How does an LLC Company file for Bankruptcy?

There comes a time when a company is so deep in debt that it has to file for bankruptcy in order to deal with the situation. When an LLC company files for bankruptcy, it is simply handing over the responsibility of liquidating the company assets to pay off creditors to a trustee. This way the trustee is trying to buy time in order to help you manage your debt until the threat of going out of business ceases to exist.

Why LLC companies file for bankruptcy?

One of the main reasons why any company or individual can file for bankruptcy is because there is less money to run the business. Some of the reasons for this can be;

Poor management: There are so many companies in the UAE that have filed for bankruptcy soon after some transfers and promotions have been done. Mismanagement of funds can put a company in a tight financial place that can lead to bankruptcy.

Bad debts: without taking care of debts as required, an LLC can accumulate big debts that cannot be handled solely by their profits.

Competition: consumer preferences are known to change, and as we all know, when better products hit the market, everyone will forget the old ones, and this can lead to losses because, without customers, a company cannot make any good money.

Filing for bankruptcy

Keep in mind that an LLC company is still in operation even when it has filed for bankruptcy and shut down. It is only considered closed after all the debts have been paid. If you are considering to file for bankruptcy for your LLC, here is how to go about it;

Dissolution approval by owners

LLCs usually have a constitution that guides them through the dissolution process. For a company dissolution to take place, members need to take part in a vote. All this needs to be well documented and stored with the LLC’s company records.

File dissolution documents with the authorities

You must notify the law about your decision to dissolve your company. This is done differently depending on the country that you have registered the company. In the UAE, you will file these documents with the secretary of state or the agencies responsible for keeping company records on behalf of the state.

Filing the dissolution documents has to be done by an appointed company liquidator in UAE. There are two in appointing a company liquidator. The first is through the singing of a company resolution for the appointment of the company's chosen liquidator. The resolution has to be approved by majority of the board. This kind of appointment for a liquidation professional is quick and easy.

The second way is the creditor claiming for the need to have a court-appointed company liquidator in UAE. A creditor that is owed by an insolvent company for a significant amount can apply to the local court for the company dissolution, as well as liquidator appointment. If another party or a third party goes to the court in appointing a liquidator, the selection process will be done by them instead of the company itself.

Clear outstanding business

Since you are winding down activities and preparing for closure, it is important to ensure that you clear with customers, suppliers, and even employees. That way, you will be getting rid of extra problems and costs that can also leave you with a bad reputation.

Remember you also have to allocate remuneration for the appointed company liquidator. If the company has assets that are available which can cover the costs for the liquidation, there will be nothing that the shareholders have to shell out in order to pay them costs associated with appointing a liquidator. A liquidator is also entitled in being paid from the assets of a company, subject to the approval of the company creditors.

If the company doesn't have assets that can fully cover the entire costs for company liquidation in UAE, including claims of debtors, then the company liquidator will require the company board of directors to have funds made available in order to pay for the professional to act and assist as the company liquidator.

Apart from being mandatory for any company liquidation in UAE, a liquidator will help a company going through voluntary or mandatory winding down with the following:

• Take control and realize the assets of the company

• Evaluate the circumstances which resulted to company liquidation

• Examine transactions and determine whether the business traded while it's technically insolvent

• Report any offences that have been committed to regulators

• Pursue recovery claims which are warranted to pursue

• Distribute company property according to priorities for payment as set out in UAE Commercial Companies Law, including paying dividends to the company creditors if funds available are sufficient

• Report the assets and liabilities of the company to creditors, including reasons for the failure of the company, and results of the investigations carried out by the appointed company liquidator

Clear stock and sell assets

There is no point in continuing production when heading towards filing for bankruptcy, and once you clear the stock and close doors, the rest of the assets will follow. This can include machinery, land, and any other equipment that can be disposed of.

Pay creditors

After selling the company assets, the creditors can get paid. Note that there are some creditors that will not be affected by bankruptcy, and they need to be notified about the step that the LLC has decided to take. Usually, such creditors deal directly with the LLC and can be paid off quickly as their credits are, in many cases, small.

Distribution of remaining assets

If, in any case, there is some money remaining after liquidation and debt repayment, the money is supposed to be distributed among the LLC owners. This can be done in terms of shares held by the owners. If there are no shares, then the owners can agree to share the money equally among themselves.

Filing for Bankruptcy?

Filing for bankruptcy for your LLC is an easy process when in the hands of a good, competent firm such as ourselves here at Farahat & Co. With stellar team with years of experience, more than capable of taking through this process one step at a time. Feel free to call for more information or book an initial consultation.

This articles does not necessarily reflect the opinions of the editors or the management of EconoTimes