Insolvency and Liquidation FAQs

1. What is the difference between insolvency, liquidation, and restructuring?

• Insolvency refers to a company’s inability to pay its debts when they fall due.
• Liquidation is the formal process of winding down a company and distributing its assets to creditors and shareholders.
• Restructuring involves reorganising operations, debt, or ownership to restore financial stability and potentially avoid liquidation.

2. What triggers insolvency proceedings in the UAE?

Companies must initiate insolvency procedures when they become unable to meet debt obligations or when accumulated debt exceeds available assets. Failure to act may lead to legal consequences, including penalties for directors.

3. What are Manager/ directors’ responsibilities during financial distress or liquidation?

Directors must:

• Take reasonable steps to minimise losses to creditors
• Avoid wrongful or fraudulent trading
• Maintain accurate records
• Act in the best interests of creditors once insolvency becomes likely

Failure to meet these requirements can expose directors to civil or criminal liability.

4. What is the difference between voluntary liquidation and court liquidation?

• Voluntary liquidation is initiated by shareholders or directors—either because the company is solvent and wishes to cease operations or because directors choose a structured wind-down to protect stakeholders.
• Court liquidation is ordered by the court, typically due to insolvency, non-payment of debts, or creditor petitions. A court-appointed liquidator manages the winding-up process and creditor distribution.