WINDING UP

AZAHARI ABDUL AZIZ

LAW DEPARTMENT
UiTM TERENGGANU
INTRODUCTION

• S.20(b) a company’s existence will end only when it is removed from the
register.
• One of the ways to remove a company from the register, is by winding up
the company.
• Winding up: a process where liquidator will sell of the company’s assets
(realize) and distribute the proceeds among the company’s creditors and if
there is any excess, will be given to the members.
• Ultimate aim: to pay off any debts before the company’s life span is
terminated/deregistered. It is also known as “liquidation”.
• It usually occurs when the company want to end its life or upon the
application of the creditors.
TYPE OF WINDING UP

1) Voluntary Winding-Up (VWU)

• Takes place when the company is solvent and the liquidator is
appointed by the members.
• 2 types of VWU – S.432(2) :
(a) Members voluntary winding up (MVWU)
(b) Creditors voluntary winding up (CVWU)
• Takes place where the company is solvent and the liquidator is
appointed during the members’ meeting.
• S.4: ‘members’ voluntary winding up’ as a winding up under
Subdivision 4 of Division 1 of Part IV, where a declaration has been
made and lodged under S.443.
• Why MVWU? S.439:
(a) Fixed duration;
(b) Occurrence of any event which lead to the winding up;
(c) Members passed a special resolution to wind up the company
• A voluntary winding up shall commence:
(a) Where a provisional liquidator has been appointed before the resolution
for voluntary winding up was passed S.441(1)(a), and
(b) In any other case, at the time of passing of the resolution for voluntary
winding up – S.441(1)(b)

• The resolution may be of two types:

(a) Ordinary resolution – it is passed when the articles provide that the
company is to be wound up when a specified purpose has been achieved or
a specified period has elapsed.
(b) Special resolution – it requires no ground for winding up and is used in
any other case such as a solvent liquidation.
Two Types Of Voluntary Winding Up

1. Members voluntary winding up

• The company is solvent.
• By passing the members’ resolution to initiate the MVWU, it signifies the
date of commencement of winding up – S.441(1)(b).
• Notices of the general meeting must be sent out in order to pass the
members’ resolution to wind up the company. It can be either special
resolution or where the constitution provides for an event where the
company is to be dissolved, then a resolution will be passed at a general
meeting requiring the company to be wound up voluntarily.
• This resolution must be passed within 5 weeks after the making of the
declaration of solvency – S.443(3)(b).
• At the members’ meeting, a liquidators will be appointed. Please see
S.446(2) for his powers.
Who is not allowed to be appointed as liquidator?

• S.433(a)-(h)
• Is not an approved liquidator.
• Is indebted to the company not exceeding RM25,000.
• Is an officer/partner/employer/employee of the company.
• Becomes bankrupt.
• Assigns his assets for the benefit for his creditors or makes
arrangement with his creditors.
• Is convicted of an offence involving fraud or dishonesty.
Functions of a Liquidator

• To take possession of the company’s assets

• To realise/liquidate the assets (selling the assets to meet the demand
of the creditors)
• To work out what debts are payable by the company and any valid
claims that exist against the company
• To distribute the proceeds of the realised asset among creditors
• If got surplus, to distribute these liquidated assets among members
(ordinary vs preference, if any)
• Finally, to bring about the de-registration of the company.
Duties of a Liquidator

• Taking into his custody and control all properties and assets of the
company
• Conduct investigation into the company’s affairs
• Collecting and administering the company’s assets
• Keeping proper books, entries and minutes of proceedings at
meetings.
• Lodge various notice and report with SSM
2. Creditors’ voluntary winding up
• The company is insolven and the liquidator is appointed by the creditors at the creditors’
meeting.
• CONVERSION FROM MVWU TO CVWU: It can also happen when the liquidator who has
been appointed by the members discover that the company will not be able to pay or
provide for the payment of its debts in full within the period not exceeding 12 months
from the date of commencement of the winding up.
• Then, liquidator shall call for the creditors’ meeting and lay before the meeting the
statement of assets and liabilities of the company – S.447(1).
• S.440 - Instead of making Declaration of Solvency, the directors will make a statutory
declaration that state:
a. The company by reason of its liabilities continues its business; and
b. That meetings of the company and of its creditors have been summoned for a date
within 30 days of the declaration.
Declaration of Solvency – S.443

• The directors will make a declaration that the they have made an inquiry into the affairs of the
company; and
• At the meeting of directors, they have formed an opinion that the company will be able to pay its
debts in full within period not exceeding 12 months after the commencement of the winding up.
• Made by the sole director or the majority directors of the company – S.443(1)
• This declaration is known as “Declaration Of Solvency”.
• A statement of affairs of the company must be attached to the declaration containing the
following particulars:
(a) The assets of the company and the total of amount expected to be realised;
(b) The liabilities of the company; and
(c) The estimated expenses of winding up.
• After the declaration above has been made, the company must then lodge with the ROC before
the notice of general meeting are sent to the members informing the intention (to wind up the
company).
Compulsory Winding Up

• The company is insolvent.

• The liquidator is appointed by the creditors.
• Requires an order from the court.
• The difference between a winding up by a court and voluntary
winding up lies in the manners in which the winding up is initiated.
• A winding up by the court is initiated by the presentation of a petition
to the court by a party who is entitled to do so, based upon one of
the grounds set out in the Act.
GROUNDS TO WIND UP.

1. Special Resolution.
• The company has passed a special resolution that the company be wound up by the court – S.465(1)(a). It is
immaterial whether the company is solvent or insolvent.

2. Default In Lodgement Of Statutory Declaration Of Compliance

• S.464(2) and S.465(1) provide that a contributory of the company or the Minister may present a petition to
wind up the company. To be eligible to petition to wind up the company on this ground, the contributory
must fulfill one of the conditions listed in S.464(2)(a).

3. Failure To Commence Business Or Suspends Business

• S.465(1)(c) provides that the court may order the company to wound up if a company is incorporated to
trade, and it is does not commence business within one year of its incorporation. The one-year grace period
will commence from the day the company is issued with the notice of registration.
• S.465(1)(c) also provides that the court has the discretion to wind up the company if the company ceases its
business for one whole year.
4. No Member
• S.9 provides that the minimum number of members in a company is one. It is immaterial whether the
company is a public or private company, limited or unlimited. S.465(1)(d) also provides that a company with
no member is subject to be wound up by the court.

5. Unable To Pay Its Debts

• S.466(1): Three Circumstances:
(a) The creditor is owed a sum exceeding RM10,000 and pay within 21 days after the service of the demand.
S.466(2) states that if the company failed to do so, the creditor may file the petition to wind up the company
within six months from the expiry date of the notice of demand.
(b) Secondly, the creditor has obtained judgment against the company. Though the creditor has executed the
judgment, the execution did not meet the net sufficient proceeds to satisfy the judgment sum.
(c) Thirdly, the court is satisfied that the company is unable to pay its debt after taking into account the
company’s contingent and prospective liabilities.
• In other words, the company’s liabilities are more than its assets.
7. Directors Unfair Or Unjust To Other Members
• S.465(1)(f) - the directors have acted in the affairs of the company in the directors' own interests rather than
in the interests of the members as a whole, or acted in any other manner which appears to be unfair or
unjust to members.
• In Re Cumberland Holdings Ltd (1976) the Court held that the plaintiff need not prove that the whole board
of directors have acted in their own interests. It is sufficient to show that the majority acted in their own
interests.

8. Expiry Of Term/Event Stated In The Constitution

• The company’s constitution has fixed the duration of the company and the period has expired; or the
company’s constitution has provided that the company is to be dissolved upon the occurrence of a certain
event and such event has occurred.

9. Just and Equitable

• S.465(1)(h) provides that a company may be wound up by the court if the court is of the opinion that it is
just and equitable to do so.
SITUATIONS WHERE THE COURTS HAVE ORDERED
WINDING UP
1. Oppression
• A member is oppressed or treated unfairly by the controlling members, he
may apply to court for relief under S.346.

Loch v John Blackwood Ltd (1942)

The company failed to hold general meetings and make available the
company’s accounts to the members. These omissions were to suppress
information about the company to enable the controlling members to
acquire the company’s shares at an undervalued price. According to the
court, this was oppression against the minority member and thus he had the
standing to petition to wind up the company.
2. Breakdown of mutual trust
• Where the company is small and there was an understanding among the members on
the management and operation of the company, such understanding should be upheld. If
a member is deliberately excluded from the management in contravention of the
understanding, he may petition to wind up the company.

Ebrahimi v Westbourne Galleries Ltd (1973)

A private company was incorporated to take over the partnership of E and N. Both held 500
shares in the company and shared the profits on an equal basis. N’s son joined the
company. N and E transferred 100 shares each to N’s son. N and son passed a resolution to
remove E as a director of the company. E petitioned for the company to be wound up.
Held: the majority shareholders should have acted in a way which is consistent with the
understanding of the shareholders at the time the company was incorporated. The
majority shareholders did E a wrong when they removed him from the position of director.
3. Main object of the company cannot be achieved or has been departed
from
• S.35(2) - ”if the constitution sets out the objects of the company, the
company shall be restricted from carrying on any business or activity that is
not within those objects.

Re German Date Coffee Co (1882)

The company was incorporated to work on a patent to manufacture a coffee
substitute from dates. It was discovered that this could not be done.
Held: it was just and equitable to wind up the company as the company
could not carry out the objects for which it was formed.
4. Deadlock in management
• If the company could not function because the shareholders are deadlocked, then it is just and
equitable to wind up the company. If there is any reasonable opportunity for reconciliation and
cooperation, the court will not order the company to be wound up.

Re Yenidje Tobacco Ltd.

The company had 2 shareholders and they were also its directors. Both had equal shares in the
company. They fell out & refused to have direct communications. All communication was through
the company secretary.
Held: that it was just & equitable to wind up the company.

5. Carried business in a fraudulent manner

• If company is doing a business which is illegal or carries on business in a fraudulent manner, the
court may order the winding up of the company.
Re Thomas Edward Brinsmead & Sons Ltd
The firm “John Brinsmead & Sons” was well known firm of piano makers. Its former employees
incorporated a company “Thomas Edward Brinsmead & Sons Ltd” to make pianos and passed them
off as products of John Brinsmead & Sons. John Brinsmead & Sons obtained an injunction against
the fraudster company. The innocent shareholders of Thomas Edward Brinsmead & Sons Ltd
petitioned to wind up the company. They were misled and could refuse to continue the business.
The court ordered the company to wound up.

6. Prejudicial to Malaysia
• S.464(1)(h) provides that the ROC may petition to wind up a company if the company is being
used for one of the purposes specified in Section 465(1)(k).
• They are:
(a) Unlawful purpose
(b) Any purpose prejudicial to or incompatible with peace, welfare, security, public interest, public
order, good order or morality in Malaysia.
• Reference should also be made to subsection (2) which appears to
further clarify the scope as follows:
• (a) Unlawful purpose
• (b) Any purpose prejudicial to public interest
• (c) Any purpose incompatible with peace, welfare, public order,
security, good order or morality in Malaysia

• *It is submitted that there should be consistency between S.465(1)(k)

and (2)
7. Revocation of license or no license
• Financial institutions and insurance companies are regulated by Bank
Negara Malaysia. In the event their license are revoked, Bank Negara
Malaysia may petition to wind up the companies under S.465(1)(i).

8. Investigation
• S.465(1)(l) provides that the court may order the winding up of a
company if the Minister has made a declaration under S.590.
• S.590 investigation of the affairs of a company. The Minister may do
so for protection of the company or shareholders.
• Definition of compulsory winding up
• It is a winding up order of the court which is initiated by the presentation of a
petition by a person who is entitled to do so.
• The petition can be presented in the High Court of Malaysia. Two things must be
shown before the court will make a winding up order on a petition:
(a) That the petitioner had the right to present the petition and;
(b) That one of the grounds set out in the Act as justifying a winding up has been
made out.

• The court may not make a winding up order unless it is satisfied that the
voluntary winding up cannot be continued with due regard to the interest of the
creditors or contributories.
• See S.464(1)–(i) for categories for persons who may petition for CVWU.
Grounds For Compulsory Winding Up

• S.465 – Circumstances in which company may be wound up by the court

(a) The company has by special resolution resolved that it be wound up by the court;
(b) The company has defaulted in lodging the statutory report or in holding the statutory meeting
under S.190(3);
(c) The company does not commence business within a year from its incorporation or suspends its
business for a whole year;
(d) The company has no member;
(e) The company is unable to pay its debts;
(f) The directors have acted in their own interests rather than in the interest of the members as a
whole, or in any other manner whatsoever which appears to be unfair or unjust to other members;
(g) When the period fixed for the duration of the company by the constitution expires; or of the
event if any, occurs on the occurrence of which the constitution provide the company to be
dissolved
(h) The court is of the opinion that it is just and equitable to wind up.
When Does A Company Is Unable To Pay Its Debts?
– S.466
• The company is indebted in a sum exceeding the amount as may be
prescribed by the Minister and a creditor by assignment or otherwise
has served a notice of demand....and the company has 21 days after
the demand to pay the sum; (RM10,000- PU (B) 58)**
• 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 part;
• It is proved to the satisfaction of the Court that the company is
unable to pay its debts and in determining so, shall take into account
the contingent and prospective liabilities of the company.
• Usually, the vast majority of application for compulsory winding up are presented
by creditors on the grounds contained in S.464(1)(e) i.e the company is unable to
pay its debts.
• S.464(1)(b) permits a creditor, a contingent or a prospective creditor to apply for
a company winding up. This section enables the creditors to apply for a winding
up even though their debts are not immediately due and payable at the date of
the application.
Re William Hockey Ltd [1962] 1 WLR 555, it was held that a person who is owed a
debt by the company, which is still unpaid at the date of the application for winding
up, is a creditor.
• The essential element here is that there must be a valid debt otherwise the
fundamental requirement of a debtor-creditor relationship would not be fulfilled.
Without a ‘valid debt’, the petition will be accordingly dismissed - Jurupakat Sdn
Bhd v Kumpulan Good Earth Sdn Bhd [1988] 3 MLJ 49 and Re Merchanised
Construction Pte Ltd [1989] SLR 533.
• A contingent creditor is a person to whom a debt is owed, payment of which is only due
on the occurrence of some future event.

Community Development Pty Ltd v Enqwirda Construction Co

The High Court of Australia held that a builder whose debt only became payable on the
outcome of arbitration proceedings is a contingent creditor and is therefore capable of
filing a winding up application. This is so even though it was uncertain whether the builder
would be successful in the arbitration.
• A prospective creditor is a creditor to whom a debt is due but not immediately payable.
For example, a person who sells goods on the basis of payment within 30 days after
delivery is a prospective creditor of the buyer for the debt due during the 30 days period.
• The question of a person’s standing as a creditor usually arises when the company
disputes the existence of the debt. The question of disputed debts also arises in the
context of determining whether a company is deemed to be unable to pay its debt or
whether it has failed to meet a statutory demand made pursuant to S.218 (2)(a).
• Application by the contributories as a ground for liquidation –
S.464(1)(c)
• S.4(1) defines contributory to include:
(a) A person liable as a member or past member to contribute to the
assets of the company in the event of winding up; and
(b) A holder of a fully paid shares of the company.
• This definition of a contributory, in the case of a company limited by shares, includes a
person who at the commencement of the winding up, held either fully paid or partly paid
shares, even though strictly speaking, only a holder of partly paid shares is liable to
contribute an amount on the winding up. Not only the contributories must hold the
shares, their name must also appear in the register of membership.
• S.435(2) - Past members may also be liable to contribute to the assets of a company if
they were members within one year of the commencement of winding up and the
present members are unable to satisfy the full extent of their liabilities. Exceptions to this
rule are set out in S.435(2). eg past member ceased to be a member for one or more
years before the commencement of the winding up [(a) till (e)]
• A deceased contributory’s personal representative is by virtue of S.437 also liable to
contribute to the assets of the company on a winding up. Accordingly, the personal
representative is also included within the definition of contributory even though not
registered as a member.
“Just and equitable” grounds/circumstances for a
company to be wound up
(a) Where the main object of the company has failed – Re German Date
Coffee
(b) Where the business is carried on in a fraudulent manner – Re Thomas
Edward Brinsmead & Sons Ltd
(c) Where there is deadlock in the management – Re Yenidje Tobacco Co Ltd
(d) Where members have justifiable lost confidence in the management –
Loch & Anor v John Blackwood Ltd
(e) Where there is no bona fide intention on the part of the controllers to
manage the company in proper manner – Re London Country & Coal Co.
(f) Where the mutual trust and confidence which is the basis of the company
is gone – Ebrahimi v Westbourne Galleries
(g) Exclusion of management – Tay Book Choon v Tahansan Sdn Bhd
Effect of an order for compulsory winding up

• If an order is made, it is retrospective in effect to the date on which the

petition was presented to the court which becomes the date of
commencement of liquidation –
• Among the legal consequences of an order by the court for compulsory
winding up are:
(a) The effective dismissal of all directors, officers and employees of the
company;
(b) A stay of any execution of a judgment against the company and of any
legal proceeding in which it is either plaintiff or defendant;
(c) A standstill on any disposition of assets or transfer of shares (unless
approved by court) from the date of commencement of liquidation
Undue Preference – S.528

• Is a transaction between a company and an unsecured creditor that result in the creditor
receiving more from the company that the creditor would have received if the creditor
had to prove the debt.
• The transaction must have taken place 6 months prior to the commencement of winding
up proceeding.
• 4 elements of undue preference:
a) the transaction is any transfer, mortgage, delivery of goods, payment, execution of other
act relating to property made or done by or against the company;
b) where the company is unable to pay its debts, as the debts become due, from its own
money, (insolvent) at the time of the transaction
c) where the transaction is made in favour of any creditor or any person in trust for any
creditors;
d) the transaction took place within 6 months from the date of the presentation of the
winding-up petition and a winding up order is made.
STAY AND TERMINATION OF WINDING UP

Stay Of Proceeding
• S.492: Once the court has granted the winding up order, the court
may, make an order for a stay for specified time

Termination
• S.493: The court can terminate the winding up order
CORPORATE RESCSUE MECHANISM

Scheme of Arrangement (SOA)

• A statutory mechanism to carry out a formal compromise to bind all dissenting participants (creditors).
• This process require 75% approval in value of the creditor or classes of creditors.
• The directors still retain control in the company

Corporate Voluntary Arrangement (CVA)

• Provides protection for a company against directors while the director manage the company.
• Faster than judicial management.
• Qualified insolvency practitioner will supervise the restructuring plan.

Judicial Management (JM)

• Option which is open to a financially stricken company.
• Protection is given against any legal proceedings or steps taken to enforce any security over the company’s assets and will b egin as
early as when the application for Judicial Management is made.
THANK YOU