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Registrar of Companies (ROC), Malaysia
Australian Securities Commission
Companies House, UK
 
 
WINDING UP A COMPANY
     
INTRODUCTION

Winding up or liquidation of a company is the ending of a company's life; its property administered for the benefit of its creditors and members. At the end of the winding-up, the company will be dissolved.

Types of Winding Up

There are two main types of winding up: compulsory, under and order of the court; and voluntary, under resolution of the company: 211. The former occurs when the occurs when the directors or those in control do not want the company to be liquidated, whereas the latter occurs when they do.

Winding Up by the Court (Compulsory Liquidation)

The company, any creditor or any member may petition the court to wind up the company on any of the grounds, only two need particular mentioned

  • section 218(e) - the company is unable to pay its debts (the most common ground); and
  • section 218(i) - the court is of the opinion that it is just and equitable that the company be wound up (which, as we have seen, may be useful in the event on unfairness or deadlock or if the substratum of the company has been destroyed).

For example, in Ng Eng Hiam v Ng Kee Wei & Ors (1965) 1 MLJ 238, winding up of a private company was petitioned where there was a deadlock between managing directors. In Re Chi Liang & Son Ltd, Tong Chong Fah v Tong Lee Hwa & Ors (1968) 1 MLJ 97, a winding up petitioned was filed where there had been oppression of the petitioner both as a member of the company and as director. This case followed the English case of Re H R Harmer Ltd (1958) 3 All ER 689; (1959) 1 WLR 62, where it was held that once it was shown that the acts complained of were oppressive to the petitioners as members of the company, it was irrelevant that the petitioners were also directors, for oppressed members who were also directors were not, by virtue of holding such office, disqualified from obtaining relief.

In Re Long Thai Sawmill (Miri) Sdn Bhd; Kong Thai Sawmill (Miri) Sdn Bhd & Ors v Ling Beng Sung (1974) 2 MLJ 227, the Privy Council pointed out that for a case to be brought within section 181 (1((a) at all, the complainant must identify and prove "oppression" or "disregard". The mere fact that one or more of those managing the company possessed the majority of the voting power and, in reliance upon the power, made policy or executive decisions, with which the complainant did not agree, was not enough. There must be a visible departure from the standards of the fair dealing and a violation of the conditions of fair play which a shareholder is entitled to expect before a case of oppression can be made out.

Similarly, "disregard" involved something more than a failure to take into account minority interest. There must be awareness of that interest and an evident decision to override it or brush it aside or to set at naught the proper company procedure. The Privy Council continued that although the grant of winding up was at the discretion of the court, the court must bear in mind the character of the remedy, if sought to apply to a company which was a going concern. It would take into account inter alia:

  • the gravity of the case under section 181(1)
  • the possibility of remedying proved in other ways than by winding up the company
  • the interest of the applicant in the company
  • the interests of other members of the company not involved in the proceedings.

The petition for winding up is normally brought by a creditor. Rarely can it be brought by a shareholder: 217. Such a shareholder may be a past or present member of the company: Re Consolidated Goldfields of New Zealand (1953) Ch 689; (1953) 2 WLR 584.

Section 218(2) provides that it is proven that the company cannot pay its debts if the company defaults in complying within three weeks with a written demand for payment served by the creditor to whom more than RM 500 is due or if unsatisfied execution has been levied.

In Teck Yow Brothers Hand-Bag Trading Co v maharani Supermarket Sdn Bhd (1989) 1 MLJ 101, defined "unable to pay its debts" as meaning "insolvency in the commercial sense" i.e., inability to meet current demands irrespective of whether the company is possessed of assets, which, if realised, would unable it to discharge its liabilities in full.

The meaning and scope of the phrase "unable to pay its debts" in section 218(e) was clearly explained by Justice Siti Norma Yaakob in the case as follows:

The scope of the meaning to be given to the phrase "unable to pay its debts" appearing in section 218(1)(e) of the Companies Act 1965 is explained by McPherson in his book "The Law of Company Liquidation" (3rd Editon) at page 54 as follows:

The phrase "unable to pay its debts" is susceptible of two interpretations. One meaning which may properly be attached to it is that a company is unable to pay its debts if it is shown to be financially insolvent in the sense that its liabilities exceed its assets. But to require proof of this in every case would impose upon an applicant the often near-impossible task of establishing the true financial position of the company and the weight of authority undoubtedly supports the view that the primary meaning to the phrase is insolvency in the commercial sense - that is inability to meet current demands irrespective of whether the company is possessed of assets which, if realised, would enable it to discharge its liabilities in full.

That meaning has been accepted in many cases, such as Re Hong Huat Realty (M) Sdn Bhd (1987) 2 MLJ 502.

The court may also accept other evidence and take into account the contingent and prospective liabilities of the company. However, the court would not grant the petition if the debt is seriously disputed: Mann v Goldstein (1968) 1 WLR 1091. In Liew Yin Yin Construction Sdn Bhd v Yata Enterprise Sdn Bhd (1989) 3 MLJ 249, a winding up petition was struck out as the disputed debt was to be subject to arbitration proceedings. Similarly, in Re Mechanised Construction Pte Ltd (1989) 3 MLJ 9, a winding up petitioned was dismissed as the court held that a winding up petition is not a legitimate means of seeking to enforce payment of a debt which is bona fide disputed.

Voluntary Winding Up

Under section 254, voluntary liquidation of a company occurs if it passes a special resolution to take effect or when the period fixed for the duration of the company expires and a resolution of the general meeting requiring the voluntary winding up of the company is passed. Winding up commences at the time of the passing of the resolution for voluntary winding up.

Where it is proposed to winding up voluntarily, the majority of the directors may at a board meeting make a statutory declaration that having made full inquiry into the affairs of the company, they have formed the opinion that the affairs of the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the winding up: 257(1). The company at a general meeting would then proceed to appoint its liquidators. There would not be any supervision by the creditors: 258.

However, should the company be unable to pay its debts within the period stated in the aforesaid declaration, the directors would have to make a financial report to the creditors and the creditors themselves may appoint the liquidator. It then becomes a Creditors' Voluntary Winding Up.

Obviously directors would prefer members' winding up as this meansa that, through their de facto control, their nominee is likely to be appointed liquidator and therefore their past conduct may not be examined too closely.

Dissolution of the Company

The law has made special provisions which apply during the liquidation so that those who have invested in or had dealings with the company can be protected.

  1. Ouster of Directors and Management. This is perhaps the most important provision of all. On winding up, the board of directors becomes functus officio; its powers are assumed by the liquidator: 216(4). This is because it is those in control who have the power to cause harm and their removal is therefore essential before any remedial action can be taken. This removal occurs automatically on liquidation.
  2. Investigation of Officers' Conduct.The Act makes provisions enabling the conduct of directors and managers to be investigated. The official receiver may make a report to the court on whether further inquiry into the conduct of the company's business is desirable or whether there has been any fraud being committed.
  3. Civil Remedies Against Officers. The Act also imposes certain civil liabilities on officers of companies in liquidation. The two main provisions are section 304 and 305. Section 304 enables the court to impose personal responsibility on those who were knowingly parties to the continuation of the company's business with intent to defraud creditors or for other fraudulent purposes. However, actual dishonesty has to be proven: Re Patrick & Lyan Ltd (1933) Ch 786. Section 305 provides power to the court to investigate any misappropriation or breach of trust by any promoter or officer and to compel him to restore the money or property or to pay compensation.
  4. Liquidators. Once the liquidator is appointed, the powers of the directors cease: 261(4). The liquidator is the fiduciary agent of the company: Knowles v Scott (1891) 1 Ch 717. The property of the company does not vest in him but the company continues to exists. The liquidators makes contracts on behalf of the company: Stead Hasel & Co v Cooper (1933) 1 KB 840. Although a liquidator is normally bot personally liable on his contracts, he has statutory duties: 277(2). He has a fiduciary relationship with the company and creditors as a body. He has to give accounts [section 281] and make good defaults [section 282].

 

Copyright 1998 Md. Rodzi Harun. All rights reserved.
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