Understanding Assets and Liabilities
Before we take a look at what actually happens to your company when it goes into liquidation, it makes sense to have a quick overview of what is meant by “liability” and “asset”.
Assets are what a business owns or is about to receive. It could be cash, bank balances, property, plant and equipment, inventories and money owed to the business by customers.
Liabilities, on the other hand, are money owed to other people. For instance, you owe money to a supplier for items or services acquired that you bought on credit, you’re in debt to a bank, or a vendor bill, wages you haven’t been paid, etc.
When a company is liquidated, the assets and liabilities are listed and examined. This provides information of what the company owns, and what needs to be dealt with during the liquidation process.
The liquidator proceeds to review the company’s accounts, inventory of assets and liabilities during the liquidation process. The procedure differs based on the type of company and the applicable regulations of the UAE.
How Are Company Liabilities Dealt With?
When a company goes into liquidation, any debts outstanding are identified and paid as part of the liquidation process such as unpaid supplier bills, loans, salary and other dues to the employer.
It reviews the company’s books to see what the company owes and to whom. The liabilities and creditor claims in question are then dealt following the specific liquidation process.
And that is why it is so important to keep accurate records. Proper records will allow the liquidator to establish what the company owes and help ensure that all outstanding liabilities are properly considered during the liquidation process.
The exact treatment of liabilities can depend on the legal structure of a company, financial position and the applicable UAE laws and requirements.
How Are Assets Used to Settle Liabilities?
As per the UAE’s laws and procedures for liquidation, a company’s assets may be used for, or in relation to, the settlement of the company’s liabilities.
For instance, the liquidator may work with the company’s bank to release funds, seek payment from customers or recover, sell or satisfy other assets such as inventory.
The resources then available in the company can subsequently be used to satisfy the company’s claims, to its creditors following the process as laid down.
The liquidator is responsible for monitoring the company’s accounts while in liquidation. The procedure for how creditor claims will be handled can vary, depending on UAE law and the specific circumstances of the company.
What If the Company Cannot Pay All Its Liabilities?
Sometimes, when a company is liquidated, the company may not have sufficient assets or funds to settle all of the company’s liabilities.
In such scenario, liquidator considers the financial position of the company, discovers the assets available and claims pending against the company, and after that will liquidate the debts of the company in accordance to the applicable UAE legislation and in accordance with the liquidation or insolvency process.
The company cannot just ignore creditors or allow its debts to remain unpaid. The point of liquidation is to properly deal with the company’s liabilities and wind up its affairs in line with the law.
The outcome may be different according to the financial state of the company, legal form and nature of the remaining rights.
What Happens to Assets Left After Liabilities Are Settled?
If the company owns more assets than is necessary to satisfy all of its outstanding liabilities and expenses of liquidation, there may be some cash or assets that is left over after the company’s obligations have been paid in full.
All balance remaining shall be allocated in accordance with the legal form of the company and the relevant liquidation process. The liquidator shall begin legal proceedings and, if necessary, shall allocate the proceeds among those legally entitled.
The exact treatment can vary depending on the company’s circumstances and the rules of the relevant authority.
Why Proper Accounting Records Matter During Liquidation
Accurate accounting record helps make a liquidation easier and can be helpful in clarifying the true financial position of the company.
Clear and up-to-date records can help identify:
- The company’s assets and their value
- Outstanding liabilities and creditor balances
- Money owed by customers
- Bank balances and transactions
- Previous payments and financial transactions
If the records are not kept up-to-date, or are not complete, it will take longer to trace what the company possesses, what it owes, and what money is owed to it. The keeping of the accounts can, therefore, in such a case be a help in clearing the delays.
How Everest Chartered Accountants LLC Can Help
To manage a company’s financial position during liquidation, proper accounting records, accurate information about assets and liabilities and right documentation are needed.
Everest Chartered Accountants LLC can support businesses with:
- Financial record review and organization
- Support for accounting in the liquidation process
- Review of assets, liabilities and outstanding balances
- Preparation of financial statements and liquidation related documentation
- Assisting in preparing audit or liquidation reports as required
- Assistance with the documentation and compliance issues that accompany shutting down business
Are you planning to close down or liquidate your UAE company? Everest Chartered Accountants LLC can help you understand the accounting and documentation requirements and guide you through the process.