Winding up a company in Malaysia is a process that must be approached with precision and legal understanding, to ensure the rights of all parties are maintained, and the procedures are properly followed.
The procedures are strictly governed by Malaysian law, requiring adherence to the Companies Act 2016. It’s vital for all stakeholders to understand the step-by-step process to avoid legal pitfalls.
A winding-up order is used as a last resort when the petitioner has supposedly exhausted all the alternate means to obtain payment. Of course, this is a time consuming and costly process.
In a winding-up process, all the assets of the company are sold off and distributed to its creditors. The remaining ones will be distributed among the shareholders/partners.
What are winding up rules?
Winding up procedures are a critical aspect of Malaysia’s corporate landscape, playing a pivotal role in how businesses conclude their affairs when ceasing operations.
In 2020, significant updates to the winding-up rules were made, reflecting the Malaysian government’s response to economic conditions during COVID and corporate realities.
If the debtor is a company, winding-up proceedings can be initiated if the company owes the debtor an amount of RM10,000 and above.
To initiate the process, a winding-up petition has to be presented to the court by the debtor. The court will take four to five months to review and approve the request.
After the court has approved the petition, a winding-up order is issued, forcing the company into compulsory liquidation. The entire company’s assets are then sold off in an auction to pay off the debts.
Procedures and processes for winding up
Overall, the process of winding up a business and the associated expenses can differ depending on how complicated it is.
There are two main types of winding up – voluntary and compulsory.
Voluntary winding up can be initiated by the company itself even if solvent. Compulsory winding up is typically initiated by creditors or the court when the company is insolvent.
Voluntary winding up involves:
- Directors declaring the company can pay debts in full within 12 months.
- Members passing a resolution for voluntary winding up.
- Appointing a liquidator to oversee the process.
- Liquidator selling assets, settling debts, and distributing remaining assets.
Compulsory winding up involves:
- Filing a winding up petition in court, which decides whether to allow it.
- Advertising the winding up order in the gazette and newspapers once a petition is filed.
- Court appointing liquidator to take over company affairs.
- Liquidator selling assets, settling debts, and distributing assets per priority.
During winding up, employees’ rights are protected by law to ensure they receive what they are owed. Former directors are legally obliged to assist the liquidator in the proper closure of the company’s operations.
The latest update in winding up Provisions 2023
As per section 615 of the Companies Act 2016, the minister is allowed to exempt any person, company or class of companies from all the provisions of the Companies Act 2016.
The Minister of Domestic Trade and Consumer Affairs has exercised his power under section 615 of the CA 2016 and produced the exemption order.
On 22.04.2020, the Federal Government gazetted the Companies (Exemption) Order 2020 (“the Order”) under Section 615 CA 2016.
As per the order, an exception is given to all companies who fail to satisfy a statutory notice of demand within 21 days upon receiving. As per the usual definition, a company would be deemed unfit if it failed to reply to a letter of demand within 21 days upon reception.
Please note that the exemption is valid only for the duration of the company to respond. Other legal actions can still be taken against the debtor company.
Recent changes after December 31-2020
On December 31, 2020, the moratorium period for winding up in Malaysia came to an end.
This means that the two winding-up reliefs provided under the companies (Exemption) Order 2020 are no longer applicable.
The first relief was the temporary winding up protection for six months through the Companies(Exemption)(No.2)Order 2020.
After December 31, 2020, the demand period will be 21-days as per the Companies Act in Malaysia.
The second protection was that the minimum threshold amount should be RM50,000(section 466(1)(a)).
In the significant shift, Malaysia has increased the minimum threshold for winding up indebtedness to RM50,000, a fivefold increase from the previous RM10,000 limit. This amendment affects the ability of creditors to initiate winding-up proceedings, potentially altering the debt recovery landscape.
The Minister temporarily set the RM 50,000 debt threshold, applicable from January 1, 2021, to March 31, 2021.
This means that small-scale businesses with a debt threshold of RM 50,000 or less were eligible for relief during this period.
Whether an exemption under section 615 of the Companies Act good enough to amend?
After the temporary amendment order was issued, there have been some views questioning whether an exemption order made under section 615 amends the provisions laid down by the Companies Act 2016.
The order states that “A Company shall be deemed unable to pay its debts under paragraph 466(1)(a) of the Act if the company neglects any notice of demand by any creditor to pay its debt or to secure its debt or compound its debt to the satisfaction of the creditor within six months after the notice of demand is being served upon him.”
As per the general rule, to amend any Act requires the approval of both the houses of the parliament. Whether a Minister can utilise his powers under s.615 to amend a provision of the principal Act itself is still subject to be questioned.
Fortuna Injunction
If a creditor persists to threaten to petition for a winding-up, the legal remedy of Fortuna Injunction can be sought.
In general, an injunction order means an authoritative order, directed by the court to do, or not do something.
Fortuna injunction is a specific order of injunction from the High court temporarily restraining the creditor from filing a winding-up petition against the debtor company after the final letter of demand has been served.
If the debtor company successfully obtains an injunction order, the creditor won’t be able to file a winding-up order against the company.
What are the grounds in which a Fortuna injunction can be granted?
The grounds for Fortuna Injunction is established in the famous case of Fortuna Holdings Pty Ltd v Deputy Federal Commissioner of Taxation [1978] 2 ACLR 349
The court stated that a company under debt could be granted an injunction under two conditions.
First condition: The winding-up petition if presented has no chance of success or is sure to fail.
Second condition: The winding-up petition, if presented by the creditor, is sure to bring irreparable damage to the company. The better option will be to follow some of the alternate options available.
Key Takeaways
- The threshold for commencing winding-up proceedings against a debtor company for inability to pay debts has increased from RM10,000 to RM50,000. A creditor may now only initiate such proceedings if the debtor fails to satisfy or secure a debt exceeding RM50,000 within 21 days after receiving a statutory demand.
- Winding up a company involves distinct voluntary and compulsory procedures. Voluntary winding up occurs when shareholders pass a resolution to wind up, while compulsory winding up is court-ordered.
- Employees’ rights are prioritised during winding up. Their wages and employment claims take precedence over unsecured creditors.
- Finally, proof of debt must be submitted within three months of a winding-up order, ensuring all creditors have the opportunity to prove claims against the company.
FAQ
Can a company continue to operate after a winding-up order has been made?
Once a winding-up order is made, the company must cease its business operations, except as necessary for the beneficial winding up of the company.
How are the company’s assets distributed during winding up?
The company’s assets are liquidated, and the proceeds are used to pay off creditors in a specific order: secured creditors, preferential creditors (including employees), and then unsecured creditors.
What is a statutory demand?
A statutory demand is a formal request for payment issued to a debtor company. If the company fails to pay, comply, or reach an agreement within 21 days, it can be used as grounds for a winding-up petition.
Are there alternatives to winding up for debt resolution?
Yes, alternatives like debt restructuring, negotiation with creditors, or schemes of arrangement can be explored to avoid winding up.
How can a winding-up order be contested?
A winding-up order can be contested on various grounds, such as disputes over the debt or the procedure followed. Legal advice should be sought immediately due to the time-sensitive nature of these proceedings.
What happens after the winding up is complete?
After the winding-up process is complete, the company is formally dissolved and no longer exists as a legal entity. Any surplus funds after paying off debts are distributed to shareholders.
Bottom Line
Winding up has far-reaching commercial implications for the business environment in Malaysia. The economic climate can significantly impact the frequency and nature of winding-up proceedings.
For example, the COVID-19 pandemic has undoubtedly shaken the pillars of many companies in Malaysia. Being a country where small and medium scale businesses are one of the significant sources of income, the recent update in the winding-up rules are sure to provide some relief to small and medium scale business owners.
