dissolved unless
the statement is submitted before the Registrar.
Second – return of originals
All originals which were given to the offshore company by the
Registrar must be returned.
Third – liquidators report
The appointed liquidator will need to formulate a liquidation
report for the offshore company which will be submitted to the
Jebel Ali Free Zone Authority. On the appointment of a liquidator
all the powers of the directors cease except so far as the
resolution appointing the liquidator or any subsequent resolution
otherwise provides and, subject to any such resolution and to
Regulation 75, all those powers shall thereafter be exercisable by
the liquidator.
Fourth - advertisement
The Registrar upon receipt of the above mentioned documentation
will post an advertisement in a public news paper on the expense of
the offshore members.
After the collapse of 14 days period from the advertisement date
the Registrar will issue a Letter of Dissolution for the offshore
company unless reason is shown to the contrary.
Some Relevant Aspects to Summary Winding up
Does the validity of an offshore company effect the commencement of
Summary Winding up?
The Regulations are silent in this regard, but the offshore
Register has adopted an approach to facilitate the Summary Winding
up without extra expenses whereby it would be acceptable to file
the winding up Resolution within 6 months of the expiry date, the
period of 6 months is based on the fact that offshore companies can
benefit from a grace period of 6 months after the commencement of
winding up to settle their affairs. In this sense, summary winding
up is not possible after 6 months of the expiry of the offshore
company.
Termination of Summary Winding up
Where the summary winding up of an offshore company has commenced;
the termination of this winding up may only occur by instrument of
a shareholder resolution approving the termination of the winding
up process and provided that the offshore company has not for the
purposes of the winding up distributed any of its assets among its
members. In addition, the offshore company must not have received
any contribution from any present or past member pursuant to
Regulation 100 which requires every present and past member which
was a member for less than one year before the commencement of the
winding up to contribute to its assets to an amount sufficient for
payment of its liabilities arisen after their membership, and the
expenses of the winding up.
Distinction Between Winding up" and "Striking
off"
The terms "Winding up" and "Striking off" are
sometimes erroneously used to mean the same thing. However, they
are quite different in their meanings. Winding up is a process
whereby all assets of the company are realized and used to pay off
the liabilities and members. Striking off of the company takes
place after the entire process of winding up is over. Striking off
practically ends the corporate existence of the company.
Pursuant to Article 113 of the Regulations the Registrar has been
granted authority to strike off a company that he has cause to
believe is not in business or operation. This is usually because
documents have not been delivered by the company, and in particular
because it has not been renewed annually, and because there has not
been a response to statutory enquiries sent to the registered
office. Notwithstanding the above, it is not a recognized practice
in JAZFA Offshore Registration to strike off defunct offshore
companies.
Conclusion
Summary winding up is currently being preferred as a way to wind up
insolvent JAFZA off shore companies. This procedure is relatively
quick, however, cannot be used for disputed debts and, if the
offshore company has debts due to it, members of the offshore
company should consider all the debt recovery options before
proceeding down this path .
Footnotes
1. See Article 41 of the Offshore Regulations
2003
2. Article 76 (7) of the Offshore Regulations 2003
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.