How Business Owners Can Navigate Through The Winding-Up Process

INTRODUCTION

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. Today’s article will help you understand the various steps involved in the winding-up process and what options are available to a business when facing such proceedings.

WHAT IS WINDING-UP?

Winding-up Generally

When a company is being wound-up, it means that the company is in the process of being brought to an end. When this happens, the assets and business of a company are liquidated (meaning they are likely sold off) to be distributed to the company’s creditors. Shareholders would usually receive part of the company’s assets if the value of the company’s assets exceeds the liabilities of the company. For instance, if the assets of the company total RM 1 million and the debts of the company amounts to RM 700,000, then the remaining RM 300,000 will be distributed to the shareholders of the company (after deducting the cost of winding-up the company).

Besides effectively ending or closing down the company and its business, winding-up proceedings could also damage the company’s reputation and business, even if the company is not wound-up in the end. Usually, this happens because when the banks, creditors for suppliers find out that a winding-up petition has been presented against a company, they would be wary of dealing with the company (especially on credit) because it could mean that the company no longer has the money to pay them. Quite often if the company has a loan facility from a bank when a winding-up petition is presented, the banks would terminate the facilities and demanding the repayment of such loans.

Inability to Pay Debts

The most common situation which results in winding-up proceedings against a company is when the company is not able to pay its debts to their creditor(s) on time.

Under the provisions of the Companies Act 2016 a company is considered 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 RM10,000.00 within 21 days from the date of delivery of the notice.

It is important to remember that when the Court is assessing whether a company is able or unable to pay its debts, it would not only consider whether the value of the company’s assets exceeds the value of the company’s liabilities. Instead, the Court will often look at whether the company has cash in hand available to pay its current liabilities as they become due.

What this means is that it does not matter that the company has investments, properties or other assets that are worth more than the value of their debts if the company cannot come up with the cash to pay its debts on time. It would also not matter if, for instance, the company would be able to eventually repay its creditors over time if allowed to continue carrying out its business. Hence, a big or wealthy company can still be wound-up by the Court!

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. To do so, 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 and usually requires the creditor to deliver this notice to the company’s registered address or company secretary.

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 that 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 which prevents a creditor from presenting a winding-up petition against the company. If successful, the creditor would not be able to start winding-up proceedings against the company.  

For the Court to grant a Fortuna Injunction, the Court must be satisfied with two factors, namely:

1. The winding-up petition has no chance of success or is bound to fail; or,
2. The creditor intends to initiate winding-up proceedings on a disputed debt, which will cause irreparable damage to the company.

If a company can satisfy the court of the two factors above, the company would be able to prevent the creditor from filing winding-up proceedings against it. Most importantly, the company must be able to show that the debt claimed by the creditor is bona fide or genuinely disputed. An example of when the Court would allow a Fortuna Injunction would include cases where it can be shown that the creditor is attempting to pressure the company to pay the disputed debt.

Another specific instance where the Court may allow a Fortuna Injunction can be seen in the case of Tan Kok Tong v Hoe Hong Trading Co Sdn Bhd. In this case, the Court decided that even though the debt was not in dispute, a creditor could not file a winding-up petition against the company when there is already an agreement in place for its repayment, such as an agreement for the debt to be repaid in instalments.

A minor or technical dispute such as a minor dispute on quantum would usually be insufficient for the Court to grant a Fortuna Injunction. For instance, a High Court Judge recently decided not to allow a Fortuna Injunction because even though the sum claimed by the creditor may have been higher than the true amount due at the time, the company is still considered to be unable to pay its debts if the true amount owed by the company exceeds RM 10,000.00.

STAGE 2: WINDING-UP PETITION

If the company was unable to obtain a Fortuna Injunction, the creditor would be able to present a winding-up petition against the company.

After the winding-up petition is presented, the creditor must advertise the petition in the government gazette and newspapers. The purpose of these advertisements is to inform the public that someone is attempting to wind-up the company. This would then allow other parties, such as the company’s other creditors to support or oppose the winding-up petition.

Often, these advertisements would cause serious problems to the company’s reputation and business as the public may begin to doubt the company’s financial health and ability to pay even though the company has not been wound up.

The winding-up proceedings would then be heard before the Judge in Court. Here, the Judge will then decide whether the company should be wound-up or not.

What Can Be Done?

At this stage, the company must oppose the petition on the day of the hearing itself. To successfully prevent a winding-up, the company must be able to show that there is a genuine dispute over the validity of the debt being claimed by the creditor.

STAGE 3: POST-WINDING UP

If the company is unable to show that there is a genuine dispute on the debt claimed, the Court would likely order that the company be wound-up. Once this happens, 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 may still continue to exist, the appointment of a liquidator would cause the directors to lose most of their powers over the management and running of the company. However, the directors are not completely free from responsibility over the company. For instance, the directors are still required to prepare and file a statement of the company’s financial affairs with the liquidator.

What Can Be Done?

At this stage, the liquidator would already begin to liquidate the company and sell its assets. 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, for such an application to work, the debts of the company must usually be settled. Often, before the Court allows this, it would want to make sure it is not allowing a company that cannot pay its debts back into the market and accumulates more debt.

CONCLUSION

Winding-up proceedings can be extremely damaging to the business of a company and directors should take urgent steps to save the company, especially when the debts claimed by a creditor is substantially disputed. Therefore, 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.

From a business perspective, directors should always remember to make every effort to pay its creditors on time and without delay to avoid the initiation of winding-up proceedings.