Wednesday, December 4, 2019

[452.19] Process of Winding Up under Companies Act 2016

Generally, winding up of a company can be instigated either by the company director(s), better known as a voluntary winding-up, or by the creditor. The latter is known as a compulsory winding-up as mentioned under Section 432(1) of CA 2016.
- The process flow for winding-up (both Voluntary and Compulsory Winding-up ) in the Companies Act 1965 is retained in the Companies Act 2016.
- Nevertheless, Section 619 (6) of the CA 2016 states that a company which is in the course of winding-up immediately before the commencement of the Act shall continue to be wound up under the relevant provisions in the Companies Act 1965.
1. Voluntary Winding-up
The process is initiated by the company itself, through its directors and shareholders in deciding that the company should be wound up. This process does not involve the court at all. Voluntary winding up can be divided into two categories, namely Creditors’ Voluntary Winding-up, and Members’ Voluntary Winding-up.
a. Creditors Voluntary Winding-up (CVW)
CVW is a voluntary process, but is inadvertently an admission on part of the company directors that the business is insolvent and no longer viable. The liquidator is appointed by the creditors at the creditor’s meeting and there is no need for the declaration of solvency by the director(s) as per Section 444 of CA 2016.
This is a situation where the company is unable to pay off all of its debts. Nonetheless, a voluntary winding up process can still be initiated by its directors and shareholders. However, the creditors now can have the final say in who should be appointed as the liquidator of the company as the liquidator has the important role of taking control of the assets of the wound up company, selling the assets and then trying to maximize the distribution of the proceeds to the creditors. A creditor who is owed money by a company cannot object to a company deciding to wind itself up or the company deciding to close down its business. That is the usual business risk when dealing with any company.
Since the company is insolvent, it is very likely that the creditors would not be able to be paid in full. Therefore, their interests need to be protected.
The general process:
1. Members of the company to propose resolution for voluntary winding up.
2. Give written notice by post to all creditors for a Creditors Meeting. Notice to be given at least seven (7) clear days before date of commencement of the meeting.
3. Winding-up notice to be advertised in a widely circulated newspaper in Malaysia in both the national language and in English.
4. Creditors Meeting to convene at a time and place agreed upon by majority attendees.
5. Creditors Meeting to decide on:
a) Appointment of a liquidator as per Section 432(2)(b) of CA 2016; and
b) Appointment of a committee of inspection, if necessary;
6. A copy of the resolution for winding-up is to be lodged with the Companies Commission of Malaysia within seven (7) days from the date the resolution was passed.
7. A copy of the resolution for winding-up is to be posted in a widely circulated newspaper in Malaysia in both the national language and in English ten (10) days from the date the resolution was passed.
8. Liquidator takes over all affairs of the company and proceeds with winding-up.
b. Members Voluntary Winding-up (MVW)
Companies opting for an MVW must be solvent and able to meet its liabilities. A company could very well be solvent and be rich in terms of assets. The directors and shareholders may decide that they wish to wind up the company, and for all of the assets to be sold, and for the proceeds to then be distributed back to the shareholders. A method to essentially realize the investment the shareholders made into the company.
The general process:
1. Members of the company to pass a resolution for the winding-up of the company and the appointment of a liquidator.
2. Written Declaration of Solvency to be prepared by the sole director or majority of directors and executed at a Board of Directors meeting as per Section 443 of CA 2016.
3. The declaration must be made before the notice calling for the member’s meeting to decide on the winding up of the company is given to its members as per Section 443(2) of CA 2016.
4. Members of the company to appoint a liquidator as per Section 432(2)(a) of CA 2016.
5. Declaration of Solvency to be lodged with the Companies Commission of Malaysia.
6. The company ceases all operations save and except for functions necessary for the winding-up process.
7. Liquidator takes over all affairs of the company and proceeds with winding-up.
2. Compulsory Winding-up
In a compulsory winding-up, the court can wind up a company on several grounds under the Companies Act 2016. The most common ground as per Section 465(1) of CA 2016 is when a company is unable to pay its debts in accordance to Section 466(1) of CA 2016, and creditor(s) of the company have initiated legal action in pursuit of the money owed.
Apart from that, there is also the circumstances under Section 465(1)(h) of CA 2016 where it is just and equitable to wind up the company. For instance, it applies to where there is any deadlock in the company as in the case of Re Yenidje Tobacco Ltd (1916). The company had two shareholders and they were also its directors. Both had equal shares in the company but they fell out and refused to have direct communication with each other. All communication was through the company secretary. Thus, the court held that it was just and equitable to wind up the company.
It also applies in the case of oppression where a member is oppressed or treated unfairly by the controlling members. In the case of Loch v John Blackwood Ltd, the company failed to hold general meetings and make available the company’s account to the members. These omissions were to suppress information about the company to enable the controlling members to acquire the company’s shares at an undervalued price. According to the court, this was oppression against the minority member and thus, he had the standing to petition to wind up the company.
Any disposition of property after the commencement of a winding-up suit is void, unless ordered otherwise by the court.
The general process:
1. A notice of demand by virtue of Section 465 of the CA 2016 is to be served on the company, demanding the company to settle its outstanding debt.
2. Necessary legal documents are to be filed in court. This includes the winding-up petition if the company fails to settle the debt as per the notice of demand above.
3. Due notification will be given by the court on date of hearing.
4. The court is to decide on whether or not to grant a winding-up order.
5. If a winding-up order is granted by the court, the court will either appoint a Director General of Insolvency (DGI) or a liquidator to wind up the company in question.
a) If an order is made , it is retrospective in effect to the date on which the petition was presented to the court which becomes the date of commencement of liquidation –
i. Among the legal consequences of an order by the court for compulsory winding up are:
1. The effective dismissal of all directors, officers and employees of the company;
2. A stay of any execution of a judgment against the company and of any legal proceeding in which it is either plaintiff or defendant;
3. A standstill on any disposition of assets or transfer of shares (unless approved by court) from the date of commencement of liquidation.
6. The appointed DGI or liquidator takes over all affairs of the company and proceed with winding-up.
The Court process for the winding up petition will require mandatory advertisement and inserting of a notice in the Government Gazette. The public knowledge may cause contracting parties to fear whether the company is going under and banks may also take the step to freeze the company’s bank accounts. So, as a matter of litigation strategy, if the company disputes the sum demanded, it is important for a company to take steps to prevent the filing of a winding up petition.
Faculty of Law,
Universiti Teknologi MARA

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