Written by Richard Wee & Jacob Wong
Winding up of a company means ending the business of the company by dissolving all the assets to pay off the creditors and subsequently distribute the remaining assets to all the members. There are several methods of winding up and each will be used on different occasions.
Due to Covid-19, commerce is affected and may unfortunately lead to companies facing financial restraint. This may eventually lead to the winding up of the company. This article aims to discuss the causes and modes of winding up of a company.
There are multiple reasons for a company’s winding up. The most common reason is when a company is insolvent. Therefore, winding up is needed to dissolve the company’s assets to pay off the creditors. Apart from paying the creditors, winding up also serves the purpose of ceasing the running of business to prevent incurring further debts.
Besides that, a company can be wound up even when the company is solvent itself. This can happen when the shareholders decide the objectives of the company have been met and are keen on distributing all the assets evenly among the shareholders after paying all the creditors.
A winding up process can also be brought following the provisions illustrated under the company’s constitution. For instance, a company constitution might state a fixed period or specific event for the company to end the business. Once the fixed period has been met or the specific event occurred, the company can be wound up by passing a resolution in a general meeting.
In the event of company’s internal disputes such as oppressive conducts against shareholders or any disagreement between members, shareholders can submit a petition for winding up of the company under Section 464 Companies Act 2016 (CA 2016).
In addition, winding up of a company can also be used as a restructuring and profit maximisation tool. For instance, a company that belongs to a group can be wound up to cut down tax liabilities or financial restructuring to change the ratio of equity and debt in a company’s capital structure.
There are two ways of winding up a company in Malaysia which are voluntary winding up and compulsory winding up.
Voluntary winding up is carried out by the members. However, there are two types of voluntary winding up where one takes place when the company is solvent (member’s voluntary winding up) whereas another is when the company is insolvent (creditor’s voluntary winding up).
On the other hand, compulsory winding up takes place when the court makes an order to wind up the company.
This is the mode of winding up when the company is solvent and the members of the company decide to bring an end to the business and distribute all the assets to the members. The decision of winding up the company can be done in a general meeting through a resolution or special resolution in accordance to Section 439 (1) CA 2016.
Subsequently, according to Section 443 CA 2016, a declaration of solvency has to be made by the members to prove that the company is solvent during the time of winding up. It can be made at a meeting of directors, where the directors may form the opinion that the company will be able to pay its debts in full within a period not exceeding twelve months after the commencement of the winding up. A failure to make such a declaration will deem the winding up a creditor’s voluntary winding up according to Section 444 CA 2016.
In the process of winding up, the court will not be involved and all the procedures will be carried out by the liquidators appointed by the shareholders.
This mode of winding up will arise when a company unable to pay off the debts and decided to come up with a plan with the creditors in winding up the company. In this scenario, the liquidator will be chosen by the creditors in order to secure their interest. The liquidator will prioritise the interest of creditors and arrange a fair distribution of the assets of the company among the creditors. Therefore, creditors do not have to fear that their debts will not be paid equally.
This method is also known as winding up by court start by a presentation of petition to court under Section 464 CA 2016. Individuals that are allowed to start the petition including creditors, liquidators, shareholders, the Registrar of companies or the Official Receiver.
Creditors can issue a notice of demand to collect debts if the amount has reached a certain threshold under Section 466 CA 2016. In normal circumstances, the threshold will be RM10,000. However, due to the current situation of Covid-19, the Companies Commision of Malaysia (SSM) provided a temporary protection of winding up and set the threshold to RM50,000 in the duration from 23 April 2020 – 31 December 2020. Upon the notice demand, if the company is unable to pay up in 21 days, the creditors can file a petition to seek a court order to wind up the company.
During the process of winding up, the court will make mandatory advertisements in newspapers. This is to serve the purpose of informing all other potential business partners from doing business with the company.
After the petition has been served, the company may either seek for Fortuna Injunction from court to prevent the creditors from filing the presentation of the petition or oppose the petition of winding up in a court hearing.
In conclusion, winding up can be a tool for creditors and also shareholders to secure their interest in the company. Besides that, directors of a company have to be cautious in preventing the creditors or members from filing petition of winding up as it will be damaging to the reputation of the company.
Published on 23 September 2020