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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
companys 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).

Creditors 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