Navigating the Winding Up Process
by Sean Tan ~ 15 September 2019
As a director of a company, one of the last things you would want to deal with is winding-up proceedings being filed against your company. It can be confusing and difficult to understand the implications these proceedings can have against your business as well as figuring out the options available to you in order to save your company. This article will help you understand the various steps involved in the winding-up process and what options are available to a business facing such proceedings.
WHAT IS WINDING-UP?
The winding-up of a company is the process in which the company is brought to an end. During the process, the assets of a company are liquidated (meaning they are likely sold off for money) and distributed to the company’s creditors. Shareholders would usually receive part of the company’s assets if at liquidation, the value of the company’s assets exceed the liabilities of the company.
Besides potentially bringing the company and its business to a complete end, winding-up proceedings can also be extremely damaging to a company’s reputation and business even if it turns out to be unsuccessful. Often, the presentation of a winding up petition can result in the termination of contracts and the revocation of banking facilities for the company.
Inability to Pay Debts
The most common situation which results in the commencement of winding-up proceedings against a company is when the company is unable to pay its debts to their creditor(s) on time.
Under the provisions of the Companies Act 2016 a company is deemed to be unable to pay its debts if the company fails to satisfy demand by a creditor for a debt which exceeds the sum of RM 10,000.00 within 21 days from the date of delivery of the notice. The debt demanded by the creditor can either be a debt based on a judgment obtained before the Courts or otherwise.
Directors should note that in assessing whether a company is able or unable to pay its debts, the Court would not only examine whether the value of the company’s assets exceed the value of the company’s liabilities. The Court can still find that a company is unable to pay its debts if the company cannot pay its creditors when its debts fall due even if the company has assets far-exceeding the value of the debts demanded. What is important is whether the company can meet the claims of its creditors on time.
STAGE 1: THE STATUTORY NOTICE
When a creditor intends to bring winding-up proceedings against a company, the first step involves the presentation of a notice pursuant to Section 466 of the Companies Act 2016 by the creditor to demand that the debt owed by the company to the creditor be paid. For this notice to be issued, the creditor must have a minimum debt of RM 10,000.00 that has yet to be settled by the company to the creditor. This notice must be properly served to the company.
Once this notice is received, the company will have 21 days to pay the sums demanded by the creditor, failing which the company would be presumed to be insolvent and unable to pay its debts.
What Can Be Done?
Aside from paying up the amount owed, a company which disputes that the debt is owed has the option of filing a Fortuna Injunction to restrain the presentation of a winding-up petition against it.
A Fortuna Injunction is a specific order by the Court directing that the creditor be restrained from presenting a winding-up petition against the company. If successful, the company would be able to prevent the creditor from commencing winding-up proceedings against it.
For the Court to grant a Fortuna Injunction, the Court must be satisfied of 2 grounds, namely:
The winding-up petition has no chance of success or is bound to fail; or,
The creditor intends to initiate winding-up proceedings on a disputed debt, which will cause irreparable damage to the company.
Based on these grounds, a company would likely be able to prevent the initiation of winding-up proceedings against it where the company can show that the debt claimed by the creditor is bona fide disputed. Cases where the Court would be in favour of granting a Fortuna Injunction would include cases where: (1) the creditor is attempting to pressure the company to pay a dispute debt; or, (2) where the creditor is attempting to pursue the repayment of a sum on demand even though there is an agreement over the terms for such repayment already in place. A minor or technical dispute such as a minor dispute on quantum would usually be insufficient for the Court to grant a Fortuna Injunction.
STAGE 2: WINDING-UP PETITION
If the company was unable to file a Fortuna Injunction, the creditor would be free to begin winding-up proceedings against the company by presenting a winding-up petition.
After the winding-up petition is presented, the creditor must advertise the petition in the government gazette and newspapers. The advertisements would put all creditors of the company on notice and would usually cause damage to the company’s reputation and business as contracting parties may begin to doubt the company’s ability to pay even though the company has not been wound up.
The winding-up proceedings would then culminate with the hearing of the petition where the Court will decide whether the company ought to be wound-up or otherwise.
What Can Be Done?
At this stage, the company must oppose the petition on the day of the hearing itself. Similar to an application for a Fortuna Injunction, the company must be able to show that there is a substantial dispute over the debt being claimed by the creditor in order to prevent the Court from winding-up the company.
STAGE 3: POST-WINDING UP
If the company is unable to show that there is a bona fide dispute on the debt claimed, the Court would likely order the company to be wound-up. If the Court makes this order, a liquidator would be appointed to take control of the company and its assets in order to liquidate and distribute the proceeds to the company’s creditors.
While the company would still continue to exist, the appointment of a liquidator would result in the directors losing their powers over the management and running of the company. Be that as it may, the directors are not completely released from responsibility over the company. For instance, one major duty imposed on directors is the preparation and filing of the company’s statement of affairs with the liquidator.
What Can Be Done?
At this stage, the liquidator would already begin to liquidate the company. However, the shareholders of the company may be able to apply to the Court for an order to stay or terminate the winding-up proceedings.
Usually, such an application to end the winding-up and to allow the company to resume its business would involve the settlement of the company’s debts to its creditors. Often, the Court must be satisfied that in making the order to terminate the winding-up of the company, the Court would not be returning an insolvent company to business and incur even more debts.
Winding-up proceedings can be extremely detrimental to the business of a company and directors ought to take urgent steps to save the company, especially in cases where the debts claimed by a creditor is substantially disputed. As such, if a company is presented with a statutory notice of demand, the directors should immediately consult its lawyers to determine the necessary steps to be taken.