Liquidation or winding up involves a situation in which a company ceases its operation and sells all its assets to settle outstanding debts. Liquidation has the primary objective to settle the company’s debts before its life span is terminated.
Functions of a Liquidator
A liquidator is a professional who handles the affairs of the company under liquidation.
Since the main actor in the process is a liquidator, it is worth highlighting the functions of a liquidator. A liquidator begins the winding up process by taking possession of the company’s assets. Subsequently, the liquidator has to realise or liquidate the assets concerned. This will allow the liquidator to raise funds to pay any valid claims which may exist against the company. The liquidator will then distribute the proceeds of the sale among the company’s creditors and if there is any excess, to each members. A liquidator will then have to initiate the process of de-registration of the company with the Companies Commission of Malaysia.
Types of Winding Up
In law, there are two types of winding up: (1) voluntary winding up; and (2) compulsory winding up. Depending on the nature of solvency of the company, it is probable to take either route to close down the business. The type of winding up is dependent as to whether the company is solvent or not.
Voluntary Winding Up
Under voluntary winding up, even though the company is solvent, its members can put the company under liquidation. The initiative is taken by the members themselves with the view to possibly change the business strategy or direction or the company is no longer relevant to its members.
Under the Companies Act 2016 (“CA 2016”), there are two types of voluntary winding up.
They are: (1) members’ voluntary winding up (“MVWU”); and (2) creditors’ voluntary winding up (“CVWU”). MVWU is applicable for a company which is solvent and CVWU is generally used when the company is insolvent.
A voluntary winding up shall commence: (1) upon the appointment of a provisional liquidator which is done by the members before the passing of the resolution for voluntary winding up; or (2) in any other case, at the time of passing of the resolution for voluntary winding up by the members.
Members’ Voluntary Winding Up
In order to commence the process of MVWU, the majority of the directors have to make a written declaration of solvency stating the ability of the company to settle its debts within a period of 12 months after the commencement of the winding up process. After such declaration has been made, the company must then lodge the said declaration with the Registrar of Companies before the notice of general meeting is sent to the members informing the intention to wind up the company.
The date of commencement of the MVWU shall be the passing of the members’ resolution to initiate the MVWU. The members’ resolution must be passed within 5 weeks after the making of the declaration of solvency by the directors. A liquidator will be appointed by the members at the members’ meeting.
If the liquidator is of the opinion that the company will not be able to pay or provide for the payment of its debt in full within 12 months, the liquidator shall immediately call for a meeting of the creditors. Liquidator shall submit before the meeting, a statement of the assets and liabilities of the company.
The creditors may then appoint the liquidator appointed by the company or any other person to be the liquidator. As from the date of the creditors’ meeting, the winding up becomes a CVWU.
Creditors’ Voluntary Winding Up
If the company is insolvent, the company shall call for a meeting of the creditors of the company in which the resolution for winding up is to be proposed. A liquidator is appointed after the creditors’ meeting is held.
The procedure begins with the company calling for the creditors’ meeting. The company must send a notice with a list of creditors and amount of their claims within 7 days prior to the date of the creditors’ meeting.
The directors of the company shall appoint one of the directors to attend the creditors’ meeting. The director so appointed shall disclose the company’s affairs and the circumstances leading to the liquidation. The creditors may then pass the resolution to commence the liquidation process. The liquidator may be appointed by the company or by the creditors.
Where different persons are nominated as liquidator, then the person nominated by the creditors shall be the liquidator and if there is no person nominated as liquidator, the person nominated by the company shall be the liquidator.
Compulsory Winding Up
Liquidation is ‘compulsory’ if the court so orders. It is initiated by the presentation of a petition to the court by a party who is entitled to do so, based on one of the grounds set out in the CA 2016.
The court will only make a winding up order if 2 circumstances are satisfied: (1) the petitioner has the right to present the petition; and (2) the petition satisfies one of the grounds set out under section 465 of CA 2016, justifying a winding up.
Grounds for Compulsory Winding Up
Section 465 of CA 2016 lists down 12 circumstances under which a company may be wound up by the court. The circumstances mainly relate to the affairs and conduct of the company which may include where the company has no member or are unable to pay its debts.
The other condition is where the court is of the view that it is just and equitable to wind up the company. A compulsory winding up commences on the date of the winding up order.
Upon the court’s order for liquidation, all directors, officers, and employees of the company are effectively dismissed. The court order also amounts to a stay of any execution of a judgment against the company and of any legal proceeding in which it is either a plaintiff or a defendant. Any disposition of the property of the company made by the company after the presentation of the winding up petition shall be void, unless approved by the court.
Another pertinent issue in liquidation of a company to bear in mind is that of “undue preference” given to a creditor. It refers to a transfer of asset or payment of debt by a company to an unsecured creditor that results in that creditor being unfairly preferred in the hierarchy of distribution.
A transaction is deemed to be under undue preference if it took place within 6 months from the date of the presentation of the winding up petition and a winding up order is made. Any such transfer or payment constitutes undue preference and is deemed to be fraudulent and void. A transaction which is in favour of any person for valuable consideration and who did not have the actual notice or knowledge that the transaction is of undue preference is likely to be held valid.
Corporate Rescue Mechanism
The CA 2016 introduced some drastic changes in the form of a mechanism to assist or rehabilitate companies that are under financial distress. This is meant to eventually decrease the number of companies from being liquidated.
The CA 2016 introduced 2 new options in this regard: (1) Corporate Voluntary Arrangement; and (2) Judicial Management.
The similarities of the 2 options are as follows:
- Both afford a moratorium effect to the distressed company (that stays legal proceedings).
- Both require a 75% creditor approval requirement to bind the restructuring proposal on the creditors.
- Both are embodied in the Companies (Corporate Rescue Mechanism) Rules 2018 (came into force on 1 March 2018).
- Both arrangements are not available to:
- public company;
- company which is a licensed institution or an operator of a designated payment system regulated under the law enforced by the Bank Negara Malaysia; and
- a company which is subject to the Capital Markets and Services Act 2007.
Features and Procedures of Corporate Voluntary Arrangement
- A procedure which allows a company to put up a proposal to its creditors for a voluntary arrangement.
- A nominee (either a lawyer, judicial manager or a liquidator) is appointed to manage and implement the voluntary arrangement proposal.
- A meeting must be called within 28 days to approve the said proposal.
- A secured creditor may appoint a receiver to deal with the charged property of the company.
- With such approval, the arrangement takes effect and binds all creditors.
- The independent insolvency practitioner would report to the court on the feasibility of the proposal.
- This arrangement is not available to a company which creates a charge over its property or any of its undertaking.
Features and Procedures of Judicial Management
- A procedure in which a petitioner files a petition to the court and grants an order to appoint a judicial manager to manage the company’s affairs.
- An application may be made either by the company, its director, or its creditor(s) to the court.
- The court will only grant the petition for a judicial management order in the following circumstances:
- If it is satisfied that the company is or will be unable to pay its debts; and
- If it is of the view that the order is probable to accomplish one or more of the following objectives:
- the survival of the company as a going concern;
- the approval of a compromise or voluntary arrangement; and
- a more valuable realisation of the company’s assets than on a winding up order.
- The vacation of office of the receiver or manager.
- Proceedings can only be commenced or continued with the consent of the judicial manager or the court.
- No steps can be taken to enforce any charge over security.
- Moratorium period of 180 days takes effect.
- This arrangement is not available to a company after the company has gone into liquidation.
The old Companies Act 1965 has been amended in order to keep up with the time for a better corporate law structure in Malaysia. The CA 2016 brings changes in revamping the corporate insolvency and rehabilitation framework in Malaysia. With the new provisions under CA 2016, companies will have more options in this area which may reduce the pressure for a company to be put under liquidation.
1. Writer’s note: In this article, the term ‘liquidation’ and ‘winding up’ are used interchangeably.
Haji Mohd Rasheed Khan Mohd Idris & Wan Nur Ain Nabilah Wan Zawawi (email@example.com)