Following the publication of our recent article on the voluntary liquidation of solvent limited liability companies (LLCs) in the UAE, an important question was raised by one of the readers: what happens if, during liquidation, it is discovered that the company’s assets are insufficient to discharge all of its debts, and what liability may arise for shareholders or directors in such a case?
Under the UAE Companies Law (Federal Decree-Law No. 32 of 2021), an LLC may be voluntarily liquidated where the shareholders resolve to dissolve the company and appoint a liquidator. In cases where the company is solvent at the time of passing the resolution, the liquidation proceeds in a straightforward manner: the liquidator realizes the assets, settles the company’s liabilities in full, and distributes any remaining surplus among the shareholders. This is the ordinary process of solvent voluntary liquidation.
However, if during the course of liquidation it is discovered that the company is in fact insolvent—meaning that its liabilities exceed its assets—the liquidation cannot continue on a solvent basis. In such circumstances, Article 325 of the Companies Law requires the liquidator to settle debts proportionally, ensuring that secured creditors and liquidation expenses are prioritized. Where the insufficiency of assets is significant, the matter will often fall within the scope of the UAE Bankruptcy Law (Federal Decree-Law No. 51 of 2023), which provides a court-supervised framework to guarantee equal treatment of creditors and prevent preferential payments.
This approach has deep roots in UAE jurisprudence. In Legal Opinion No. 1574 issued by the Ministry of Justice on 13 September 1993 under the former Commercial Companies Law (Federal Law No. 8 of 1984), it was confirmed that liquidation proceeds even where the company’s assets are insufficient. The opinion explained that the liquidator must first prepare an inventory of the company’s assets and liabilities, preserve and realize its assets, and deposit the proceeds in the company’s liquidation account. If the assets do not suffice to cover all debts, creditors are to be paid proportionally, while liquidation expenses and the rights of preferred creditors take priority. It further clarified that unclaimed or disputed debts should be deposited with the competent court treasury, ensuring creditors are not prejudiced by the insufficiency of assets. Although the article references in that opinion were tied to the 1984 law, the substantive principles it expressed remain consistent with the current regime under Articles 314–328 of Decree-Law 32 of 2021.
It is equally important to address the issue of liability. In principle, the separate legal personality of an LLC ensures that its shareholders are liable only to the extent of their capital contributions. Their personal assets remain protected, and creditors may look only to the company’s assets for repayment. This principle has been repeatedly reaffirmed by the Dubai Court of Cassation, most recently in Cases No. 461/2025 and No. 187/2025, which confirmed that shareholders cannot be pursued personally for company debts unless they have misused the corporate form as a veil for fraud, manifest deception, or gross error. The burden of proving such misconduct rests with the party alleging it.
Directors and managers, however, may face liability in limited circumstances where they have engaged in fraud, abuse of power, or statutory breaches, or where they have acted with gross negligence—for example, by concealing insolvency or continuing to trade when the company was no longer viable.
Accordingly, a voluntary liquidation will not be denied simply because the company’s assets prove insufficient. Rather, the law ensures that the process continues under the supervision of the liquidator and, where necessary, the courts, with debts settled proportionally and creditors protected through established statutory mechanisms. Shareholders who act in good faith remain protected by the principle of limited liability, while directors and managers will only be personally exposed where there is proven misconduct.
The 1993 legal opinion, the current statutory framework, and recent Court of Cassation decisions all converge to reinforce this position, demonstrating a consistent approach over time in protecting creditors’ rights while preserving the principle of limited liability for shareholders.
Disclaimer:
This article is provided for general information purposes only and does not constitute legal advice. Specific advice should be sought in relation to particular circumstances.
Author: Dr. Salman Al Tuweel (Partner) & Ali Bitar (Associate)
