Liquidation is a process by which a company ends its life and distributes its assets to those it owes money to in an orderly manner. Legal procedures must be taken when a company goes into liquidation, starting with the reason for liquidation. In this blog, we will explore the grounds for liquidating a company as stipulated under article 40 of the Commercial Companies Law.
The Commercial Companies Law governs the complete lifecycle of a company starting from the registration of the company all the way to closing it and liquidating its assets. The following are the grounds stipulated in article 40 of the Commercial Companies Law that require a company to start liquidation procedures:
Failure to carry out activity
The Commercial Companies Law stipulates that companies must be dissolved if the company fails to carry out activity for a period exceeding two years. This can be due to regulatory hurdles, market conditions, or internal management challenges. Such inactivity burdens the company resources, ultimately leading to the compulsory liquidation of the company.
Expiry of the term fixed for the company
Some companies are formed with a specific lifespan, especially those with temporary projects or a particular objective. Once the predetermined term expires, the company is required by law to liquidate.
Success or failure to accomplish objectives
Some companies are set up to accomplish a specific objective. However, not all companies succeed, and if the company consistently fails to meet its objective, triggering the compulsory liquidation procedures under the law.
Transfer of shares to a number of partners less than the minimum number prescribed
Some companies are required by law to have a certain number of shareholders, such as SAOGs, which need at least two partners. If these shares are transferred to a number of partners less than the minimum number prescribed by law, liquidation becomes compulsory.
Share capital falls below the minimum level
A company’s share capital is a crucial part of its operations and legal standing, and some company forms under the law are required to be a specific minimum share capital. For example, SAOGs require a minimum share capital of 150,000 Rial Omani to be named an SAOG. If the company fails to maintain that capital, liquidation becomes compulsory.
Bankruptcy or loss of all/most of the share capital
Similar to the point above, if a company goes bankrupt or suffers significant losses in share capital in a manner that makes it impossible for the company to continue operating, liquidation becomes compulsory.
Agreement by shareholders to liquidate
Sometimes, shareholders may collectively decide to liquidate the company. This can be due to strategic shifts, changing market conditions, a lack of profitable opportunities, or even personal reasons. If the shareholders agree to liquidate, the company must start liquidation procedures.
Conclusion
These are the cases that mandate liquidation as prescribed by the Commercial Companies Law. To learn more about liquidation or company law, we highly recommend that you read the Commercial Companies Law on the link below:
