What You Should Know About Company Winding Up

Winding up is a process in which the existence of a company is brought to an end. The company's assets are then sold off and then used to pay off the company's debts. Any excess proceeds are then returned to the shareholders of the company.

In Malaysia, 'winding up' and 'liquidation' are the right terms to be used in describing this process of winding up a company. We usually use the term 'bankruptcy' for individuals.

Understanding Winding Up

When winding up an insolvent company, there are 3 key purposes of the winding up procedure:

1. It allows an orderly and fair distribution of the assets of the company among its creditors. This fair distribution of assets also recognises the public interest in allowing particular kind of debts such as a certain amount of wages owed to employees to be prioritised.
2. It allows for the winding up of an insolvent company serves the greater good. It does not help the business society to have an insolvent company to resume trading and acquire even more debts.
3. It allows for an independent and appropriately qualified person (the liquidator) to investigate the affairs of the organisation. They will examine for any signs of problems such as mismanagement or wrongful depletion of assets.

In Malaysia, the winding up laws are contained in Companies Act 1965 and Bankruptcy Act.

There are two modes of winding up: Voluntary Winding Up and Compulsory.

Voluntary Winding Up

i. Members voluntary winding up 

This process is started by the company through its directors and shareholders in deciding that the company should be wound up. This process does not involve the court.

A company could be solvent and rich in terms of assets. The directors and shareholders can decide if they want 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.

This method is to basically realise the investment the shareholders made into the company. Safeguards are made to ensure this method is only reserved for the situation when a company is really solvent.

ii. Creditors voluntary winding up

The second form of voluntary winding up is where the company is insolvent. This is a situation where the organisation is unable to pay off all its debts. A voluntary winding up process can still be started by the directors and shareholders. 

A creditor who is owed money by an organisation cannot object to a company deciding to wind itself up. This is the usual business risk when dealing with any company.

Compulsory winding up

In Malaysia, it is regular for companies to go through the winding up process at court. This is the most common example where a company is unable to pay its debts:

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

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

Many companies had to go through the winding up process at the Court.

If the company still has an active business or the company disputes the demand, the filing up the winding up petition can always cause grave reputational and business damage.

The Court process for the winding up petition will need mandatory advertisement and inserting of a notice in the Government Gazette. The public knowledge may cause contracting parties to fear if the company is going under. As a matter of litigation strategy, if the company disputes the sum demanded, it is vital to take steps to prevent the filing of a winding up petition.

The liquidator

A liquidator is usually the independent party who leads the wound up company. One of the key tasks of the liquidator is to take control of all the company's assets, sell off the assets and then distribute the proceeds.

In Malaysia, they could be the Director-General of Insolvency, the government official who is in charge of the administration of bankruptcy and winding up issues.

Alternatively, a private liquidator could also be appointed. They would have to be an accountant since only those who possess an audit license can obtain a liquidator's license.

The liquidator can sell off the company's lands and command the company to carry on the business for a limited time. They also have the powers to investigate the internal matters of the organisation.

This is the overall information regarding the winding up rules in Malaysia. It will be tweaked and strengthened in certain areas in the future but the relevant winding up provisions will still be retained within the Companies Act.

Source: Conventus Law / Shih Lee & SSM

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