Topic  Winding Up

11
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Elaborate the meaning of voluntary and compulsory winding up;
2. Compare members' voluntary winding up and creditors'
voluntary winding up;
3. Explain the various procedures governing voluntary and
compulsory winding up; and
4. Apply the relevant procedures on voluntary winding up and
compulsory winding up.

 INTRODUCTION
Winding up is the process of closing down a companyÊs business. Under the
Malaysian CA 2016, there are two primary methods of winding up as illustrated
in Figure 11.1.

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Figure 11.1: Methods of winding up

11.1 VOLUNTARY WINDING UP

Voluntary winding up refers to the process of closing down a business. It is initiated
by the members voluntarily. A liquidator will be appointed to oversee the winding up
process including selling the companyÊs assets to pay off creditorsÊ debts if any, and
returning the surplus to the shareholders as part of their capital contributions. A
liquidator is considered as an agent of the company and not an officer of the court nor
individual members of the company (Chan, Koh & Ling, 2006).

MembersÊ voluntary winding up can be converted to creditorsÊ voluntary winding

up. This happens when the liquidator who was appointed under the membersÊ
voluntary winding up is of the opinion that the company is not able to fully settle
its debts contrary to the solvency declaration signed by the Board of Directors at
the time when the resolution for the membersÊ voluntary winding up was
proposed.

11.1.1 Members’ Voluntary Winding Up

MembersÊ voluntary winding up can only be initiated when the company is
solvent. There are many reasons for which a resolution for voluntary winding up
is moved. For example, the company may be dormant or inactive for quite some
time but still needs to comply with all statutory requirements of a registered
company and closing down the business is the best way to cut down unnecessary
administrative costs such as the payment of annual fees (Aiman Nariman &
Effendy Othman, 2018).
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When a membersÊ voluntary winding up is proposed, the law requires a director

or the majority of directors to make a written declaration that that the directors
have made an inquiry into the affairs of the company and are of the opinion that
the company is able to pay its debt in full within a period not exceeding 12 months
after the commencement of the winding up (Section 443). The solvency declaration
must comply with the following requirements:
(a) Must be made during the BoardÊs meeting by a director (single company) or
majority of the directors if the company has more than one director;
(b) Declaration by a director or majority of directors must be made before the
date on which the notice of the meeting to move for a voluntary winding up
was sent out to the members;
(c) The declaration must be made within five weeks immediately preceding the
passing of resolution for voluntary winding up;
(d) The declaration must be accompanied by a statement of affairs of the
company setting out the following:
(i) The assets of the company and the amount expected to be realised;
(ii) The liabilities of the company; and
(iii) The estimated costs of winding up (Aiman Nariman & Effandy
Othman, 2018).
(e) The declaration should be lodged with the Registrar before the date on which
the notice of meeting to consider the voluntary winding up is sent out to the
members.

The membersÊ voluntary winding up shall commence at the time of passing a

special resolution to wind up the company. The membersÊ meeting must be
convened at a date not later than 5 weeks from the date of the BoardÊs meeting.
Since membersÊ voluntary winding up requires a special resolution, the notice of
at least 21 days before the date of the meeting should be given to the members of
the company.

11.1.2 Creditors’ Voluntary Winding Up

CreditorsÊ voluntary winding up can only be initiated when the company is in the
state of insolvent. The law requires the directors to give a written declaration
(declaration of insolvency) which is slightly different from the solvency
declaration under membersÊ voluntary winding up. The directors must affirm that:

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(a) The company cannot continue its business as a result of its liabilities; and
(b) The meeting of members and creditors has been summoned within 30 days
from the date of the declaration.

The law also requires the declaration of insolvency that was made by the directors
to be lodged with the Registrar and the Official Receiver, followed by the
appointment of an interim liquidator whose function is to manage the companyÊs
affairs during the process of winding up. The appointment of an interim liquidator
continues for a period of 30 days from the date of the appointment, subject to any
extension given by the Official Receiver or until a liquidator is appointed,
whichever occurs first. The notice of appointment of an interim liquidator must be
lodged with the Registrar within 14 days from the date of the appointment
(Section 513).

Contrary to membersÊ voluntary winding up, the declaration of insolvency must

be made by all of the directors in the Board meeting. The declaration made must
be accompanied by a statement of affairs of the company setting out important
information such as the assets and liabilities of the company, and the estimated
costs and expenses of winding up. The declaration of insolvency must also be
submitted to the Registrar. The creditorsÊ voluntary winding up commences when
the declaration of insolvency is lodged with the Registrar.

One of the important features of the creditorsÊ voluntary winding up is the need
to call for the creditorsÊ meeting. The purpose of the creditorsÊ meeting is to
disclose the companyÊs affairs and circumstances leading up to the proposed
winding up. The creditorsÊ meeting must be summoned on the day or one day
after the membersÊ meeting in which the creditorsÊ voluntary winding up is
proposed.

A director of the company will be appointed to attend the creditorsÊ meeting

together with the companyÊs secretary. The appointed director shall lay before the
meeting a full statement of the companyÊs affairs containing information relating
to the assets, the method of valuation of the assets, the list of creditors and the
estimated amount of their claims.

The law allows members to nominate any person as a liquidator at the membersÊ
meeting. However, creditors may affirm the membersÊ nomination or put forward
their own nominees. If both members and creditors nominate different persons,
the creditorsÊ choice shall prevail over the membersÊ choice (Aiman Nariman &
Effendy Othman, 2018)

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The creditorsÊ voluntary winding up method also allows the members to set up
the appointment of a Committee of Investigation (COI), which consists of not more
than five members (Section 450(4)). According to Aiman Nariman & Effendy
Othman (2018) the duty of the COI is to protect the interest of the creditors and to
assist the liquidator in carrying out his duties. The power of the COI is to
determine the liquidatorÊs remuneration, to approve the continuance of the
directorÊs power after the appointment of the liquidator and to approve the
exercise of certain power by the liquidator under the Twelfth Schedule of
voluntary winding up by the court.

11.1.3 Effects of Voluntary Winding Up

A company must cease to carry out its business upon the commencement of the
winding up except when the liquidator affirms that the continuance of the business
is beneficial for the winding up (Section 442(1)). The liquidator may carry out the
business for not more than 180 days except with the approval of the members by
passing a special resolution or by the approval of the court or COI (for creditorsÊ
voluntary winding up).

The power of the director ceases upon the commencement of the winding up
unless the liquidator or members, with the consent of the liquidator, approves the
continuance of the power (Aiman Nariman & Effendy Othman, 2018).

No actions or proceedings can be taken against the company after the

commencement of the winding up except with the leave of the court (Section
451(2)). The requirement to obtain the leave of the court is to avoid any
unnecessary or frivolous litigation against the company, which may result in the
depletion of the companyÊs assets (Aiman Nariman & Effendy Othman, 2018).

Section 451(1) of CA 2016 prohibits any attachment, sequestration, distress or

execution to be levied on the companyÊ assets after the commencement of the
creditorsÊ voluntary winding up.

Section 442(3) of CA 2016 prohibits any transfer of shares or alteration of the status
of members upon the commencement of the winding up. This is to prevent the
members from evading their liabilities by transferring their shares to someone else
after the winding up has commenced (Aiman Nariman & Effendy Othman, 2018).

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SELF-CHECK 11.1
1. When can membersÊ voluntary winding up and creditorsÊ voluntary
winding up be initiated?

2. What are the effects of a voluntary winding up?

11.2 COMPULSORY WINDING UP (BY COURT)

Compulsory winding up of a company can be done through a court order. Section
464(1) of CA 2016 lists down a number of persons who can apply for a petition to
the court to wind up a company. They include the company, any creditor,
liquidator and the registrar, among others. Compulsory winding up is a common
method for creditors to apply for a winding up of a company due to the companyÊs
failure to settle its debts.

Section 464(1)(b) also extends the locus standi to a contingent or prospective

creditor. The law also allows the company itself to bring a winding up petition to
the court, for example, if it is not feasible to obtain the consent of all directors (for
declaration of insolvency) in the case of creditorsÊ voluntary winding up (Aiman
Nariman & Effendy Othman, 2018).

11.2.1 Grounds for Compulsory Winding Up

Section 465(1) of CA 2016 stipulates certain grounds in which a compulsory
winding up can be presented including, but not limited to, the following:
(a) A special resolution has been passed to wind up the company by the court;
(b) The company does not commence business within a year from its
incorporation;
(c) The company has no member;
(d) The company is unable to pay its debts; and
(e) The company is used for the furtherance of any unlawful purpose or any
purpose that is prejudicial to peace, welfare, security, public interest and the
like.

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The companyÊs failure to settle its debts is a common ground for creditors to
present a petition to the court to wind up the company. By virtue of Section 466 of
CA 2016, the inability to pay its debts arises as a result of three situations:
(a) The company is indebted with a sum exceeding the amounts prescribed by
the Minister and a creditor has served a notice of demand to the company.
Following that, the company had failed to settle the debt within 21 days after
the service of the notice of demand. According to the Federal Government
Gazette dated 26 January 2017 on the Prescription of Amount of
Indebtedness of Company, the limit amount prescribed by the company is
that exceeding RM10,000 (Aiman Nariman & Effendy Othman, 2018). The
winding up petition should be filed in the court within six months from the
expiry date of the notice of demand;
(b) Execution or other process issued based on a judgement, decree or order of
any court in favour of a creditor of the company is returned unsatisfactorily
in whole or in part; or
(c) If the creditor is able to prove to the satisfaction of the court that the company
is unable to settle its debt taking into consideration both the contingent and
prospective liabilities of the company.

11.2.2 Effects of Compulsory Winding Up

During the period between the date of the presentation of the winding up and the
date of the court order of the winding up, certain dealings with the assets are
prohibited, including the following:
(a) Any disposition of the property of the company unless with the approval of
the court except for disposition made by the liquidator or interim liquidator
in accordance with the power conferred to him under the CA 2016;
(b) Any transfer of shares and alteration of the status of the members without a
court order;
(c) Any attachment, sequestration, distress or execution levied against the
companyÊs assets; and
(d) Any settlement of the companyÊs debt in favour of any creditor within six
months immediately before the submission of the winding up petition
(Section 528).

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When the order of the winding up has been made by the court, the company is not
allowed to carry on its business as usual unless the liquidator is of the opinion that
the continuance of the business is beneficial for the winding up. The liquidator
may cause the company to carry on its business for not more than 180 days except
with the approval of the court or COI (Aiman Nariman & Effendy Othman, 2018).
In order to protect the interests of the creditors and to prevent the dissipation of
the companyÊs assets, no proceedings can be commenced against the company
except with the leave of the court. This includes any attachment, sequestration,
distress or execution, which have not been completed before the winding up order
is given by the court. The order of winding up by the court will result in automatic
termination of the employment contract between the company and its employees
simply because the company no longer has the power to deal with the companyÊs
assets (Aiman Nariman & Effendy Othman, 2018).

11.2.3 Duties and Functions of a Liquidator

The main duty of a liquidator is to ensure that the winding up of the companyÊs
affairs and the distribution of the companyÊs assets proceed smoothly. The other
duties and functions of the liquidator include the following:
(a) Taking custody or control over the companyÊs assets which includes
recovering the companyÊs assets from or pursuing legitimate claims against
third parties and contributories;
(b) Ascertaining the genuineness of the debts to the creditors and ranking the
priority of claims;
(c) Selling all the companyÊs available assets, using the proceeds to pay off the
creditorsÊ debts and returning the surplus to the contributories; and
(d) Ascertaining the possible causes of liquidation especially in the case of
insolvency. This includes examining the officers of the company or any
person having possession of the companyÊs property or indebted to the
company, or examining the promoters or directors of the company to
ascertain whether there is any wrongdoing or fraud in relation to the affairs
of the company. The company may proceed with legal actions against the
promoters or directors for the losses suffered by the company.

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SELF-CHECK 11.2

1. What are the effects of winding up to a company?

2. Differentiate between voluntary and mandatory winding up.

3. What are the duties and functions of a liquidator?

ACTIVITY 11.1

CD Sdn Bhd is a private limited company that was established in 2016. In

2018 the court granted an order to wind up the company due to its
inability to settle creditorsÊ debts. Explain the effects of the compulsory
winding up in the myINSPIRE online forum.

 Winding up is the process of closing down a companyÊs business.

 Winding up methods can be categorised into voluntary winding up and

compulsory winding up.

 Voluntary winding up can be further categorised into membersÊ voluntary

winding up and creditorsÊ voluntary winding up.

 Members can only initiate the membersÊ voluntary winding up when the
company becomes solvent.

 For membersÊ voluntary winding up, a director or majority of the directors

must make a solvency declaration.

 CreditorsÊ voluntary winding up can only be initiated when the company is

insolvent.

 For creditorsÊ voluntary winding up, a declaration of insolvency must be made

by all the directors.

 The creditorsÊ voluntary winding up requires the call for a creditorsÊ meeting
and the creditors may nominate any person as the liquidator.

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 A company can also be wound up by court order.

 The CA 2016 lists down a number of persons who can apply to the court for
the company to be wound up. In addition, there are certain grounds on which
a winding up order can be applied to the court.

 In practice, compulsory winding up through court order is a common method

for creditors to dissolve the company due to the companyÊs inability to the pay
off its debts.

 A liquidator has the duty to oversee and manage the winding up process of a
companyÊs affairs including selling the companyÊs asset and settling the
creditorsÊ debts.

Committee of investigation (COI) MembersÊ voluntary winding up

Compulsory winding up Voluntary winding up
CreditorsÊ voluntary winding up Winding up
Liquidator

Aiman Nariman, & Effendy Othman. (2018). Malaysia company law: Principles
and practices. Netherlands: Wolters Kluwer.

Chan, C. C. B, Koh, T. N. P, & Ling, P. S. W. (2006). Chan & Koh on Malaysian

company law: Principles & practice. Petaling Jaya, Selangor, Malaysia: Sweet
& Maxwell Asia.

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