Thursday, August 15, 2013

Dissolution and Liquidation of an LLC

The process of dissolution and liquidation of a company is an important aspect that should be analysed at the time of setting up a company in a new jurisdiction. It is particularly important in a situation where the new entity will not be completely controlled by one shareholder. In Oman, a limited liability company needs to have at least two shareholders and, except in certain circumstances, one of these shareholders needs to be an Omani individual or entity with at least 30% shareholding in the company.

Since a branch office of an international company can only be established in Oman if the international company has a qualifying contract with the Government (or a Government-controlled organisation), international companies at times need to establish limited liability companies in Oman for the purpose of undertaking specific projects (mainly for the private sector) and, unless they are awarded new contracts, such international companies normally intend to dissolve and liquidate the Omani company after the completion of such projects.

In this respect, the legal framework for the dissolution and liquidation of limited liability companies is set out in the Commercial Companies Law (Royal Decree No. 4/1974).

Article 168 of the Commercial Companies Law provides that a limited liability company shall be dissolved for any of the reasons for dissolution specified in the Constitutive Contract of the company or in Article 14 of the Commercial Companies Law. A shareholders’ meeting may decide at any time to dissolve the company upon the favourable vote of a majority of the shareholders representing at least three quarters of the company’s capital. Article 169 of the Commercial Companies Law provides that after its dissolution the limited liability company shall be liquidated in accordance with the law and the provisions of the Constitutive Contract of the company, provided such provisions do not violate any mandatory provisions of applicable law.

The reasons for dissolution specified in Article 14 of the Commercial Companies Law include:

  • Transfer of all the shares or stocks in the company’s capital to one shareholder.
  • Agreement of the shareholders to dissolve the company.
  • Accomplishment of the purpose for which the company was established or impossibility of accomplishing such purpose.
The Commercial Companies Law provides that, upon dissolution, a company shall enter the phase of liquidation and retain its juristic existence to the extent required for and until the end of its liquidation and the powers of the managers of the company shall cease upon the dissolution of the company. Such managers are liable as trustees of the company’s assets until a liquidator is appointed.

The Commercial Companies Law provides that liquidation shall be effected by all shareholders of the company or by one or more liquidators to be appointed by agreement of all the shareholders or by virtue of a specific provision in the Constitutive Contract or articles of association of the company. In the absence of such an agreement concerning the appointment of liquidators then the relevant Court shall, upon application by any interested party, appoint one or more liquidators. If two or more liquidators are appointed, they shall act jointly unless they are expressly authorised by the authority appointing them to act individually.

Upon assuming their functions, the liquidators are required, in conjunction with the company’s auditors or managers if any, to prepare an inventory of the company’s assets and liabilities. The liquidators are to take possession of the company’s records and assets and need to record all transactions of liquidation in a daily ledger maintained in accordance with international accounting rules.

An important aspect of the liquidation process which has a direct impact on the overall time required for the completion of the liquidation process is the time provided to the creditors of the company to file their claims. The Commercial Companies Law provides that the liquidators shall, by notice published in the Official Gazette and any other appropriate means, invite the creditors of the company to submit their claims against the company. The period during which such claims may be submitted shall be specified in the notice addressed to the creditors, which shall be limited to six months from the date of publication of the first notice.

The final step in respect of the liquidation process is the approval of the final report and the statement of accounts by the shareholders of the company (or the Court) after which the liquidators are required to declare the completion of the liquidation process and register such declaration in the Commercial Register.

In addition to the above, there are many other important aspects of the liquidation process (such as the authority of the liquidators, the status of the company while it is “under liquidation” and distribution of the assets of the company) which should be reviewed and considered carefully and in respect of which legal advice should be obtained.