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Business Practices to Invest in a Limited Liability Company in the UAE
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The Invalidity of Limited Liability Company (LLC)
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The National Partner Controlling the Majority of the Voting Rights in LLC’s
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Profit and Loss Distribution Ratio in LLCs
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Distribution of the Company Assets (Fixed and Movable)
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Invalidity of Fixed Payment Agreements
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Invalidity of the LLC due to Non-Capital Payment
Distribution of the Company Assets (Fixed and Movable)
Introduction
As soon as the National Partner is appointed as a true partner, distribution there may arise the concerns about the assets of the LLC. It is pertinent to note that the shares owned/held by the National Partner would entitle him to an equal share of the company’s assets at the time of liquidation as per the general practice.
First: The Regulations under the Law for the distribution of profit and loss
According to the article 678 of the Federal Civil Transactions Law, the company’s assets are to be allocated and/or distributed in accordance to agreement between the partners concerning the distribution of the assets of the LLC at the time of liquidation. On the other hand in case the partner did not reach to an agreement then the assets it will be distributed according to the partner’s shares in the company’s capital in-line with article 681 and 682 of the Federal Civil Transactions Law. The company\’s equity capital would be distributed in accordance with Articles 681 and 682 of the same law. The above referred articles are produced below:
Article 678 of The Federal Civil Transactions Law
“The assets of a company shall be liquidated and distributed in such a manner as the partners agree, and if they do not agree it shall be permissible for any person having an interest to apply to the court for an order appointing one or more liquidators to carry out the liquidation and distribution.”
Article 681 of Federal Civil Transaction Law
The rules relating to the distribution of the property in co-ownership shall be followed in distributing companies.
Article 682 of Federal Civil Transaction Law
(1) The property of the company shall be divided among the partners after settling the rights of creditors and retaining monies for the payment of debts that are not due or disputed debts, as well as the costs arising out of the liquidation.
(2) There shall be allocated to each partner a sum of money proportionate to his share in the capital. Such person shall also receive profits and bear losses in the proportion agreed or laid down in the provisions of this Law.”
The Federal Companies Law has stated that the assets shall be distributed according to the shares of each partner in the profits after refunding his contribution to the capital of the company.
Article 325 (1) of Federal Companies Law:
“The company\’s property resulting from liquidation shall be divided among partners after the payment of all debts. Upon division, each partner shall have an amount equal to the value of shares provided thereby to the capital. The remainder of the company\’s property shall be divided among partners in proportion to the share of each of them in profit…”
Second: The Limitation under the Laws
Unless otherwise decided by the partners in compliance with Federal Companies Law, the partners cannot prevent any other partner from claiming his shares of the assets in accordance to the profit rate as set out in the Federal Companies Law, presuming that the other agreement would not prevent the partner from his share.
If the properties/assets are real estate and cannot be distributed/assigned to any of the partners under their agreement due to the absence of an agreement or because the nature of the real estate is limited to UAE nationals. Then, the liquidator will sell the real estate and divide the sales consideration between the partners.
Third: The Risks with common practice of preventing a Partner from his shares on assets under a Nominee Shareholder Agreement
The risk of preventing any partner from keeping its shares on assets according to the profit ratio is that this term will be invalid and the Federal Companies Law will be applied correctly irrespective to the court issuing full liquidation of the LLC.
Fourth: The Solution
The solution is that the partners/shareholders should specify in the MOA of the company, that the assets as well as the profits of the company shall be distributed during liquidation based on the same profit ratio, since, the profit distribution ratio is also stated to be used in the distribution of the assets of the company as seen in article 325 (1) mentioned above. As we mentioned earlier, under some conditions, the ratio can be fixed to 1% or 0.5%, such ratio will be acceptable to satisfy the demands of the law, further, with our final solution such risk will be reduced to the minimum.
Lawyer & Legal Consultant
Mr. Mohamed Nouredin
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Business Practices to Invest in a Limited Liability Company in the UAE
-
The Invalidity of Limited Liability Company (LLC)
-
The National Partner Controlling the Majority of the Voting Rights in LLC’s
-
Profit and Loss Distribution Ratio in LLCs
-
Distribution of the Company Assets (Fixed and Movable)
-
Invalidity of Fixed Payment Agreements
-
Invalidity of the LLC due to Non-Capital Payment
