Winding Up Procedures (LAW 662) PDF

WINDING UP PROCEDURES (LAW 662) 1 Table of content 1 Voluntary winding up 2 Compulsory winding up 3 Procedures for winding up 2 Introduction It is a process whereby the assets of a company are collected and realised by the liquidator...

WINDING UP PROCEDURES (LAW 662) 1 Table of content 1 Voluntary winding up 2 Compulsory winding up 3 Procedures for winding up 2 Introduction It is a process whereby the assets of a company are collected and realised by the liquidator in order to pay its debts to the creditors. There are two types of winding-up namely, compulsory and voluntary winding- up. A company is wound up for various reasons, and the most obvious and common reason is that the company is insolvent, i.e. unable to pay its debt. 3  Section 432 of the Companies Act 2016 recognises two modes of winding up: i) Winding up made by the court (Compulsory winding up) ii) Voluntary winding up 4  Voluntary winding up (Sec 432(2)) of CA 2016 There are two forms of voluntary winding up: a) by a members’ voluntary winding up where the company is solvent and the liquidator is appointed by the members at the members’ meeting; b) by a creditors’ voluntary winding up where the company is insolvent and the liquidator is appointed by the creditors at the creditors’ meeting. 5 (i) Member’s voluntary winding up Section 439 of Companies Act:  A members’ voluntary winding up is initiated by special resolution of the company; and can only proceed if the company is solvent.  A liquidator is then appointed by the members in general meeting  Section 445 (1): In a members’ voluntary winding up, the company shall appoint one or more liquidators for the purpose of winding up the company’s affairs and distributing its assets in general meeting. 6  Before a member’s voluntary winding up can proceed, the directors must make a written declaration to the effect that they have made an inquiry into the affairs of the company and are of the opinion that it will be able to pay its debt in full within a period of 12 months after the commencement of winding up (Sections 443(1)(a) &(b) of CA). 7  The declaration must be made in a prescribed form: Form 66 (Schedule 2 of Companies Regulations) 8  (ii) Creditor’s Voluntary Winding Up A creditor’s voluntary winding up is similar to a member’s voluntary winding up except that the company is insolvent. This type of winding up, despite its name, cannot be initiated by creditors. A member’s voluntary winding up is converted into a creditor’s voluntary winding up if the company is insolvent. 9  Section 448: Conversion to Creditor’s Voluntary Winding Up This situation may arise in the following situations:- a) No declaration of solvency Where there is a proposal to wind up the company voluntarily but the directors do not make and lodge a declaration of solvency under Section 443, the liquidation proceeds as a creditor’s voluntary winding up. 10 b) After appointment of liquidator by members A member’s voluntary winding up may be converted into a creditor’s voluntary winding up even after the directors have made and lodged a declaration of solvency. 11  If a liquidator appointed by the members, during the course of the liquidation forms the opinion that the company is unable to pay its debt in full within the period stated in the declaration of solvency, the liquidator is required to convene a meeting of creditors. (Section 447(2) of CA). 12  The liquidator is then required to lay before the creditor’s meeting a statement of the assets and liabilities of the company and draw their attention to their right under Section 447(2) to appoint a new liquidator. 13  From the date of the Creditor’s meeting, the liquidation proceeds as a creditor’s voluntary winding up whether or not the creditors appoint a new liquidator (Section 447(3) of CA). 14  Compulsory winding up Initiated by application to the court by any one of the persons listed in section 464 of CA 2016. The petition can be presented in the High Court. Two things must be shown before the court will make a winding up order on a petition: 1. that the petitioner had the right to present the petition and 2. that one of the grounds set out in the Act as justifying a winding up has been made out. 15 Who can petition? See section 464 CA 2016 The petitioners include creditors, the liquidator, the Registrar of companies or the Official Receiver under section 217(1) of the CA 1965 or section 464 of the CA 2016. 16  Community Development Pty Ltd v Enqwirda Construction Co (1969) 120 CLR 455 The High Court of Australia held that a builder whose debt only became payable on the outcome of arbitration proceedings was a contingent creditor and was, therefore, capable of filing a winding-up petition. *** A contingent creditor is someone whose claim or debt depends on a future event that may or may not occur. In this case, the builder’s entitlement to payment was conditional on the resolution of disputes through arbitration. 17  GROUNDS ON WHICH A COMPANY MAY BE WOUND UP BY THE COURT Section 465 (1) (a) to (l) of the Companies Act 2016. *** Section 465(1)(e): the company is unable to pay its debt. 18 Inability to pay its debt: section 465(1)(e) Under section 466(1) a company is deemed to be unable to pay its debt for the purpose of section 465(1)(e) in three different situations: (i) The company fails to pay a debt after being served a notice by a creditor which complies with section 466(1)(a); 19  (ii) an execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; (Section 466(1) (b)) (iii) the court after taking into account any contingent and prospective liabilities of the company, is satisfied that the company is unable to pay its debt (Section 466(1)(c)). 20  YPJE Consultancy Service Sdn Bhd v Heller Factoring (M) Sdn Bhd (formerly known as Matang Factoring Sdn Bhd ) 2 MLJ 482 On 15 June 1993, the respondent (creditor) obtained a default judgment against the appellant (debtor company). The respondent served a statutory demand under section 218 of the Companies Act, requiring payment of the debt. The appellant failed to make the required payment, leading the respondent to file a winding-up petition against the appellant in the High Court. The appellant opposed the petition on the ground that the statutory notice was invalid because it did not specify the interest on the principal amount owed. The High Court dismissed the appellant’s objections and ordered the winding-up of the appellant company. 21 Issue on Appeal: The appellant argued that the interest on the debt had not been calculated and included in the statutory notice, rendering it invalid. They relied on bankruptcy law principles, where interest must be quantified in bankruptcy notices. The court held: The Companies Act 1965 does not require the interest to be quantified in the statutory notice, unlike bankruptcy law. The appellant's reliance on bankruptcy law was misplaced, as the provisions governing companies are different. Even if the notice overstated the amount owed, the key issue is whether the company is unable to pay its debts. In this case, the principal debt was much greater than the minimum amount (RM500) required for a winding-up petition, so the notice was valid.  WINDING UP PETITION Prescribed by Rule 22 Companies (Winding- up) Rules 1972 Form No. 3 (specific format for creditor’s petition) or Form No. 2 (all petitions on other grounds) 24  The prescribed form requires the petitioner to state: (a) The company is insolvent (b) Unable to pay its debt (c) Just and equitable to wind up the company 25  Presentation of the petition A petition for a winding up of a company has to be presented at the office of the Registrar- Rule 23 26  COUNSEL TO SEE REGISTRAR FOR ISSUE OF REGISTRAR’S CERTIFICATE Rule 32 certificate After a petition has been presented, the petitioner or his solicitor shall on a day to be appointed by the Registrar attend before the Registrar and satisfy him that- (a) the petition has been duly gazetted and advertised; (b) the prescribed affidavit verifying the statements therein and the affidavit of service, if any, have been duly filed; 27  (c) the consent in writing of the approved liquidator nominated by the petitioner has been obtained and filed (d) the provisions of these rules as to petitions have been complied with (e) A sum of RM3000 has been deposited to cover the fees and expenses to be incurred by the approved liquidator or the Official Receiver as the case may be (Rule 23A). 28  SERVICE OF THE PETITION Rule 25(1): a copy of the petition has to be served upon the company at its registered office. If no registered office, then at the principal office or last known principal place of business. Rule 25(2): where a petition is presented by any other person than the liquidator, in relation to a company which is in the course of being wound up, the petition shall be personally served upon the liquidator. 29 Hearing of Winding Up Petition Section 469 of the Companies Act: On hearing of the Petition, the Court may:- a) Dismiss the petition with or without cost b) The Court may adjourn the hearing conditionally c) To make any interim order or other orders as it thinks fit. 30 THE IMPACTS OF WINDING- UP The winding-up of a company, whether voluntary or through a court-ordered process, has significant impacts on various stakeholders and the company itself. 31  1. IMPACT ON THE COMPANY Upon winding-up, the company ceases its business operations, except as necessary for the process of liquidation. The company's assets are liquidated to pay off its debts. Once the winding-up is complete, the company is dissolved and loses its legal personality. It can no longer enter into contracts, sue, or be sued. The powers of the directors cease, and the appointed liquidator takes over the management of the company's affairs.The liquidator’s role includes collecting and distributing the company’s assets and settling liabilities.  2. IMPACT ON CREDITORS Creditors are paid in a specific order of priority as per the Companies Act 2016: Secured creditors. Preferential creditors (e.g., employees' wages up to a certain limit, statutory dues). Unsecured creditors. Shareholders (only if surplus assets remain). Creditors may recover part or all of their debts, depending on the company's remaining assets after liquidation expenses.  3. IMPACT ON SHAREHOLDERS Shareholders are the last in the priority order for payment. They typically lose their investments unless surplus assets remain after paying all creditors and liabilities. Shareholders’ liability is limited to the unpaid amount on their shares.  4. IMPACT ON THE BUSINESS COMMUNITY The winding-up of a company may affect related businesses, especially suppliers and customers reliant on the company. Winding-up proceedings serve as a warning to the market about the financial instability of the company and possibly its industry.