Is All Lost for a Creditor when a Company is Wound Up?

What is liquidation?

Liquidation is a process to distribute the assets of a company to pay off its debt and liabilities. This process occurs as part of the winding up of a company. It is during liquidation that creditors should be most concerned about the debt owed to them.

This is because the liquidation process will determine whether and how much of the debt will be paid to the creditors. Once liquidation is completed, the company dissolves and ceases to exist.

Who is a creditor?

Generally, if you have provided finance (cash advance/postponed a payment) in exchange for a promise to receive the payment at a future date, you are a creditor.

As a creditor, your main goal would be to recover your debt from the company. In order to recover your debt, you would first have to prove that such a debt exists between the the company and you by filing a proof of debt.

What is a Proof of Debt?

A proof of debt is the document on which a creditor (a person who is owed money) submits details of its claim. A proof of debt may be submitted for two purposes: 

1. To enable the creditor to vote on matters relating to the insolvency process; and 
2. To entitle the creditor to receive a dividend distribution from the insolvent estate.

Proving of a debt usually occurs when creditors seek to substantiate a claim against their debt.

In summary, A “proof of debt” is a statutory declaration by the creditor of a statement of account, showing the proof of the debt owed to them by the company with supporting documents, validating the debtors. 

When Must you File the Proof of Debt? (Rule 91 Companies (Winding up ) Rules 1972)

Generally, the proof of debt can be filed once the company is in liquidation. For a company that is being wound up by the court, the proof of debt must be filed within 3 months after the winding up order is made.

In addition, the liquidator can send a Notice to File Proof of Debt, setting a date in which all creditors are to submit their proofs of debt. The notice will be made available:

• By advertisement in the Gazette and in the newspaper (Form 94) ; and
• Notice in writing to every person (Form 57/58) who, to the knowledge of the liquidator or Official Receiver, claims to be a creditor of the company.

This notice will be made at least 14 days in advance of the deadline of submission.

What if the creditor fails to file the proof of debt before the deadline?

The failure to file the proof of debt before the deadline does not mean that the creditor’s debt is extinguished. The creditor can appeal to the Liquidator to be allowed to submit his POD. 

As long as the company has yet to be dissolved and there are assets yet to be distributed, the creditor can still prove his debt and claim from subsequent distributions.

Procedure for submitting a proof of debt

The proof of debt must be submitted to the Liquidator by, or under the direction of, the creditor and authenticated by the creditor or a person authorised on the creditor’s behalf, and must include the following:

• the creditor’s name and address;
• if the creditor is a company, the company must be identified;
• the total amount of the creditor’s claim (including any SST) as at the relevant date, less any payments made after that date in relation to the claim;
• particulars of how and when the debt was incurred by the company;
• particulars of any security that is held, the date when it was given and the value which the creditor puts on it;
• interest of up to 6% per annum from date debt due or sum payable;
• details of any reservation of title in respect of goods to which the debt refers;
• date and authentication; and
• the name and address of the person authenticating the proof (if other than the creditor itself).

The proof of debt must specify any documents which substantiate the debt. Every creditor bears the cost of proving their own debt, including such costs as may be incurred in providing documentation in support of their claim (unless the court orders otherwise).

Rule 79 CWUR 1972 states that a debt shall be proved via the delivering of an affidavit verifying the debt to the liquidator. The affidavit must specify the particulars of the debt referring to statements of accounts and other vouchers. 

Rule 80 CWUR 1972 then specifies that the aforementioned affidavit must be filed by the creditor himself or someone authorized by the creditor or one on behalf of him, to file the said affidavit. If the affidavit is filed by someone authorized by the creditor, the affidavit must specify the said person’s authority and means of his knowledge. Affidavits in the context of proving a debt refers to the submission of Form 55 to the liquidator. 

In simple terms, Form 55 is a template affidavit that eases the process of submitting the proof of debt, understanding that the drafting of an affidavit from scratch can be a tedious process for the layman. Additionally, the standardizing of affidavits via Form 55 would also allow liquidators to examine and deal with the proofs submitted in a more efficient manner.  The affidavit is also to be affirmed before a Commissioner for Oaths (Rule 83).

It is important to note that the liquidator, in his notice of intention to declare a dividend, may specify a deadline by which proofs have to be lodged. Creditors must take note of and comply with this deadline as the filing of a proof after the determined deadline may result in the creditor not receiving any dividends. The basis to this would be the fact that once the liquidator starts distributing the assets of the company after the determined deadline, there may be insufficient assets to compensate creditors yet to file their proofs of debt.

Quantification of debt

The starting point is that the debt claimed in the proof is to be valued/quantified as at the date of liquidation. However, where a contingent/prospective debt crystallises at some point after the onset of insolvency, the creditor is allowed to prove for the full amount under the 'hindsight principle'.

Regardless of whether the company is facing a voluntary or involuntary winding up, all debts and claims against the company that are present or future, certain or contingent, may be proved against the company. Creditors may also file a proof of their debt regardless of whether the debt is due on the date of filing.

Liquidators are under a statutory duty to estimate the value of any debt which, by reason of its being subject to any contingency or for any other reason, does not bear a certain value. They may revise any estimate previously made if they think fit, by reference to any change of circumstances or to other information becoming available to them. They shall inform the creditor as to their estimate and any revision of it.

Duty of the Company/Liquidator After the Proof of Debt is Filed?

A liquidator is under a duty to ascertain and discharge the liabilities of the company/bankrupt in so far as there are net realisations to do so. If possessing evidence of additional potential claims against the company, the liquidator should actively ascertain whether contingent creditors intend to prove and set aside any provisions as necessary.

It is clear from the provisions of the Winding Up Rules that at first instance, it is the liquidator that makes the decision on whether such proof of debt is to be admitted. Upon the lodging of the proof of debts, the liquidator will examine the proof of debts lodged and shall in writing, either admit or reject (in whole or in part) the proof. Rule 98 clarifies that liquidators would generally be allocated twenty – eight (28) to make a decision regarding a proof lodged. Such decisions would include the requirement for further evidence to substantiate the proof lodged. 

Rule 91 CWPR allows for liquidators to arrange a date for creditors to substantiate and prove the debt referred to in their affidavits. If a creditor fails to successfully substantiate the existence of the debt via accurate statement of accounts and vouchers, the liquidator may decide to reject the submitted proof on its lack of merit. 

If such proof is rejected, whether in whole or in part, the liquidator must state in writing in Form 59, the grounds for rejection which is to be then sent to the creditor. 

Creditors who have had their proofs of debt accepted and admitted will receive a notice of this decision from the liquidator in writing. Rule 99 clarifies that a notice of dividend shall suffice as notice of admission of the proof.

If a creditor’s proof of debt is improperly/wrongly admitted, the liquidator may apply to the court to remove the proof or reduce the amount of debt. 

In any event, even if the liquidator were to reject a proof of debt, an appeal to the courts can be made where the aforesaid evidence would be significant in reversing the liquidator's decision. Therefore, it is important for creditors to accurately file and document all transactions and monetary advances in order to ensure that they can substantiate their claim as a creditor of a company, should the need arise.

How do I Appeal against the Rejection of the POD by the Liquidator 

Method of Appeals

If such prove of debt is rejected by the liquidator, creditors may appeal to the courts to reverse or vary the decision of the liquidator in accordance with Rule 93. However, there are certain limitations on making such an appeal. 

Appeals must be made within twenty – one (21) days from the date of service of rejection of proof. The courts may of course exercise their discretion in extending the aforesaid time limitation, but in the absence of a time extension, notice of application for appeal must be submitted within 21 days. 

Consequently, the liquidator would have to file a memorandum of his disallowance of the proof alongside the proof within three (3) days from the date he receives notice of the creditors appeal. (Rule 97)

In the High Court case of Torita Rubber Works Sdn Bhd v Chew Chong Eu [2009] 5 MLJ 208, the applicant had filed a notice of motion seeking to appeal against the decision of the liquidator in rejecting the applicant’s proof of debts. Here, the application was allowed on the basis that the liquidator’s rejection of the proofs was unfounded and unsubstantiated. The applicant had submitted sufficient evidence to justify the existence of a debt. It was held that the findings of the liquidator must be reasonable and with proper basis. Each proof of debt must be meticulously considered, and the decision of the liquidator must be one that can be substantiated based on the facts and evidence.

In the case of MAICA Corporation Sdn Bhd and Others v Bina Satu Sdn Bhd and Abdul Karim bin Ibrahim (Contributory) [2006] MLJU 229, the liquidator rejected the filed proof of debts on the basis that the evidence relied on the substantiated the debt were mere photocopies of purchase orders and invoices without the original copy. On appeal, the courts reversed the liquidator's decision and admitted the creditor's proofs. The courts held that the mere lack or original copies of payment vouchers and invoices were not sufficient grounds to reject the proofs of debt in its totality. The applicants had taken all necessary steps to ensure the validity of the photocopies via affirmation of all these copies on oath. Ultimately, the lack or original documents was not accepted as the sole ground for rejecting a proof of debt.

In the case of Orix Leasing Malaysia Berhad v Rossington Consolidated Sdn Bhd (Dunheved Industries Sdn Bhd, applicant) [2015] MLJU 1902, the courts clarified that liquidators have a statutory duty to examine all proofs of debt submitted to them. They also have a statutory right to request further documents to prove the debt in question. Here, upon the request of further documents, the applicant’s reverted with the same affidavit (Form 55) previously filed. The liquidator then found that the claim of the applicant could not be substantiated and rejected the proofs of debt. On appeal, the courts were of the view that failure on part of the applicants to revert with further documents to substantiate their claim was sufficient grounds to reject their proofs. 

Will Proof of Debt Ensure Payment by the Company?

Even if your proof of debt is successfully submitted and accepted, it does not guarantee that your debt will be paid by the company. Whether a debt will be paid depends on whether the company has any leftover assets and whether you are a secured, preferential or unsecured creditor. The law has set out a certain priority when it comes to settling creditors’ claims.

Secured creditors rank second in priority for debt repayment as they are a special class of unsecured creditors granted priority by the law. Secured creditors are creditors who usually hold rights over the company’s property and/or goods as a security for the payment of debt. It ensures that the creditor receives repayment through the asset in case the debtor fails to repay his debt on time. Secured creditors are entitled to realise their security regardless of the liquidation process. It is only if the security is inadequate to repay the debt that they have to prove as unsecured creditors for the remaining balance. 

Unsecured creditors are creditors who did not receive any security for their financing. They will be paid last from what is left over after distributions are made to the preferential and secured creditors.

However, if the company runs out of assets to repay the unsecured creditors after paying the secured creditors and preferential creditors, the unsecured creditors will not get paid.

CONCLUSION

In essence, if one can substantiate the existence of a debt via adequate evidence, while also complying with the proper time limitations and other procedures, it is likely that his proof of debt will be admitted. 

As a creditor, in order to significantly ensure that your proofs be admitted, it is important to take note of two things. 

First, debts referred to in the affidavit filed with the liquidator must be capable of being substantiated and evidenced with the relevant documents. Such documents, as clarified in Rule 79 would include account statements and payment vouchers that ultimately can substantiate the notion that the company does indeed owe you money. It is unlikely that the liquidator would reject a proof of debt if evidence put forth to him is conclusive and accurate. 

It is therefore important to submit the proof of debt in the proper form with the right supporting documents, following the proper procedure and deadline.