Recent Federal Supreme Court Judgment on Company Liquidation and Shareholder Rights
Dispute Resolution / UAE
By clarifying that judicial dissolution does not require General Assembly approval in cases of severe financial distress and partner conflict, and by confirming the applicability of the Companies Law to free zone companies where incorporated...
Law Update: Issue 377 – English Law
Ammar HaykalPartner,Dispute Resolution
Said Refaei Senior Associate,Dispute Resolution
Zane Anani Senior Knowledge Lawyer,Dispute Resolution
The Federal Supreme Court issued a significant judgment (case number 182 of 2025) that concerns the dissolution and liquidation of companies operating within UAE free zones. The judgment not only clarifies the legal standards for judicial dissolution of distressed companies but also addresses the interplay between the UAE Companies Law and the regulatory frameworks governing free zone entities. This article will discuss the main issues set out in the judgment, namely, judicial dissolution does not require General Assembly approval in cases of severe financial distress and partner conflict, and the UAE Companies Law will apply to free zone companies where the UAE Companies Law is incorporated by reference. The judgment also provides a clear and authoritative interpretation of Articles 301 and 308 of the UAE Companies Law. The court in this case held that these articles are clear in their intent and effect: the occurrence of significant financial loss or the destruction of company assets is, in itself, a sufficient legal ground for dissolution. The right of a partner to seek dissolution in such circumstances is a substantive statutory right, not subject to additional procedural requirements unless expressly stated in the law. This article will discuss the Federal Supreme Court judgment in detail below.
A partner (claimant) in the defendant company, commenced legal proceedings to compel a court appointed expert, acting as the judicial custodian of the company, to produce documents related to the management and financial status of the company. The claimant further requested the dissolution and liquidation of the company, citing severe financial deterioration, mismanagement by his co-partner, and a breakdown in the relationship between the partners. The company, licensed in the Sharjah Airport Free Zone, had suffered significant losses, and its license had expired without renewal.
The court of first instance rejected the claimant’s claims, reasoning that the judicial custodianship had been properly executed and that the decision to liquidate the company was a matter for the general assembly of shareholders. This decision was upheld by the Sharjah Federal Court of Appeal. Dissatisfied, the claimant appealed to the Federal Supreme Court, arguing that the lower courts had misapplied the law and failed to consider the statutory grounds for company dissolution.
By clarifying that judicial dissolution does not require General Assembly approval in cases of severe financial distress and partner conflict, and by confirming the applicability of the Companies Law to free zone companies where incorporated by reference, the Court has strengthened the legal framework for corporate governance and dissolution in the UAE.
Clarification of Judicial Dissolution Standards
The defendant company, the subject of the dispute, was registered in the Sharjah Airport Free Zone. The defendant company was embroiled in severe financial distress, with accumulated losses far exceeding its capital, and was paralyzed by conflict between its two equal partners. The lower courts had dismissed the petition for dissolution, holding that such a decision could only be made by the defendant company’s General Assembly. This position effectively blocked judicial intervention, even when evidence of dysfunction and insolvency was submitted.
The Federal Supreme Court reversed the lower courts’ decisions which reaffirmed the judiciary’s authority to order the dissolution and liquidation of a company in circumstances where statutory grounds are met, regardless of internal deadlock or the absence of General Assembly approval. The Court emphasized that Articles 301 and 308 of the Companies Law provide clear and unambiguous grounds for dissolution: when a company’s losses exceed three-quarters of its capital, or when there is a loss of all or a substantial portion of its assets, any partner may petition for dissolution. The Court held that imposing additional requirements—such as mandatory General Assembly approval—constitutes a misapplication of the law, especially when such approval is practically impossible due to partner conflict or lack of a controlling interest.
The court’s decision is significant as it protects minority partners and creditors, ensuring that the statutory mechanisms for dissolution are not rendered ineffective by internal company deadlock. It also provides a clear judicial pathway for winding up companies that are no longer viable, thereby promoting commercial certainty and the integrity of the business environment.
The judgment also highlighted the role of expert evidence in establishing the financial condition of the company. The court-appointed expert’s report confirmed that the company’s losses had far exceeded its capital, and that its financial situation was irreparable. This, combined with the breakdown in the relationship between the partners and the inability to convene a general assembly, justified judicial intervention to dissolve and liquidate the company.
The Federal Supreme Court also considered the applicability of the UAE Companies Law to a company incorporated in a free zone. Free zones in the UAE often have their own regulatory regimes, which can differ from the federal Companies Law. However, the Court found that the UAE Companies Law was applicable in this case due to the specific legislative framework governing the Sharjah Airport Free Zone.
The Court’s reasoning was grounded in the fact that Decree No. 2 of 1995, which established the Sharjah International Airport Free Zone, expressly incorporates the provisions of the UAE Companies Law by reference. This means that, unless the free zone regulations provide otherwise, the general rules and protections of the UAE Companies Law apply to companies registered within the free zone. The Court underscored that where the legislative text is clear, it must be applied as written, and courts are not permitted to introduce conditions or restrictions not found in the statute.
By applying the UAE Companies Law, the Court ensured that the same standards for dissolution and partner protection available to mainland companies are also available to free zone entities, provided the free zone’s founding legislation incorporates the UAE Companies Law. This approach promotes consistency and predictability in the treatment of companies across different jurisdictions within the UAE, while respecting the autonomy of free zones to establish their own rules where expressly provided.
The Federal Supreme Court’s decision is a significant affirmation of the judiciary’s role in upholding statutory rights and remedies for partners in distressed companies, including those operating in free zones. By clarifying that judicial dissolution does not require General Assembly approval in cases of severe financial distress and partner conflict, and by confirming the applicability of the Companies Law to free zone companies where incorporated by reference, the Court has strengthened the legal framework for corporate governance and dissolution in the UAE. Accordingly, the court applied Articles 301 and 308 of the UAE Companies Law which provide clear, direct grounds for the judicial dissolution and liquidation of a company when certain factual conditions—such as catastrophic financial losses or the destruction of assets—are met. The Court rejected the imposition of any additional requirements, such as the need for a general assembly resolution, and affirmed that the judiciary has the authority and obligation to enforce the law as written, thereby protecting the rights of shareholders and upholding the integrity of the statutory framework.
For further information,please contact Ammar Haykal and Said Refaei.
Published in May 2025
