WINDING UP OF COMPANIES BY COURT *

Paper prepared by Sitpah Selvaratnam,

in April 2000

WINDING-UP OF COMPANIES BY COURT

A.

Introduction

The commencement of the winding-up of a company is usually the beginning of the end of
the company. It is the prelude to the cessation of the company as a legal entity. Either upon
resolution of its members or by Order of Court, the company may be wound-up through the
appointment of a third party as liquidator. The primary function of the liquidators is to
liquidate and distribute all assets of the company for its ultimate dissolution.

B.

Procedure

1.

Commonly, the court is moved by creditors for an Order that the company be woundup on the grounds that it is unable to pay its debt. There are various other
circumstances in which a company may be wound-up by Court and these are
prescribed by the Companies Act 1965.

2.

Judgment is usually obtained prior to an application to Court to wind-up the company.

Thereafter, a demand, customarily called the 218 Demand is dispatched to the
company seeking satisfaction of the judgment. However, where the debt is clear,
particularly where an admission of debt in writing exists, a 218 Demand may
suffice, without judgment, to commence winding-up proceedings.

3.

A Petition is presented to Court with an Affidavit Verifying the Petition, affirmed

within 4 days of the Petition. Upon the issue of the Petition by Court, the Petition is
served on the company, advertised in newspapers and gazetted. At the hearing of the
petition, the Court may order that the company be wound-up, and appoint a liquidator.
A private liquidator may be nominated in lieu of the Official Receiver. A private
liquidator, upon giving security to the Official Receiver towards his performance as
liquidator, may then commence work in ascertaining creditors, debtors and
contributories of the company towards realising the assets and distributing it to
persons entitled to monies.

4.

Upon realisation of the assets, the liquidator calls for proof of debts to be submitted
by creditors within a particular time not being less than 21 days. Thereafter, the
liquidator assess the proof and is required to either accept or reject the proof within 28
days though time may be extended. Creditors dissatisfied with the liquidators
decision may appeal thereon to the High Court but within very limited time.

5.

In distributing the assests, the liquidator ascertains the classes of creditors; secured,
unsecured and preferential creditors.

Secured creditors have the option to reaslise the security outside the
liquidation, for instance, by fore-closure proceedings. However, since the

Federal Court decision in BBMB v Kimlin Housing Development Sdn Bhd

[1995] . , there is ambiguity as to the ability of secured creditors to realise
securities without the involvement of either the liquidator or Court. The
secured creditor may nevertheless sell secured properties through the
liquidator whilst retaining most of the benefits of priority of payment.

6.

Unsecured creditors rank equally amongst themselves. However Section 292

of the Companies Act 1965 provides categories of preferential creditors whose
unsecured debts must be paid in priority to other unsecured creditors.

The liquidators function also extends to investigating the affairs of the company and
to recover assets lost due to undue preference to creditors, fraudulent trading by
directors, or voidable transactions concluded by directors.

C.

Points to Note

1.

If the purpose of the winding-up of the company is to obtain some dividend in the
payment of the debt, unsecured creditors should consider the appointment of a private
liquidator, as opposed to Official Receiver. The Malaysian experience is that
liquidation, not in the hands of a private liquidators, take many more years to bear
dividend.

2.

Once a petition is presented to Court, provision of the Companies Act 1965 preclude
the sale or disposition of properties of the company without Court sanction, and the
attachments and enforcement of judgments. Hence, further trading with the company
subsequent to the presentation of the petition may result in the transaction being
avoided, and undone, unless particularly validated by Court. The Court would
consider if the transaction is beneficial to the company and not prejudicial to the
creditors, when validating the transaction.

3.

Upon the appointment of liquidators or provisional liquidators by Court, no Court

proceedings may be commenced nor proceedings proceeded with, except with leave
of Court. This is to ensure that the liquidator is not disturbed by the demands and suits
and is allowed to sort the affairs of the company without distraction. Claims will
instead be dealt with in the course of the winding-up without the expense of litigation.
Nevertheless, in certain circumstances, leave of Court may be granted to enable
proceedings to be commenced or proceeded with where the claim is of a nature not
readily resolved by the liquidator or where claims to specific property are involved.

4.

It must be observed that post-liquidation trading debts or contracts will be paid in full.
Hence, traders contracting with the liquidator would not ordinarily fall within the
general rule of pari passu payment. This is to allow the company to gradually winddown its affairs for better realization.
It is necessary to ensure that proof of debt are properly filed and within time, failing
which the debt may be extinguished. Similarly, the rejection of proof or part thereof,
would be quickly considered for appeal.

5.

6.

Evidence of any preferential transaction or payments either by the directors or the

liquidators should be scrutinised to consider there is a possibility of setting aside the
transaction, thereby enhance the pool of funds available for dividend. However, no
action may be commenced against the liquidator personally for his conduct as
liquidator without first obtaining leave of Court.

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