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
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.
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.
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.
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.