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WINDING UP & ITS IMPLICATIONS ON COMPANIES

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Winding up is a process in which the existence of a company is brought to an end, where assets of a company are collected and realized by a legally appointed liquidator. The proceeds collected will be used to discharge the company’s debt and liabilities.

There are two types and/or modes of winding-up as pursuant to the Companies Act 2016:

  • winding-up by the Courts; or
  • voluntary winding-up.

This article is mainly focused on winding-up by the Courts, which also known as compulsory winding-up, and its implication on the companies.

Companies winding up by court

Before commencement of a winding-up Petition in Court, two things must be shown:

  • That the Petitioner (meaning the person or entity seeking to wind-up the company) has the right to present the Petition.

The categories that the Petitioner must fall within include:

  • the company itself;
  • any creditor of the company, contingent or prospective creditor;
  • a contributory or any person who is a personal representative of a deceased contributory or the trustee in bankruptcy or the Official Assignee of the estate of a bankrupt contributory;
  • the liquidator of the company; and
  • the Registrar of Companies.

Grounds justifying a winding up Petition.

The Court may order the winding up if:-

  • the company has by special resolution resolved that it be wound up by the Court;      
  • default is made by the company in lodging statutory reports or in holding the statutory meeting;
  • the company does not commence business within a year from its incorporation or suspends its business for a whole year;
  • the number of members is reduced in the case of a company (other than a company the  whole  of  the issued shares in which are held by a holding company) below two;
  • the company is unable to pay its debts;
  • the directors have acted in the affairs of the company in their own interests rather  than  in  the  interests  of  the  members  as  a whole, or in any other manner whatsoever which appears to be unfair or unjust to other members;
  • an appointed inspector appointed has reported that he is of opinion-
    • that the company cannot pay its debts and should be wound up; or
    • that it is in the interests of the public or of the shareholders or of the creditors that the company should be wound up;
  • where   the   memorandum  or  articles  provide  that  the company can be dissolved;
  • the  Court  is  of  opinion  that  it  is just and equitable that the company be wound up;
  • the company is being used for unlawful purposes or any purpose prejudicial   to   or incompatible with peace, welfare, security, public order, good order or morality in Malaysia; or
  • the company is being used for any purpose prejudicial to national security or public interest.

Commonly, the Court is moved by creditors for an Order that the company be wound-up on the grounds that it is unable to pay its debt. The Companies Act provides that it is proven that the company cannot pay its debts if the company defaults in complying within three weeks written demand for the satisfaction of the payment of more than RM500-00.

The above are the general requirements for the application of winding up in Malaysia.

Procedure

Judgment is usually obtained prior to an application to Court to wind-up the company. Thereafter a Notice of Demand, also known as a “466 Notice”, is served on the company seeking satisfaction of the Judgment. After the lapse of three weeks as per the “466 Notice” compliance time period, Creditors are entitled to file in winding up Petition in Court.

A Deposit of RM3,000-00 will have to be paid by the Petitioner to the Insolvency Department of Malaysia before presentation of Petition in court and an official receipt of the same is to be filed together with the winding up Petition in court.

A Petition is presented to Court with an Affidavit Verifying the. Upon the issuance of the Petition by Court, the Petition is served on the company, the Companies Commission of Malaysia and the Insolvency Department of Malaysia, advertised twice in two local newspapers and gazetted.

Upon compliance of the abovementioned requirement, the parties involves and/or their respective Solicitors need to attend the case management before the Registrar and the said Registrar will issue a Certificate pursuant to Order 28 of the Insolvency (Winding up) Rules 2018.

At the hearing of the Petition, the Court may order that the company be wound-up, and appoint a liquidator. A private liquidator may be nominated in lieu of the Official Receiver.  A private liquidator may then commence his work in ascertaining the creditors, debtors and contributories of the company towards realizing the assets and distributing it to the person entitled to monies.

Subsequently, every Petition shall be advertised and gazetted. Please note that there are requirements that must be complied with under Order 28, and a Petitioner may be subject to a penalty if the Petitioner fails to do so.

Upon realization of the assets, the liquidator calls for proof of debts to be submitted by creditors. Proof of Debt is a document evidencing or supporting a creditor’s claim against the Company.

In distributing the assets, the liquidator shall ascertain the class of the creditors:

  • Secured Creditors
    • Secured creditors have the option to realize the security outside the liquidation, for instance, foreclosure proceedings. The secured creditor may sell company’s asset on which they have security through the liquidator and retaining the benefits therefrom.
  • Unsecured Creditors
    • An unsecured creditor is a creditor that does not have the benefit of any security interests in the assets of the company. The unsecured creditor may entitle to file in the Proof of Debt at the Insolvency of Malaysia.

Implication on Companies

Cessation of company’s business

On the appointment of a liquidator all the powers of the directors shall cease. The power and control of the Company administration will be taken over by the Liquidator in investigating the affairs of the company and to recover assets.

Avoidance of disposition of property

Any disposition of the property of the Company including things in action and any transfer of shares or alteration in the status of the members of the Company made after the commencement of the winding up by the court shall unless the Court otherwise orders be void.

Petition to be Lis Pendens

The two words put and read together generally mean a pending law suit. The expression is a useful Latinism that has given its name to a notice required in some jurisdictions to warn all persons that certain property is the subject-matter of litigation and that any interest acquired during the pendency of the suit must be subject to the outcome of the litigation.

The doctrine of lis pendens prevents the effective transfer of rights in any property which is a subject-matter of an action pending in Court during the pendency in Court of the action. In its application against any purchaser of such property the doctrine is not founded on the equitable doctrine of notice – actual or constructive – but upon the fact that the law does not allow litigating parties or gives them, during the pendency of litigation, any property rights in such property in dispute so as to prejudice any of the litigating parties.

As such, sales of a subject-matter in lis pendens is void ab-initio. This means that the Petitioner is not allowed to alienate property of the Company pending the resolution of the suit.

Avoidance of certain attachment

This means that a creditor who has not yet executed his judgment before the presentation of winding up Petition will run the risk that he will not be able to enforce judgment against the Company.

Actions are stayed

When a winding up order has been made or a provisional liquidator is appointed, no action or proceeding may be commenced against the Company except with the leave of the court.

Conclusion

On hearing a winding up Petition the Court has wide powers – the Court may dismiss it with or without costs or adjourn the hearing conditionally or unconditionally or make any interim or other order that it thinks fit. However, the Court cannot refuse to make a winding up order on the ground only that the assets of the company does not have sufficient assets or that the company has no assets or in the case of a Petition by a contributory that there will be no assets available for distribution amongst the contributories.


This article was contributed by Norzawani Binti Othman and Hynn Choo of C.C.Choo, Hazila & Teong.
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