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Chapter Objectives After the completion of this chapter you should be able to understand amongst other things: the different types of legislation who may apply to liquidate a company the grounds for liquidation effect of winding up a company appointment of a liquidator who may be a liquidator powers of a liquidator priority on payment of debts


Perpetual succession is one of the distinguishing characteristics of a company: s 16(5). This means that a company continues to exist even though its members may die and its membership may alter from time to time.


A company continues to exist until its registration is cancelled and it is dissolved. Cancellation of registration or dissolution of a company usually occurs after the process of liquidation or winding up is completed.


The terms "winding up" and "liquidation" have the same meaning.

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Liquidations 1.4 The liquidation of a company is the process by which its assets are collected, its debts paid and the surplus, if any, distributed among its members. Until this process is completed, the company remains in existence as a legal entity. 1.5 Section 211 recognises two modes of winding up: voluntary winding up; and winding up by order of the court, also referred to as compulsory winding up. 1.6 Part X Division 2 of the Act, being ss 217-253, deals exclusively with compulsory winding up while Pt X Div 3, being ss 254-276, deals with voluntary winding up. In addition, Pt X Div 4, being ss 277-313, contains provisions applicable to both modes of winding up.

2.1 There are two forms of voluntary winding up: 2.2 members' voluntary winding up; and creditors' voluntary winding up.

Sections 258 and 259 deal only with members' voluntary winding up and ss 260263 deal with creditors' voluntary winding up. Sections 254-257 and 264-276 contain provisions applicable to both forms of voluntary winding up. solvent or insolvent. The appropriate form of voluntary winding up depends upon whether the company is

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Liquidations Members' voluntary winding up 2.3 A members' voluntary winding up is initiated by special resolution of the company: s 254, and can only proceed as such if the company is solvent. The members in general meeting then appoint a liquidator: s 258. 2.4 Before a members' 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 debts in full, within a period of 12 months after the commencement of the winding up: s 257(1). The declaration must be made on the prescribed form: Company Regulations, Sch 2, Form 66. If the company is solvent and the directors intend making a declaration of solvency, it must be made and lodged with the Registrar before the date on which the notices of the meeting at which the resolution for winding up is to be proposed, are sent out: s 257(3). There are severe penalties imposed on directors who make a declaration of solvency without reasonable grounds: s 257(4).

Creditors voluntary winding up 2.5 A creditors' voluntary winding up is only appropriate when the company is insolvent 2.6 A creditors' voluntary winding up, despite its name, cannot be initiated by the creditors. ways. No declaration of solvency A members' voluntary winding up is converted into a creditors' voluntary winding up, if the company is insolvent. This occurs in one of two

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Liquidations 2.7 After appointment of liquidator by members

The liquidator is of the opinion that the company is unable to pay its debts.

Who may apply? 3.0 Only the persons specified in s 217(1) can apply to the court to have a company compulsorily wound up. They are: the company; a creditor, including a contingent or prospective creditor, of the company; a contributory or any person who is the representative of a deceased contributory or the trustee in bankruptcy or the Official Assignee of the estate of a bankrupt contributory; a liquidator appointed in a voluntary winding up; the Minister pursuant to ss 205 or 218(1)(d); and the Central Bank in the cases of banks and finance companies under the purview of the Ministry of Finance.

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Liquidations Abuse of process 3.1 The court has an inherent jurisdiction to refuse a winding up petition which is vexatious or an abuse of process in Ng Ah Kway v Tai Kit Enterprise Sdn Bhd

Grounds for winding up 3.2 Under the Rules of the High Court an application for a compulsory winding up must be filed with the court together with affidavits in support. Where the court grants the application and makes an order winding up the company, the winding up is deemed to have commenced at the time of the filing of the application: s 219(2). 3.3 Winding up has serious consequences for the company, its members and creditors. The mere filing of an application can cause irreparable damage to the company. In recognition of this, the court will not make an order winding up the company unless the applicant satisfies it that at least one of the grounds for winding up contained in s 218(1) exists. 3.4 Even if a ground is established, the court still has discretionary powers to refuse the application. Indeed, the court has power to grant an injunction to prevent the filing of an application as an abuse of process. 3.5 The circumstances in which an injunction may be granted to restrain the filing of an application include: when it appears that the applicant does not come within the class of persons permitted to apply under s 217(1); as discussed above; and

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Liquidations when it appears that the application on its face does not allege the existence of one of the grounds in s 219(1) 3.6 Of the 11 grounds for winding up in s 218(1), the most common is s 218(1)(e), that the company is unable to pay its debts. This ground is discussed separately below. The grounds for a compulsory winding up are: Special resolution A company may be wound up where the members have by special resolution resolved that it be compulsorily wound up: s 218(1)(a). This ground is seldom relied upon in practice. Default in lodgement This ground, under s 218(1)(b) is only applicable to the winding of statutory report up of public companies with a share capital. Such companies which issue a prospectus for the first time, must hold a statutory meeting and lodge with the Registrar a copy of the statutory report provided to members: s 142. Failure to commence This ground, under s 218(1)( c) enables members to recover their business with one investment in the company if it fails to commence business or year ceases operation for the specified period. The court, exercising its discretionary powers, generally dismisses an application on this ground if it is opposed by a majority of members and the company's inactivity is explained: Re Metropolitan Railway Warehousing Co Ltd (1867) 36 LJ Ch 827. This ground may also be relied upon when the company engages in a new business, which is ultra vires its objects and ceases to carry on the business authorised by its main objects Members below two Unable to pay debts reduced t Where the number of members is reduced below two, the company may be wound up: s 218(1)(d). The inability of the company to pay its debts under s 218(1)(e). is the most common ground relied upon to wind up a company. This ground is discussed separately below; Directors acting in Where the directors have acted in the affairs of the company in

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Liquidations own interests their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever that appears to be unfair or unjust to other members the company may be wound up: s 218(1)(f). Inspector appointed Where an inspector appointed under Pt IX has reported that he or she is of the opinion that a company should be wound up because it cannot pay its debts; or it is in the interests of the public, the shareholders or the creditors: the company may be wound up under 218(1)(g). Specific event The company may be wound up where a fixed term has expired or a specific event envisaged in the memorandum and articles is attained requiring the company to be dissolved. This is particularly common in the cases of joint ventures where the parties incorporate a limited liability company for the purposes of carrying out specific projects; The just and A company may be wound up where the court is of the opinion that it is just and equitable that the company be wound up: s 218(1)(i). Banking requirements e Where a company carrying on the business of banking, or holding such licences, has contravened the provisions of, or has lost its licence, under either the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989 it may be wound up. equitable ground

4.1 Most of the companies, which are compulsorily wound up, are wound up under s 218(1)(e) on the ground that they are unable to pay their debts. In other words, they are wound up because they are insolvent.

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Companies are usually wound up on this ground on the application of creditors, though there is no reason why the other persons entitled to apply under s 218(1) cannot file an application on this ground. An inability to pay debts is also a ground for a winding up on the application of an inspector under s 218(1)(g),.

What is insolvency? 4.3 Under s 218(2)(c) the ground for winding up in s 218(1)(e) is established if the court, after taking into account the company's contingent and prospective liabilities, is satisfied that the company is unable to pay its debts. Insolvency in this context does not necessarily require proof that the company's liabilities exceed its assets. It means that the company is unable to pay its debts as they fall due. This requires consideration of the company's entire financial position and is not satisfied by evidence which merely suggests a temporary lack of liquidity: Lian Keow Sdn Bhd v Overseas Credit Finance (Malaysia) Sdn Bhd [1988] 2 MLJ 449. An important consideration is whether the company has sufficient assets in realisable form, which can be used to pay its debts as and when they fall due,Malayan Plant Pte Ltd v Moscow Narodny Bank Ltd

Deemed inability to pay debts 4.4 Under s 218(2) a company is deemed to be unable to pay its debts for the purposes of s 218(1) in three different situations. These are where: the company fails to pay a debt after being served a notice by a creditor which complies with s 218(2)(a). This notice is sometimes called a statutory demand and is discussed separately below;

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Liquidations 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; the court, after taking into account any contingent and prospective liabilities of the company, is satisfied that the company is unable to pay its debts. meaning of inability to pay debts in this context is discussed below. The

Statutory Demands 4.5 A company is presumed to be insolvent if it fails to comply with a statutory demand under s 218(2)(a). 4.6 A failure to meet the statutory demand is a simple method by which a creditor can establish the ground of insolvency under s 218(1)(e) and the most common way that creditors prove insolvency. 4.7 Section 218(2)(a) provides that a creditor who is owed a debt in excess of RM500 then due by the company, can serve a demand on the company requiring it to pay the sum so due. If the company has, for three weeks after service of the demand, failed to pay the sum or to secure or compound it to the reasonable satisfaction of the creditor, the company is deemed to be unable to pay its debts. 4.8 In these circumstances the creditor is not bound to give the debtor additional time to pay: Extraneous factors, such as economic circumstance and acute recession, are not relevant considerations for the court to take into account: Re Hong Huat Realty (Malaysia) Sdn Bhd; United Asian Bank Bhd v Re Hong Huat Realty (Malaysia) Sdn Bhd.

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Liquidations Form 4.9 To comply with that section a statutory demand must be in writing. While no special form of words is prescribed, it should refer to the section so as to warn the company of the possibility of a winding up application if the debt is not paid.

Amount 4.10 The demand must specify the precise amount which is due and payable. This must be in excess of RM500.

Service 4.11 Service must be personal service. This means that the statutory demand must come to the notice of the person upon whom it is served.

Defective Demands 4.12 A company served with a statutory demand may seek to set it aside because it contains a defect in the demand itself or for some other reasons. A demand may be alleged to be defective in any of the following situations: an irregularity a misstatement of an amount a misdcription of the a debt or other matter a misdescription of a person or entity.

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On creditors 5.1 A compulsory winding up does not commence on the date the court makes a winding up order. Under s 219(2) a compulsory winding up is deemed to commence at the time of filing the application for the winding up. 5.2 A voluntary winding up, however, commences at the time of passing of the resolution for voluntary winding up: ss 219(1) and 255(6). 5.3 The date of commencement of winding up has a significant effect on creditors for a number of reasons: After commencement of winding up, any disposition of the company's property, other than one made by the liquidator, is void, unless the court orders otherwise: s 223. Creditors cannot enforce any judgment or orders they have obtained after the commencement of winding up: s 224. Nor can any legal proceedings be brought against the company without leave of the court: s 222. The commencement of winding up is also the relevant date for the purposes of determining which preferences are voidable: s 293; and the validity of floating charges granted prior to that date: s 294. These are discussed below.

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Liquidations On the company 5.4 Whilst a company continues to exist as a legal entity when winding up commences, it is prevented from carrying on its business except for the purpose of winding it up. 5.5 The company's property continues to belong to it, but its powers to deal with it are severely restricted: s 223. 5.6 Whilst a company is in the process of being wound up, all documents issued or signed on its behalf must have the words "in liquidation" set out after its name: s 283.

On company employees 5.7 In the case of a compulsory winding up, publication of the winding up order serves as a notice of dismissal to the company employees: Re General Rolling Stock Co (1872) 7 Ch App 646. Where the liquidator wishes to continue their employment for a limited period, this dismissal notice may be waived: Re English Joint Stock Bank (1866) 3 Eq 203.

On receivers 5.8 Debenture-holders may appoint a receiver notwithstanding that the company's winding up has commenced: Re Henry Pound, Son & Hutchins (1889) 42 Ch D 402.

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Appointment of liquidators 6.1 A common feature of both voluntary and compulsory winding up is the appointment of a liquidator. It is the liquidator's function to carry out the winding up process, which leads to the eventual dissolution of the company. 6.2 In a compulsory winding up, a liquidator is appointed by order of the court when it makes the order for winding up: s 227. 6.3 The Official Receiver shall be appointed by the court to act as the provisional liquidator until an approved liquidator is put forward by either the meeting or creditors and contributories or by the court: s 227(2) and (3). 6.4 The applicant for winding up is required to obtain and file with the court the liquidator's consent to the appointment. 6.5 Where no liquidator is appointed by the court, the Official Receiver shall assume the office of liquidator for the company: s 227(4).


In a members' voluntary winding up, the liquidator is appointed by the general meeting of members: s 258. The liquidator is usually appointed at the meeting, which places the company in voluntary liquidation.


Prior to the appointment, the company must obtain the liquidator's consent in writing: s 10(4).

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Liquidations Who may be appointed as a liquidator? 6.8 A liquidator appointed by the court must either be the Official Receiver or an approved liquidator: ss 8(3) and 227. 6.9 There is no equivalent requirement in both a members' and creditors' winding up: s 10(2). Thus, a director or the secretary of the company could be appointed as the liquidator in a voluntary winding up. 6.10 All liquidators must be persons approved of by the Minister of Finance: s 8. The rationale of s 8 is to ensure that the person has sufficient experience and ability, and is a fit and proper person to act as liquidator having regard to the nature of the property or business of the corporation and the interests of its creditors and contributories.

Persons disqualified from being liquidators The statutory grounds 6.11 Under s 10(1) certain persons are disqualified from acting as liquidators without leave of the court. 6.12 Such persons include: persons who are not approved liquidators; persons who owe more than RM2,500 to the company being wound up or to a related corporation; officers or auditors of the company and their associates, the latter of which includes business partners and employees. The term "officer"

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Liquidations is widely defined in s 10(3) to include a person occupying such a position within the past 24 months; undischarged bankrupts; and persons convicted of fraud or dishonesty where the sanction includes a term of imprisonment exceeding three months. 6.12 These disqualifications do not apply in a members voluntary winding-up or a creditors voluntary winding-up where a resolution exempting the disqualification provisions has been passed: s10 (2).


The acts of a liquidator are valid notwithstanding any defect that may later be discovered in his or her appointment: s 268.


Removal by the court Section 266 provides that the court may, on cause show, remove the liquidator and appoint another liquidator. This means that the court has discretionary powers to consider a liquidators fitness for office and to remove him or her in appropriate circumstances.

Powers of the liquidator 6.15 When a company is placed in liquidation, the liquidator replaces the board of directors as an organ of the company and assumes all the powers of the board. 6.16 Because liquidators are also regarded as agents of the company, their actions bind the company. Like other agents, liquidators are generally not personally liable for contracts made on behalf of the company.

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Liquidations Statutory powers 6.17 Apart from the liquidator's powers as an agent, the Act sets out additional powers of liquidators. In the case of a compulsory winding up, a liquidator has the powers granted by s 236. 6.18 In addition, under s 252 and the Companies (Winding Up) Rules 1972, certain powers of the court are delegated to the liquidator. A liquidator's powers under s 236 include the following: to carry on the business of the company so far as is necessary for the beneficial winding up of that business; subject to the priorities set out in s 292, to pay any class of creditors in full; to make compromises with creditors and contributories with respect to their claims and liabilities; to bring or defend legal proceedings in the name of the company and to appoint a solicitor to assist; to sell or otherwise dispose of all or any part of the company's property; to sign documents on the company's behalf and use its common seal for that purpose; to appoint an agent to do any business that the liquidator is unable to do, or that it is unreasonable to expect the liquidator to do in person; and

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Liquidations to do all such other things as are necessary for winding up the affairs of the company and distributing its assets. 6.19 While a liquidator has power to commence legal action on the companys behalf, in Re Choong Khiaw Realty Co Sdn Bhd [1976] 2 MLJ 73, the Federal Court held that he or she has no power to recover moneys properly paid out by directors prior to the liquidation.

Powers of court delegated to liquidator 6.20 In relation to a compulsory winding up, s 252 delegates certain powers, which are personal to the liquidator and may not be delegated to other persons: These include powers with respect to: holding and conducting meetings to ascertain the wishes of creditors and contributories: s 237; settling the lists of contributories, rectifying the register of members where required and the collecting and applying the assets: s 244; the paying, delivery, conveyance, surrender or transfer of money, property or books to the liquidator: s 245; Making calls and adjusting the rights of contributories: s 247. This is subject to the limitations imposed being that the liquidator may not make any call without special leave of court or the sanction of the committee of inspection, and that he or she may not rectify the register of members without the special leave of court; and fixing a time within which debts and claims must be proved.

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Liquidations Powers of liquidator in a voluntary winding up 6.21 In the case of a voluntary winding up, s 269 authorises the liquidator to exercise any of the powers given by s 236 to a liquidator appointed in a compulsory winding up. 6.22 However, in the case of a members' voluntary winding up, the exercise of these powers is subject to the approval of a special resolution of the general meeting of members. 6.23 In a creditors' voluntary winding up, the liquidator must obtain the approval of the court, the committee of inspection, or the creditors, to exercise the powers in s 236.

Access to books and records 6.24 Under s 277(5), a liquidator may apply to the court for orders requiring certain persons to hand over books and records to which the company is prima facie entitled.

Power to disclaim onerous property 6.25 In some instances, the property of a company may be unsaleable or may subject the company to onerous obligations. For example, if the company has leased a building where it carried on business, the lease may oblige it to continue to pay rent after the business has ceased. 6.26 Accordingly, in order to preserve the remaining assets of the company, s 296 enables the liquidator to disclaim the lease or other onerous obligations on behalf

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Liquidations of the company. This includes any estate or interest in land, shares in corporations, unprofitable contracts or any other property that is unsaleable.

Creditors assistance to liquidators 6.27 Section 292(9) provides an incentive to creditors to give financial assistance to liquidators to pursue asset recovery proceedings. Such proceedings may include the recovery of voidable preferences from particular creditors or proceedings against directors for breach of fiduciary duty. Where creditors provide such assistance the liquidator may apply to the court for an order that the contributing creditors receive a higher dividend from the company's assets than they would otherwise be entitled. 6.28 The liquidator's obligations are, because of the nature of the position, wider and more strict than the duties imposed upon the replaced directors. In the Australian case of Re Partridge [1961] SR (NSW) 622, the court described the general duties imposed on a liquidator: 6.29 Speaking generally, the liquidator's principal duties are to take possession of and protect the assets, to make lists of contributories, to have disputed cases adjudicated upon, to realise the assets and to apply the proceeds in due course of administration amongst the creditors and contributories. 6.30 Whilst s 237(4) permits liquidators to use their own discretion in the management of the affairs and property of the company and the distribution of its property, they are nevertheless under a fiduciary duty to act honestly and to exercise a reasonable degree of care and diligence.

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Liquidations 6.31 Where a liquidator is paid professionally, he or she should observe a high standard of care and skill, commensurate with his or her professional standing: Vasudevan s/o Narayan Nair v ICAB Pte Ltd [1987] 2 MLJ 563.

Specific duties of liquidators Proper administration 6.32 One of the first tasks of a liquidator is to open a bank account, known as the liquidator's general account, into which money received by the liquidator is deposited. 6.33 A separate account is required for each company under liquidation. In the case of a compulsory liquidation, the court's order specifies the particular branch of a bank where the account is to be kept. 6.34 A liquidator who merely deposits money received into his firm's general trust account is regarded as being in breach of this duty: Commissioner for Corporate Affairs v Harvey [1980] VR 669. 6.35 Liquidators must notify the Registrar and the Official Receiver of their appointment within 14 days: s 280. 6.36 A liquidator is also under a duty to maintain a proper record of the winding up. 6.37 Such records include: books recording minutes of meetings of contributories and creditors: s 277; and

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accounts in the prescribed form: Companies Regulations, Sch 2, Form 75, which must be prepared every six months and lodged with the Registrar and Official Receiver: s 281.

Collect the company's assets 6.38 After appointment, a liquidator is required to take into custody or control all the property to which the company is or appears to be entitled: s 233. 6.39 In certain circumstances the liquidator can take legal action to recover property, which the company disposed of before the commencement of winding up.

Realise assets 6.40 Because the purpose of a winding up is to distribute the company's assets to creditors and contributories, the liquidator is under a duty to realise the company's assets. To this end, the liquidator is given powers to sell all the company's property and to execute documents in its name: s 236. The liquidator, in exercising these powers is under a duty to obtain the best possible price for the property. A company's property does not always have to be sold in a winding up. For example, the members may resolve to wind up a solvent company voluntarily for the sole purpose of dividing up its unrealised assets among themselves.

Distribute assets 6.41 Liquidators are also under a duty to repay the company's debts and to distribute any surplus assets amongst contributories. In the English case of Re Exchange

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Liquidations and Commodities Ltd [1987] 2 All ER 272, the court held that a liquidator is not bound by any representations made by directors to creditors prior to the liquidation A liquidator has a duty to invite proofs of claims by advertising. His or her duty is to admit all valid claims. These duties are considered below.

Report of breaches of the Act 6.42 Certain persons connected with a company are guilty of offences in relation to it or are guilty of fraud and concealment of material facts and other such matters which in his or her opinion are desirable to be brought up, for example, breach of duty or breach of trust, the liquidator is obliged under s 235 to report the matter to the court.

7.1 We referred earlier to the duty of liquidators to collect the assets of the company available for distribution to creditors and members. The assets available include all property owned by the company at the date of commencement of the winding up. In addition, the available assets also include: amounts due from contributories pursuant to s 214 amounts recovered from creditors of an insolvent company who received preferential payment of their debts: ss 293 and 294; and excess profits from sales to or from the company recovered from persons connected with the company: s 295.

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Liquidations 7.2 The assets available for distribution are also increased in circumstances where officers of the company are ordered to pay its debts under the fraudulent trading provision: s 304.

Recovery of voidable preferences from creditors 7.3 Under s 223, dispositions of the company's property made after the commencement of a compulsory winding up are void, unless validated by the court. 7.4 The question of validating such a transaction is at the discretion of the court, following an application by the person seeking an order for validation: Kimoyama Elekrik (Malaysisa) Sdn Bhd v Metrobuilt Construction Sdn Bhd [1990] 3 MLJ 309. 7.5 In some instances, liquidators of insolvent companies are able to recover dispositions of property made by the company before the commencement of winding up. 7.6 Section 293 deals with such undue preferences. That section incorporates the provisions of s 53 of the Bankruptcy Act 1967, by giving the liquidator the power to recover the value of certain pre-liquidation dispositions of the company's property from creditors. 7.7 These dispositions are referred to as preferences. Section 293 is designed to preserve the sanctity of the pari passu principle by which creditors in a winding up participate equally in the assets available for distribution: Sime Diamond Leasing (Malaysia) Sdn Bhd v JB Precision Moulding Industries Sdn Bhd (In Liq).

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Liquidations What is a preference? 7.8 S 53 of the Bankruptcy Act 1967: (which applies to companies), a preference is: a conveyance or transfer of property, a charge on property, a payment made or an obligation incurred; made by a debtor namely, the company; which is unable to pay its debts as they become due from its own money; in favour of a creditor; which is made with a view to giving that creditor a preference, priority or advantage over other creditors; and which was executed, made or incurred within six months of the commencement of winding up.

Inability to pay debts 7.9 Not all transactions, which have a preferential effect are avoided under s 53(1).

7.10 The liquidator must establish that, at the time it was entered into, the company was unable to pay its debts as they become due from its own money. 7.11 The test of insolvency is not whether the company's debts exceed its assets,Lian Keow Sdn Bhd v Overseas Credit Finance (Malaysia) Sdn Bhd

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Liquidations Protecting preferences 7.12 Once a preference is established under s 53(1), a creditor is afforded protection by proving that he or she received the preference in good faith and for valuable consideration: s 53(2). 7.13 Section 294 provides that a floating charge created within six months before the commencement of winding up is invalid except to the amount of any moneys paid to the company at the time of, and in consideration for, the charge together with interest at 5 per cent per annum or such other rate as is prescribed. 7.14 The floating charge is not invalid if the creditor proves the company was solvent immediately after the creation of the charge. While the creation of the charge need not be contemporaneous with the consideration provided, there should nonetheless not be an excessively long intervening period between the two: Re Columbian Fireproofing Co.

Recovery of excess profits on sales to or by a company 7.15 Sections 295(1) and (2) permit the liquidator to recover excess on a sale to the company, or a deficiency on an acquisition from it, over the value of any property, business or undertaking, if the sale or acquisition took place within two years before the commencement of the winding up. 7.16 These provisions enable the liquidator to recover the excess or deficiency where the property was sold or acquired by a director at the time of the sale or acquisition, or by a related corporation in which the director of the company was also a director at the time of the sale or acquisition.

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8.1 One of the tasks of a liquidator is to divide the company's assets among those persons entitled to them. If the company is solvent, these persons are its creditors and members. 8.2 The creditors are paid first, then the surplus is distributed among the members. Where the company being wound up is insolvent, only the creditors are entitled to share in its assets.

Proof of debts 8.3 Creditors must prove their debts in order to have any entitlements. In the case of solvent companies, s 291(1) determines which debts are admissible to be proven against the company. These include all debts and claims against the company. 8.4 If the company is insolvent, the provable debts are determined by reference to the provisions of the Bankruptcy Act 1967, the provisions of which are similar but not identical to s 291(1).


Secured and unsecured debts 9.1 The policy of the Act is that unless otherwise provided, all provable debts rank equally and if there are insufficient funds available to meet them all in full, they are paid proportionally. The Act distinguishes between secured and unsecured

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Liquidations debts. A secured creditor need not prove his debt in a winding up and wait for payment with other unsecured creditors. 9.2 Generally, secured creditors are paid ahead of unsecured creditors. However, secured creditors may prove their debts where the debts exceed the value of the property secured. When secured creditors prove for their debt, they lose their security and rank equally with the unsecured creditors.

The Parri Passu rule 9.3 One of the most important principles of insolvency law is the general rule that all creditors participate equally in the distribution of the companys assets on the winding up of the company. 9.4 From the commencement of winding-up, the battle for recovery of debts by creditors comes to an end. It is replaced by the pari passu principle, which provides for an orderly distribution of the proceeds of assets to all creditors on an equal basis. 9,5 The pari passu principle is set out in s 264 of the Act, which provides that except for certain priority payments, all debts proved in a winding up rank equally.

Preferential debts 9.6 Section 292 ranks the debts of particular classes of unsecured creditors in order of priority. The creditors with priority are known as preferential creditors and their debts referred to as preferential debts. The preferential creditors are also, as between themselves, ranked in priority. The scheme of priorities is only relevant if the company is insolvent and there are insufficient funds to pay all unsecured creditors in full.

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Where this is the case, preferential creditors are paid in full before any amount is paid to the others. If there is insufficient to meet the claims of all preferential creditors of a particular rank, they are paid proportionally.


The debts of preferential creditors are listed, in order of their priority, in s 292(1). They are: first, the costs, charges and expenses of the winding up. This includes the costs of the applicant who petitioned for winding up and the remuneration of the liquidator. This is given the highest priority on the basis that insolvent companies would rarely be wound up if this were not the case; secondly, wages and salaries in respect of services rendered to the company by employees within a period of four months from the commencement of winding up of the company. These are entitled to priority only in respect of the first RM1,500 due to each such employee; thirdly, all amounts due in respect of workers' compensation, where the liability arose before winding up; fourthly, all amounts which are due on or before winding up, with respect to vacation leave accrued; fifthly, any contributions accruing over the past 12 months prior to the commencement of winding up to any employee superannuation or provident or such approved retirement benefit schemes under the federal law relating to income tax; and sixthly, priority is given to all federal taxes, which have been assessed before the time fixed for the proving of debts has expired.

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