Introduction of Liquidation In law, liquidation is the process by which a company (or part of a company) is brought to an end, and the assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry. Liquidation may either be compulsory (sometimes referred to as a creditors' liquidation) or voluntary (sometimes referred to as a shareholders' liquidation, although some voluntary liquidations are controlled by the creditors.
Compulsory liquidation The parties who are entitled by law to petition for the compulsory liquidation of a company vary from jurisdiction to jurisdiction, but generally, a petition may be lodged with the court for the compulsory liquidation of a company by: I. II.
The company itself Any creditor who establishes a prima facie case
III.
IV. V.
Contributories: Those shareholders who may be required to contribute to the company's assets on liquidation[2][3] The Secretary of State (or equivalent) The Official Receiver
Who can be appointed as liquidator? I. II.
Official Receiver (Director General of Insolvency (DGI) in capacity as Official Receiver) Private liquidator (an individual person whom is licensed to be a liquidator).
What are the duties of a liquidator ? 1)To investigate into the affairs and assets of the company 2)To investigate the conduct of its directors and other related persons 3)To investigate claims made by of creditors and third parties; 4)To collect and realize the company's assets at the best possible price and in a manner that is to the best advantage of the company. Who is an unsecured creditor ? Any person who has lodged the proof of debt with the liquidator.
How does the unsecured creditors get paid ? Initially, all priority matters and persons as listed under section 292 of the Companies Act 1965 will be paid. The remaining balance will then be divisible amongst all pari-passu (equally). Priority matter and persons : cost and expenses of the winding up including taxed costs of a petitioner remuneration of the liquidator costs of any audit carried out employees compensation accruing under any written law before the commencement of winding up employees remuneration etc What are the duties of ex-directors of a company Ex-directors of the company must co-operate with the liquidator to provide all of the company's information such as the company's assets and creditors. All information provided must be supported by relevant documents. Ex-directors are required to complete a Statement of Affairs form which includes: • A brief description of the company's history • Details of the cause of the company's failure
• All company assets • All company liabilities • All shareholder information • Any legal claims pending by or against the company What is compulsory winding up Normally company is wound up because of unable to pay its debts. The company is wound up under an order of the court on the petition of: A. the company; B. any creditor; C. contributory; D.the liquidator; E. Minister of Domestic Trade and Consumer Affairs; F. Minister of Finance; G.Bank Negara Malaysia H.Registrar of Company. What is liquidation or companies winding up ? It is a process whereby the assets of a company are collected and realized in order to pay debts to the creditors. There are two types of winding up namely, compulsory and voluntary winding up. What is proof of debt? It is a document that states the amount of debts owing by a company to a person ( secured and unsecured creditor) and the statement must be supported by relevant documents. For example, where there is an agreement, it would be advisable to attach it.
What is the effect of winding up on a company A. Cessation of company's business B. Termination of contracts of employment C. Avoidance of disposition of company's assets D.Avoidance of transfer of shares E. Avoidance of uncompleted execution What is the effect of winding up towards contributory of the company The contributory is not personally liable towards the company's debts. However, the liquidator has power to direct the contributory to pay any unpaid shares.
voluntary winding up Voluntary winding up is whereby a company is wound up: A. when certain period of time was fixed for the duration of the company by expiration of Memorandum of Association (MOA) or Article of Association (AOA); B. when the MOA or AOA provide that the company is to be dissolved on certain events; C. when the company general meeting has passed a resolution requiring the company to be wound up voluntarily; or D.by special resolution in extraordinary general meeting. Pari-Passu – Section 292 Companies Act 1965 Subject to this Act, in a winding up there shall be paid in priority to all other unsecured debts : A. firstly, the cost and expenses of the winding up including taxed costs of a petitioner, remuneration of the liquidator and the costs of any audit carried out; B. secondly, all wages and salary; C. thirdly, all amounts due in respect of worker's compensation under any written law relating to worker's compensation accrued;
D.fourthly, all remuneration payable to any employee; E. fifthly, all amounts due in respect of contributions payable during the twelve months next before the commencement of the winding up; and F. sixthly, the amount of all federal tax assessed under any written law before the date of the commencement of the winding up or a assessed at any time before the time fixed for the proving of debts has expired.
Members’ Voluntary Liquidation (“MVL”) MVL is the liquidation of a solvent company where the directors must form an opinion that the company will be able to pay its debts in full within a period of twelve (12) months after commencement of winding-up as stated under Section 257 of CA 1965. To facilitate understanding on the MVL process, a checklist is included as Exhibit 1 to this publication for reference. An MVL is typically used where a solvent company has served its purpose and its members no longer wish to retain it as a corporate entity. It is also used where members wish to get back their investment into a solvent company.
Statutory declaration of solvency A company may be wound up voluntarily under the control of its members only if a 'Declaration of
Solvency' comprising a statement of its assets and liabilities has been made by a majority of the company’s directors within the period of five weeks immediately preceding the passing of a resolution to wind it up.
Although called the declaration of solvency, the declaration is not in fact of the general solvency of the company. What must be sworn is that the company can pay its debts in full with interest at the official rate within a period of not more than 12 months.
The directors must specify in the declaration the period within which the company will be able to pay its debts in full with interest.
Director(s) making a declaration that the company is able to pay its debts without having reasonable grounds to do so may be liable to a fine/imprisonment.
The declaration of solvency must be filed with the Registrar of Companies no later than 15 days after the passing of the winding-up resolution.
If, at any time during the MVL, the liquidator forms the view that the company is not going to be able to pay its debts in full with statutory interest as set out in the declaration of solvency, they must summon a meeting
of the creditors to place the company into a creditors voluntary liquidation. This meeting is known as a section 95 meeting.
An MVL will be said to have failed if it becomes necessary to convert it from a solvent winding up (an MVL) into an insolvent winding up (a CVL).
Creditor’s voluntary winding up CVL is the liquidation of an insolvent company where the directors will make a declaration stating that the company cannot by its reason of liabilities continue its business. Subsequent to that, a meeting of the company and its creditors will be summoned within one (1) month from the date of the declaration. This declaration must be lodged with the Registrar and the Official Receiver (“OR”) as stated under Section 255 of the CA 1965. There are two ways how a creditors winding up occurs: A. No declaration of Insolvency. Section 250(1) -provides that when this happen, the company must convene a meeting of creditors.
-This is called within 14 days of the proposal, Generally it is convened on the same day or the next day the proposal. -The company is then required to nominate a liquidator at the members meeting. Creditors are also entitled to nominate a liquidator. B. The appointment of liquidator by Members. A liquidator is appointed if the members form an opinion that the company will not be able to pay its debts in full within the period specified in the declaration when holding their meeting. A creditors meeting will be convened by the liquidator in this instance. S259(1).
Grounds for winding up The grounds upon which one can apply for a compulsory liquidation also vary between jurisdictions, but the normal grounds to enable an application to the court for an order to compulsorily wind-up the company are: -The company has so resolved -The company was incorporated as a corporation, and has not been issued with a trading certificate (or equivalent) within 12 months of registration -It is an "old public company" (i.e. one that has not reregistered as a public company or become a private
company under more recent companies legislation requiring this) -It has not commenced business within the statutorily prescribed time (normally one year) of its incorporation, or has not carried on business for a statutorily prescribed amount of time -The number of members has fallen below the minimum prescribed by statute -The company is unable to pay its debts as they fall due -It is just and equitable to wind up the company. In practice, the vast majority of compulsory winding-up applications are made under one of the last two grounds. An order will not generally be made if the purpose of the application is to enforce payment of a debt which is bona fide disputed. A "just and equitable" winding-up enable the ground to subject the strict legal rights of the shareholders to equitable considerations. It can take account of personal relationships of mutual trust and confidence in small parties, particularly, for example, where there is a breach of an understanding that all of the members may participate in the business, or of an implied obligation to participate in management. An order might be made where the majority shareholders deprive the minority of their right to appoint and remove their own director.
Commencement Date of Liquidation In liquidation, it is important to pay attention to the following dates: • Date of commencement of winding-up • Date of winding-up • Date when the liquidator takes over the affairs of the company. Each date related to winding-up will have different implication towards winding-up company as follows: Voluntary Winding-up Section 219 of CA 1965 states that the commencement of the winding-up of a company under voluntary winding-up shall be deemed to have commenced at the time of the passing of the resolution. In other cases the winding-up shall be deemed to have commenced at the time of the presentation of the petition of winding-up. Compulsory Winding-up The compulsory winding-up will only occur when the court order is obtained. Therefore, the date of the commencement of winding-up mentioned in Section 219 of CA 1965 will differ from the date that the court
orders the winding-up. Furthermore, the date where the liquidator takes over the affairs of the company from directors also may be different from the date of the court order winding-up as the liquidator is not capable of acting as a liquidator unless he has notified his appointment to the Registrar and given security to the Official Receiver as stated under Section 228 of CA 1965.
The duties and function of the Liquidator POWERS In most jurisdictions, a liquidator's powers are defined by statute. Certain powers are generally exercisable without the requirement of any approvals; others may require sanction, either by the court, by an extraordinary resolution (in a members' voluntary winding up) or the liquidation committee or a meeting of the company's creditors (in a creditors' voluntary winding-up). The liquidator would normally require sanction to pay creditors and to make compromises or arrangement with creditors. Without sanction (unless it is a compulsory winding-up) the liquidator may carry on legal proceedings and carry on the business of the company so far as may be necessary for a beneficial winding-up. Without sanction, the liquidator may, inter alia, sell company property, claim against insolvent contributories, raise money on the security of company
assets, and so all such things as may be necessary for the winding-up and distribution of assets.
DUTIES In compulsory liquidation, the liquidator must assume control of all property to which the company appears to be entitled. The exercise of their powers is subject to the supervision of the court. They may be compelled to call a meeting of creditors or contributories when requested to do so by those holding above the statutory minimum.
In a voluntary winding-up, the liquidator may exercise the court's power of settling a list of contributories and of making calls, and he may summon general meetings of the company for any purpose he thinks fit. In a creditor's voluntary winding-up, he must report to the creditor's meeting on the exercise of his powers.
The liquidator is generally obliged to make returns and accounts, owes fiduciary duties to the company and should investigate the causes of the company's failure and the conduct of its managers, in the wider public interest of action being taken against those engaged in commercially culpable conduct.
A liquidator who is appointed to wind-up a failing business should act with professional efficiency and not exercise the sort of complacency that might have caused the business to decline in the first place.
MISCONDUCT Where, during the investigation of the affairs of the company, the liquidator uncovers wrongdoing on the part of the management of the company, he may have power to bring proceedings for wrongful trading or, in extreme cases, for fraudulent trading.
However, the liquidator cannot normally enter into a champertous agreement to assign the fruits of an action to a third party offering to finance the litigation, if the right to said action accrued solely as a result of the liquidator's statutory duties, instead of being a right to action that had existed before the liquidator came on the scene.
The liquidator may also seek to set aside transactions which were entered into by the company in the time immediately preceding the company going into liquidation where he forms the view that they constitute an unfair preference or a transaction at an undervalue.
REMOVAL Depending upon the type of the liquidation, the liquidator may be removed by the court, by a general
meeting of the members or by a general meeting of the creditors.
The court may also remove a liquidator and appoint another if there is "cause shown" by the applicant for his removal. It is not normally necessary to demonstrate personal misconduct or unfitness for this purpose. However, it will be enough if the liquidator fails to display sufficient vigour in the discharge of his duties, for instance, by not establishing the current assets and recent trading of the company or in not attempting to secure favourable terms for the company in relation to the disposal of its assets.
STATUTORY PROVISION RELATING TO LIQUIDATOR
Act S252 S237
S244
Provision The court may delegate its power to the liquidator. Liquidator can hold and conduct meeting to ascertain the wishes of the creditors and contributories. The liquidator has the power to settle the list of contributories; to recify the register of member and collect and apply the assets.
S247
The liquidator has the power to make calls and adjust the right of contributories; the liquidator has the power to fix the time within which the debts and claims must be proved.
S277(5)
The liquidator has the right to access to books and records. However, the court order must be applied. Allows the liquidator to disclaim onerous property.
S296
