Closing Down a Company: Winding Up Law in Malaysia

The winding up of a company is the process of bringing an end to a company. The company’s assets are sold off and then used to pay off the company’s debts. Any excess proceeds are then returned to the shareholders of the company.

Here, I will give a brief overview of winding up law in Malaysia. We will start with getting our terminology right.

Mind Your Language: Winding Up, Not Bankruptcy

mind your language

In getting our terminology right, we should refer to the term ‘winding up’ or even ‘liquidation’ when referring to this process of winding up a company. In Malaysia (and a few other jurisdictions like Singapore, the UK and Australia), these are the correct terms to be used. In contrast, in Malaysia at least, the term ‘bankruptcy’ is for individuals and where an individual may be adjudged bankrupt.

Nonetheless, we sometimes see news reports referring to companies entering ‘bankruptcy’ of companies or certain companies seeking ‘bankruptcy protection’. The likely reason for this is that in the United States, it has a Bankruptcy Code and which will govern both the insolvency of individuals and companies.

Next, it would also be useful to look back in history. I examine briefly the reasons for the enactment of winding up laws universally, and how Malaysia introduced its winding up laws.

History Lesson

It is useful to look back and understand the underlying aims of winding up. For the winding up of a solvent company, it allows the assets of the company to be distributed back to the shareholders after paying off the debts of the company.

When winding up an insolvent company, there are three main aims of the winding up procedure. First, it allows an orderly and fair distribution of the assets of the company among its creditors. In the past, a creditor could rush to seize the assets of the company and it became a race against the clock as to which creditors could get some of the assets first. This fair distribution of assets also recognises the public interest in allow certain types of debts (for instance, a certain amount of wages owing to employees) to have priority over say, normal trade debts.

Secondly, allowing for the winding up of an insolvent company serves the greater good. It does not benefit the business community to have an insolvent company continue to trade and incur even more debts.

Thirdly, winding up allows for an independent and appropriately qualified person (i.e. the liquidator) to investigate the affairs of the company. Was there any mismanagement? Was there any wrongful depletion of assets of the company that led to the winding up?

In Malaysia, our winding up laws are contained in our Companies Act 1965 (and with some minor cross-referencing to the Bankruptcy Act). In turn, the Companies Act 1965 was based on the English Companies Act 1948 and the Companies Act 1961 of the Australian state of Victoria. Hence, the very persuasive value that we can draw on English and Australian company law cases.

With this framework in mind, I set out the ways in which one can initiate the winding up of a company.

Voluntary Winding Up: Company itself starts the winding up

The first form of winding up is known as a 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.

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 realise the investment the shareholders made into the company. Such a solvent method of winding up is known as a members voluntary winding up, or members voluntary liquidation. Safeguards are put into place to ensure that this method is solely reserved for the situation when a company is truly solvent.

A second form of voluntary winding up where the company is insolvent. 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. 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.

This second method of winding up is known as a creditors voluntary winding up or a creditors voluntary liquidation.

The company (through its directors and shareholders) can make the decision to start the winding up process. However, the creditors now can have the final say in who should be appointed as the liquidator of the company.

This voluntary winding up process is known as a creditors voluntary winding up or creditors voluntary liquidation. The creditors have the ultimate say in the identity of the liquidator 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 maximise the distribution of the proceeds to the creditors. 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.

Court Process for Winding Up: Compulsory Winding Up

In the Malaysian context, it is very common to come across the winding up of a company through the court process. This is known as a compulsory winding up. I highlight the most common example where a company is unable to pay its debts.

A creditor who is owed more than RM500 can send out a demand letter to the company to pay within 21 days. Colloquially, this is known as a ‘Section 218 Notice’ or a ‘218 Notice’ since the demand is issued pursuant to section 218 of the Companies Act.

If the company fails to pay the amount demanded in this letter, there is a statutory presumption that the company is now insolvent. The creditor can now file the court papers, known as a winding up petition, to seek the Court Order for the winding up of the company.

Where the company still has an active business, and where the company disputes the demand, the filing of a winding up petition can often cause grave reputational and business damage.

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.

Enter the Liquidator

An important facet of all forms of winding up is the role played by the liquidator. A liquidator is essentially the independent person or entity who takes charge of the wound up company. One of the primary roles of the liquidator is to take control of all of the company’s assets, sell off the assets and then distribute the proceeds.

In Malaysia, the liquidator could be the Director-General of Insolvency, the government official designated to be in charge of the administration of bankruptcy and winding up matters in Malaysia. Alternatively, a private liquidator could be appointed. This would have to be an accountant since a person can only obtain a liquidator’s license if he holds an audit license.

When the liquidator takes over the company, the company continues to exist as a legal entity. But the directors’ powers of managing the company ceases, and the liquidator is now in the driving seat of the company. In other words, if the company were a giant robot, there is now just a change in the person piloting that robot.

Time for a new pilot to take control of the robot
Time for a new pilot to take control of the robot

So if the liquidator wanted to carry on the business of the company for a limited time, or if the liquidator were to sell off the company’s lands, it is still the company carrying out such tasks but the liquidator piloting these actions.

As mentioned earlier, besides the external dealings of the company, the liquidator will also have the powers to investigate the internal matters of the company.

The winding up will come to an end, and the company will cease to exist, upon the dissolution of the company. So the winding up process should have been completed and the company is then dissolved.

Conclusion

That is a overall snapshot of the winding up regime in Malaysia. Even in the upcoming changes to Malaysia’s company law, the relevant winding up provisions will be retained within the new Companies Act. The winding up regime will be tweaked and strengthened in certain areas, as it continues to evolve to meet the changing business environment.

 

 

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65 thoughts on “Closing Down a Company: Winding Up Law in Malaysia

  1. qal 21 December 2016 / 11:52 am

    • Hi,
    my father, mother and sister are bankrupt and their bankruptcy reached 5 years soon (by the end of Dec 2015).
    My father (54 years old) was business man previously and he use my sister’s and mother’s (52 years old) name for other company and bank loan too.
    At the end all of them became bankruptcy. One of the reasons is that we were betrayed by a partner in the business; at the end my family had to bear all the loses as their names were registered in the company.
    Because of this, we have tried many lawyers in the hope to get my sister discharge from bankruptcy as she is still young at only 27 yeas old.
    She is working in travel field and it block her from travelling around and facing alot of restriction. She been sued by 2 company with amount RM50K++ & RM800K++, one of the debtor did hire lawyer and they insist don’t wan to settle. We also do not have so much money to clear the debt. I have search around and heard that after 5 years, they may have the chance to apply for discharge from bankruptcy. May i know is there any way to get my family discharge from bankruptcy? or is there anyway to get discount from them? Do really hope you may help. Thanks. Please do contact me if you may help on this case.Hi,
    my father, mother and sister are bankrupt and their bankruptcy reached 5 years soon (by the end of Dec 2015).
    My father (54 years old) was business man previously and he use my sister’s and mother’s (52 years old) name for other company and bank loan too.
    At the end all of them became bankruptcy. One of the reasons is that we were betrayed by a partner in the business; at the end my family had to bear all the loses as their names were registered in the company.
    Because of this, we have tried many lawyers in the hope to get my sister discharge from bankruptcy as she is still young at only 27 yeas old. She is working in the travel industries and the bankruptcy blocked her from travelling and imposed many restrictions.
    She has 2 creditors amounting to RM50,000; RM800,000, one of the creditors did hire a lawyer and they are persistent that they don’t want to reach a settlement with our family. We do not have sufficient to clear the debts.
    I heard, after 5 years, they may have the opportunity to apply for a discharge from bankruptcy. May I know to apply for a discharge from bankruptcy?
    Is there anyway to get a discount from the Creditors?
    Do really hope you may help. Thanks. Please do contact me if you may help on this case.

    Like

  2. Jube WJ Lim 2 January 2017 / 1:57 am

    Dear Mr Lee,

    …the company cannot repay fully the loan borrowed and the Bank obtained a judgement order from court against the company for ‘the outstanding loan amount as well as interest and penalty charges until full settlement’.

    The Bank subsequently obtained court order and wound-up the company as well as auctioned off its properties. If the money from the auction of properties were enough to repay the outstanding loan amount and (may be) also the interest and penalty charges.

    Please advise how to calculate the interest and penalty charges payable…. should they be calculated up till the date the company was wound up …or the date the charged properties were auctioned off … or the date the auction money was fully paid by the bidder….or..???

    Like

  3. Wan 20 February 2017 / 1:39 pm

    Mr Lee,
    I have registered a Sdn Bhd 12 years ago and it has been operating for about 6 years, then the business deteriorates and become dormant and dysfunction thereafter. It was a RM10 company and the company has no debtors. SSM invoked Sec 308 to winding up the company on 2015 and this process takes time. However, from time to time, the income tax contact me for small matter summons, e.g. not submit the Form E on 2014 or not update the sale prediction on 2012 or …, etc. Scared by their court tactics, I pay each summons RM300 for every threaten. I actually explained to them, but it seems they could find a small wrongdoing to validate their standing.

    Frustrated with all these scared tactics, are there anything I could do? or have to pay the summons in protest?

    How long I have to bear the responsibility before the company is fully wound up? What are the law I can refer for my rights understanding?

    Thanks for your reply or enlightenment.

    Like

    • Wan 20 February 2017 / 1:53 pm

      Sorry, the Sec 308 is to strike off the company from register, not winding up. I mention wrongly.

      Like

  4. Eric 8 March 2017 / 1:35 pm

    Hi Mr. Lee,

    I have a couple of questions regarding the liquidating process when it comes to intangible assets.

    in any case on winding up, how would the liquidator, private or otherwise liquidate intellectual property assets of a company such as the ownership of a high traffic website, patent, mobile app and so on?

    Do they just go to the highest bidders that the liquidator could find?
    Must the liquidator sell off to the highest bidder?
    Do the current members of the company have rights to also particpate in buying them over?

    Like

    • Lee Shih 9 March 2017 / 8:45 am

      Intellectual property assets would be sold just like any other assets of the company. The liquidator’s duty is to try to obtain the best possible price, in order to maximise the returns. An ideal situation may be for the liquidator to try to carry out a tender, obtain a valuation, request for bids, advertise and so on. But for a wound up company, it may also depend on how much funds are available to carry out such a process. So it will be a balancing act for the liquidator to maximise the returns from the sale. It will in the end be a commercial decision by the liquidator.

      Sometimes, it may not be as simple as the highest bid, especially if some assets are sold on a piecemeal basis or sold off entirely. The liquidation of Kian Joo Holdings had the liquidators also facing competing bids and then having to decide who to sell the assets to.

      Current members of the company can participate in the purchase of the assets.

      Like

  5. Sharon Sen 17 May 2017 / 12:59 pm

    Hi Mr Lee,

    I have a bit of different problem from most of the comment here. I opened and SDN. BHD with an initial of paid up capital of RM350k. My partner is a foreigner and while we try to obtain a visa it wasn’t granted because we do not have a company account. But without any visa, we are not granted any company account at all in any banks. Hence, we decided to close it down.

    While my accountant had tried twice to apply to the SSM, we are not granted to strike it off due to the high paid up capital. Can you please give me some advice on how am I able to solve this problem.

    Thanks.

    Like

    • Lee Shih 18 May 2017 / 10:09 am

      You can work with your company secretary to undergo a members voluntary winding up. This will require resolutions to be passed at the directors’ meeting and the shareholders’ meeting.

      Like

      • Sharon Sen 18 May 2017 / 4:29 pm

        Thank you.

        Like

  6. Kim 19 May 2017 / 4:46 pm

    Hi Mr. Lee,

    I have a sdn bhd company that is in debts and I can’t pay off the debts. No one is suing the company at the moment but 1 of the director keep mentally torture us to pay for debts that we are unclear of. And they always say we will be fine half a million dollar If we dun clear this and that. The company is a paid up capital of RM400k and is a RM100 company. Please advice because I really have no money anymore. what should I do?

    Like

    • Lee Shih 22 May 2017 / 9:47 am

      You can work with your company secretary to consider if the company can undergo a voluntary winding up. If the company has debts that cannot be paid off, then speak with your company secretary if a creditors voluntary winding up process can be pursued.

      Like

      • Kim 22 May 2017 / 5:03 pm

        Thank you sir

        Like

  7. Chiew Cindy 30 May 2017 / 12:41 pm

    I’m referring to Section 258 of the Companies Act, 1965 that provides the cessation of Directors’ powers on the appointment of a liquidator unless otherwise consented. However, the Directors are still required to sign the Statement by Directors for the last audited financial statement (“AFS”) which is made up to the day before the commencement of the liquidation and some auditors will also require for a Directors’ Circular Resolution (“DCR”) to approve the AFS and give authority to the Directors to sign the Statement by Directors. Will such acts of the Directors contravene with Section 258? Do the Directors still have power to act in their capacity to sign off the AFS and DCR accordingly?

    Like

  8. luxurybb 21 September 2017 / 12:51 pm

    Hi Mr Lee,

    I have a queries regarding the liquidating process when it comes to assets & Liabilities.

    For instants, the company which are going to strike off still owe Holding company as liabilities and there are also assets due to amount owe by related company.

    For the requirement for strike off, The company has no assets and liabilities at the
    time when the application is made.

    so in this case, the company can be strike off?

    Thank you in advance.
    hope hear from you soon.

    Like

    • Lee Shih 23 September 2017 / 7:13 pm

      With the company having assets and liabilities, it won’t be able to apply to be struck off. But, if the company fails to file its annual returns, SSM could still take steps to strike off the company. SSM is quite efficient in striking off companies on such grounds nowadays.

      Like

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