THE FACTORS AND PROCEDURE OF WINDING UP: COMPARATIVE

PERSPECTIVE IN MALAYSIA AND UNITED STATES

Nurhidayah Binti Zainal & Siti Nazirah Binti Mohd Nawi
Faculty of Management and Economics, Universiti Pendidikan Sultan Idris Tanjong Malim,
Perak, Malaysia.

Abstract
There is a legal process that must be followed when a company is formed. In the case of
winding up a company, there are steps that must be taken whether it is done by voluntary or
compulsory. When a business is wound up, it is dissolved or shut down. One of the most
common reasons for closing down is that the business can't keep going since the company has
a lot of debt and is not able to repay the debt. The issue is when they have incompetent board
of directors on managing the company in many perspectives such as financial, organization
that lead to winding up the company. The objective of this study is to give acknowledgement
to future boards of directors about what is the factor and procedure of winding up a company
so they can avoid any consequences of winding up. This paper investigates the differences
between Malaysian and American corporation dissolution laws. The purpose is to examine the
legal provisions and judicial method that both nations may employ during the dissolution of a
company. Thus, both the Companies Act 2016 and the Bankruptcy Reform Act of 1978 are
involved in this comparative analysis. This paper's research methodology relies on secondary
materials gleaned from web databases and scholarly works. Based on the whereabouts of
business registered, the mentioned act will be resourceful as reference for the employers or
external users that might encounter several issues regarding winding up in the future. This
study enables board members to select board members based on their high credibility in
managing a company and their ability to think critically to ensure the company's growth.

Keywords: winding up, factors, procedure, voluntary, compulsory.

INTRODUCTION
Company winding up involves distributing assets and ending operations. It involves liquidating
a corporation's assets and paying off its debts with company funds or member contributions.
Any surplus is allocated to members according to their entitlements. Essentially, a process to
wind up the company occurs when there is insufficient money or cash to pay the creditor's debt.
When a company's cash flow or current assets are insufficient to meet its daily operating costs,
we say that it is experiencing financial difficulty and this financial strain will almost certainly
force the company to declare bankruptcy (Lokman et al., 2020). Therefore, in winding up the
company there are some factors that cause the company to become insolvent as well as the
procedure of liquidation where the asset will be distributed to pay the debt of the creditors.
However, each country has its own approach and legal position for winding up the company.
Wee and Kiu (2020) stated in their studies that corporate governance processes during
members' voluntary winding up should resemble insolvent liquidation more than solvent going
companies, because the law requires directors to cede control to liquidators in solvent
liquidations. Whereas Oviosu and Enakireru (2020) propose that parties in Nigeria resolve debt
recovery disputes without resorting to the relevant legislation by using alternative dispute
resolution (ADR) to settle out of court and avoid litigation costs and court delays. Owomugisha
(2019) demonstrated the problems of the lack of codified laws governing liquidation in Uganda
and illustrated the understanding that claims of creditors are paid to them in a predetermined
order throughout the liquidation process in studies dealing with the legal framework for
dissolving firms in Uganda. Singhal & Goel (2021) in the United States explain that under
Chapter 7 of the Bankruptcy Code, in a liquidation, a court-appointed trustee is in charge of
disposing of the company's assets and using the money to pay back creditors in the priority
order of their claims.
The procedure and factors are mentioned in local literature on winding up the company.
For instance, according to Abdullah et al., (2019), the dependency on short-term obligations
has increased the likelihood of these organizations entering financial hardship, according to the
elements that can predict financially challenged enterprises. Ng & Chang (2021) highlight the
many modes of dissolution and procedures for winding up a business, as well as identifying
early warning signals of trouble and exhausting less drastic options to save the organization.
Khudzari et al., (2021) in studies that COVID 19 has increased non-performing loans and strict
credit provisions due to market disruption, causing more companies to close worldwide,
especially small businesses. According to the observations made, bankruptcy and corporate
rescue laws in the world continue to evolve, with Malaysia having embraced the corporate
rescue legislation of the United Kingdom and Singapore (Chen et al., 2020).
Therefore, the procedure of winding up a company depends on the type of company
and its insolvency. Thus, this paper attempts to make a comparison on factors of winding up in
Malaysia and the United States, as well as its procedure. The first part of this paper will discuss
the winding up perspective in Malaysia. The second part will discuss the United States'
perspective. Whereas the third part examines the procedure in reported cases in Malaysia as
well as the United States and the last part will conclude this paper.

THE LEGAL POSITION OF THE FACTORS AND PROCEDURE OF WINDING UP

IN MALAYSIA PERSPECTIVE
The legal act that applies in Malaysia is the Company Act 2016, which covers all acts related
to the company, including winding up. According to the act, Part 4 gives explanations about
all types of winding up as well as its procedure. Section 432(1) of the Company Act of 2016
distinguishes between two types of winding up which are court-ordered and voluntary. Section
432(2) specifies voluntary winding up by resolution, either by a voluntary winding up by the
company's members if it is solvent, or by the company's creditors if it is insolvent.
In fact, a corporation will wind itself down if it cannot pay its debts. A firm is
considered unable to pay its debts under Section 466 if it fails to pay the amount above
RM10,000 within 21 days of receiving notice. A court decree or judgment may or may not
support the creditor's claim for payment. When determining whether or not a company can pay
its debts, the court will consider factors other than whether the value of the company's assets
exceeds the value of the company's obligations. Even if a company's assets vastly exceed the
value of the demanded obligations, the court may nonetheless declare it insolvent if it cannot
pay its creditors when their debts are due. Therefore, when firm is unable to make timely
payments to its creditors, despite having more assets than debt, a court may rule that the
company is insolvent whether it voluntary or by court winding up.
To initiate a voluntary wind up, members can have the company secretary draught a
resolution of winding up, which must be signed by all members and board directors in an AGM
or EGM, declaring that the company has sufficient funds to cover the accumulated debts for
more than 12 months after the process is initiated. The Declaration of Solvency required by
Section 443 must be drafted by the company secretary once the resolution has been signed and
approved by the board of directors. SSM needs to read this paper immediately. The appointed
liquidator will then assume control of the company and wind it down. Creditors and
shareholders will get proceeds from the sale of assets if there is a surplus.
Creditors' winding-up procedure for a voluntary company liquidation. Members must
draught a resolution to dissolve the company under section 433 after consulting with the board
of directors. The majority of creditors must respond to a notice of meeting at least 7 days in
advance. The resolution and notice of winding up must be published in a Malaysian newspaper
for ten days after the resolution is passed. At the meeting of creditors, a majority vote is
required to select a liquidator and an inspection team. The appointed liquidator will then
assume control of the company and wind it down. Creditors and shareholders will get proceeds
from the sale of assets if there is a surplus.
What to do if a Malaysian court orders the dissolution of your company. Stakeholders
shall prepare a winding-up petition and supporting legal documentation after receiving a notice
of demand under section 465. All relevant parties must be notified of the court hearing that will
be held to issue the wind-up order. If authorized by the court, the company's operations will be
halted and the wind-up process will be handled by a Director General of Insolvency (DGI) or
liquidator appointed on behalf of the company. Asset sales will benefit creditors and
shareholders.

THE LEGAL POSITION OF THE FACTORS AND PROCEDURE OF WINDING UP

IN UNITED STATES PERSPECTIVE
The U.S. Bankruptcy Code, as revised by the Bankruptcy Reform Act of 1978, prohibits
discrimination in employment based on a person's bankruptcy status and establishes guidelines
for dealing with creditors when a debtor cannot pay all of their debts. Subsection (a) of Section
501 provides further clarification that guarantors who file a proof of claim on behalf of a
creditor are responsible for any damages that result from the creditor's failure to timely file a
proof of claim. Insolvent companies go through the same process as liquidation and repayment
strategies. Subsection (c) makes a creditor's claim nondischargeable if it can be shown that the
creditor did not intend to distribute the claim and so failed to timely file evidence of claim.
Overall, this safeguards the debtor's ability to pay the debt after the case has been closed, rather
than making partial or full payments during the plan's allotted time period (P.L. 95-598, 101
Stat. 2549).
Each judicial district in the country has its own bankruptcy court. Each state contains
multiple districts. There are 90 bankruptcy districts in the United States. Typically, bankruptcy
courts have their own clerk's offices. Business closure and debt relief are governed by federal
bankruptcy rules. Chapter 11 of the Bankruptcy Code allows a "debtor," or insolvent
corporation, to "reorganise" its affairs in an effort to once again become profitable. While
management retains control over day-to-day operations, the bankruptcy court must authorise
any major changes. After filing for Chapter 7 bankruptcy, a corporation ceases all operations
and essentially ceases to exist. For the purpose of paying off the company's debt, which may
include debts to creditors and investors, a trustee is appointed to "liquidate" (sell) the company's
assets.
Providing enough protection in Section 1205(b)(1), which compels trustees to make
periodic payments in cash to obtain a greater debt limit. Chapter 13 provides a reconstruction
plan for debtors who do not choose to file for Chapter 7 bankruptcy. The debtor has the option
of submitting a plan to the court, which may be accepted or refused, in order to restructure their
financial management. The maximum length of the payment plan to creditors is three years,
although it can be extended to five years with court approval (Mark H. Edward, 1982).
Alexandria C. Quinnt, (2017) stated that Reorganization of a debtor's assets as described in
Chapters 11, 12, and 13. Subsection 2 (b) of the Bankruptcy Code stipulates that a debtor may
keep all or a portion of his or her property in order to satisfy a portion of or all of the debts
owed to unsecured creditors. Business structures ranging from sole proprietorships and
partnerships to corporations may be affected by Chapter 11 bankruptcy proceedings. Thus, a
person who has filed for bankruptcy protection but continues to run their business with the
permission of the bankruptcy court and the oversight of a trustee acting in the best interests of
the creditors is called a Debtor in Possession (DIP). While Chapter 12 of the Bankruptcy Code
is there, it is often only used by families who farm or fish for a living and have a consistent
annual income.
Meanwhile, Peter M. Gilhuly, Kimberly A.Posin and Adam E. Malatesta, (2016), stated
in terms of international insolvency, as defined in Chapter 15. If an individual files for
bankruptcy in multiple countries, their assets may be spread out throughout the globe.
However, the court will allow the uniform participation of United States courts, foreign courts,
and other authorities involved in the cases. Therefore, Chapter 5 seeks to provide both creditors
and debtors with a fair and efficient framework for dealing with cross-border insolvency. There
are two types of liquidation cases, one for small businesses and one for large corporations; for
small businesses, the company can file willingly or be forced by creditors. When the petition
is filed successfully, the business will cease to exist unless the appointed trustee decides to
continue it. For large corporations, the trustee may elect to sell the entire division to other
interested parties in order to generate funds to satisfy secured creditors. Giacomo Rodono,
Nicolas Serrano-Velarde & Emanuele Tarantino (2016) stated, Chapter 7 of the Bankruptcy
Reform Act of 1978 describes the liquidation process. Involves the bankruptcy court appointing
a trustee to collect the non-exempt assets of the debtor, such as non-primary residences, jewels,
and more. The trustee must liquidate the tangible assets and distribute the cash to the creditors.
So basically, Chapter 7, called "Liquidation," is about an orderly, court-supervised
process in which a trustee takes over the debtor's assets, turns them into cash, and gives the
cash to creditors, as long as the debtor has the right to keep certain exempt property and secured
creditors have their rights. In most chapter 7 cases, there is little or no non-exempt property, so
there may not be a real sale of the debtor's assets. "No-asset cases" is the name for these kinds
of cases. Chapter 9, called "Adjustment of Debts of a Municipality," is mostly about
reorganisation, similar to what chapter 11 is about. Only a "municipality," which includes
cities, towns, villages, counties, taxing districts, municipal utilities, and school districts, can
file under Chapter 9. Chapter 11, entitled Reorganization, is typically utilised by businesses
that wish to continue operating while simultaneously repaying creditors through a court-
approved plan of reorganisation. Typically, the chapter 11 debtor has the only right to file a
plan of reorganization for the first 120 days following the filing of the case and is required to
present creditors with a disclosure statement including sufficient information to evaluate the
plan. The court eventually affirms (approves) or rejects the restructuring plan. According to the
approved plan, the debtor can lower its debts by repaying a portion of its obligations and
releasing others. In order to return to profitability, the debtor can also terminate burdensome
contracts and leases, recover assets, and restructure its activities.
Adjustment of Debts of a Family Farmer or Fisherman with a Regular Annual Income
gives debt relief to family farmers and fishermen with a regular income under Chapter 12. The
process under chapter 12 is essentially similar to that of chapter 13, in which the debtor presents
a plan to repay debts over a period of time - up to three years, unless the court permits a longer
period of up to five years. Chapter 13, Adjustment of Debts of an Individual With Regular
Income, is for a regular-income debtor. Chapter 13 permits the debtor to preserve a valued asset
like a house and present a "plan" to repay creditors over three to five years, making it preferable
to chapter 7. Consumer debtors who fail the means test for chapter 7 use chapter 13. If the
debtor's repayment plan meets Bankruptcy Code criteria, the court confirms it at a confirmation
hearing. Chapter 13 differs from chapter 7 since the debtor keeps the estate's property and pays
creditors through the trustee based on their expected income. And the objective of Chapter 15,
titled Ancillary and Other Cross-Border Matters, is to create an efficient framework for
handling cross-border bankruptcy cases. This book analyses the application of Chapter 15 in
situations when a debtor or its assets are subject to the laws of the United States and one or
more foreign nations.

JUDICIAL APPROACH OF FACTORS AND PROCEDURE OF WINDING UP IN

MALAYSIA AND UNITED STATE
According to the Malaysia Law, there are several companies that need to wind up because they
are unable to pay the debts. For instance, as in the case of Hotel Royal Ltd Bhd V. Tina
Travel & Agencies Sdn Bhd [1989] 4 MLRH. In this motion to set aside a winding-up
petition, the respondent claimed they had realizable assets to compensate the petitioner. The
petition was filed after the respondent ignored a 16 August 1988 notification. Thus, the
defendant failed to pay the petitioner's 2 September 1987 judgment. Held is that the respondent
had not given me any basis on which It may exercise its discretion to set aside the petition
because the test for solvency does not depend on their realizable assets. It dismissed their plea
and directed that the respondent be wound up under the laws, the official receiver be appointed
temporary liquidator, and that the liquidation tax and pay the petitioner out of the respondent's
assets. Principle under Section 466(1), "unable to pay its debt" means insolvency in the
commercial sense, regardless of whether the corporation has assets that could cover its debts.
Second, the case QB Khidmat Teguh Sdn Bhd v Pembinaan Legenda Unggul
[2017] 8 MLJ 376 when Pembinaan Legenda became bankrupt, its board of directors took an
extraordinary decision to dissolve the company and appoint the second defendant as liquidator.
At the creditor meeting, QB Khidmat and the other unsecured creditors of Pembinaan Legenda
voiced their opposition to this plan. After failing to reach an agreement with Pembinaan
Legenda through negotiation, QB Khidmat and 27 other unsecured creditors filed a class action
lawsuit against the company, asking the court to rule on the legality of the winding-up
procedure, the appointment of the 2nd Defendant as liquidator, and the postponement of the
creditors' meeting. The court subsequently ruled in favor of QB Khidmat and the other
unsecured creditors, saying their motions met the criteria for a successful class action.
For judicial cases related to Bankruptcy Act 1978, companies that choose Chapter 7's
liquidation path, things are much worse. Such as OneJet, Inc., which is in the Pennsylvania
Western Bankruptcy Court and filed for bankruptcy on October 17, 2018. It requires a group
of creditors to ask the court to declare a company bankrupt at the same time. Involuntary
bankruptcy deals with a call in and the company involved has 21 days to argue. In the lawsuit,
the claimants are Vesper Capital LLC, which has a promissory note with a debtor for $4.5
million, and Kronk and Campbells, which have a total of $300,000 in promissory notes. After
that, OneJet stopped flying out of Kansas City International Airport at the end of August.
In the meantime, there are a lot of big airlines in the US that are either officially
bankrupt, have shut down, or are being reorganised under bankruptcy protection. Most of the
time, Chapter 11 or the reorganisation path are the options. For example, on October 8, 2019,
Via Airlines, Inc. filed in Florida Middle Bankruptcy Court. To explain more, Via Airlines said
in May that it would no longer fly to Birmingham-Shuttlesworth International Airport. At the
time, company officials said that one of the reasons for the suspension of flights was that it was
hard to find and train qualified airline crews. Via was happy to go through Chapter 11
reorganisation. The company said that there was a lack of pilots and that Atlanta-based Ashley
Air LLC had signed a contract to buy Via in July. Unfortunately, the deal meant that taxes,
rent, and payments to the creditor were not paid on time. Associate debtors tell Via Airlines
that they are filing for bankruptcy with the plan to get back into business afterward. Because
of this, Via's gross income in the 2018 financial year was $15.22 million, and it owed about
$660,000.

CONCLUSION
In conclusion, 'winding up' and 'liquidation' refer to the process of permanently terminating a
firm, which is irrelevant to Malaysia, as the term 'bankruptcy' only refers to the individual in
question. For bankruptcy and winding up, these both terms have almost similar meanings but
not the same, in which bankruptcy happens whether or not an entity is insolvent depending on
its ability to pay its debts when they are due. This is established by the dates on which your
debts are due, in accordance with the conditions of your numerous contracts. This indicates
that not all obligations will be due simultaneously. It is essential to determine whether you are
able to meet your actual responsibilities at the appropriate time. Adegbemi Babatunde Onakoya
& Ayooluwa Eunice Olotu, (2017). While, a company’s winding up is the process of putting it
out of business. The assets of the company are sold and the proceeds are utilised to pay off the
company's debts, Norziana Lokman, Nor Farizal Mohammed, Nor Azida Mohamed &
Julizaerma Mohamad Khudzari, (2021) .
For bankruptcy law and practice in the United States, it is pretty distinctive and
fascinating, as debtors are permitted to file any relevant act that can convert them from
bankruptcy till, they get their businesses back on track and recover financially. Malaysia has
only two options for winding up a company, either voluntary or compulsory, and the process
is the same regardless of the nature of the business. In contrast, the United States has six options
for winding up, including Chapter 7, Chapter 9, Chapter 11, Chapter 12, Chapter 13, and
Chapter 15, which can be filed according to the nature of the business, thereby making the
process of winding up more complex. Still, the goal of liquidation in both nations is to assist
both debtors and creditors in resolving their respective monetary issues in accordance with the
applicable law. The factors of winding up and bankruptcy for both countries are similar, which
is inability to pay debt or insolvency, the difference between these two countries is just the
procedure of winding up and liquidation only.
Therefore, this page is designed to tell employers and external users that even if a person
registered and founded a business in a foreign country, they still have a statute that they can
refer to and recognise. Certainly, winding up is highly traumatic, and even being notified in its
presence can crush your heart. After taking the time to complete the research, there are a few
suggestions on how to avoid filing for bankruptcy. Initially, they believed that they would have
to deal with a number of obstacles, such as re-entering the courthouse and managing several
documents. First, it is required to construct a budget and cut costs that are not deemed essential
by imagining that every cent and dollar is being counted. Aside from that, it is strongly
recommended that you optimize your profit by accepting any available job opportunity, such
as freelancing in your spare time. Next, negotiate with the creditor by involving a third party,
such as a debt relief company, in order to reduce the overall debt. The approach involves
agreeing to pay half of the debt immediately and waiving the remaining balance with the
expectation that creditors will receive nothing. Finally, do not hesitate to seek assistance from
a credit counselling firm that charges a small cost and can help you avoid debt.
In addition, Malaysia may need to consider a few U.S. legislation with suitable
revisions in winding up, particularly in reorganisation by legitimate courts. Putting this into
practise can not only lessen the number of bankruptcies filed in Malaysia, but also boost the
country's economy and open up more job opportunities.
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