Topic 10 winding-up_a141

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Topic 10
WINDING UP
BKAF3063 FAR III A132

Chapter Outline
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.
☞ Winding up:
► by order of the Court
► voluntary winding up
☞ Rights of a liquidator
☞ Proof of creditors
☞ Order of payment
☞ Rights to contributors.
☞ Statement of affairs
☞ Statement of receipts and payment.
☞ Liquidation accounts
.
.
.

Winding Up
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 Insolvent: When a company cannot pay its debt as and when it falls
due.
 S218(2) CA: a company shall be deemed insolvent if a creditor to
whom a company owes more than RM500 and such sum is due for
payment, serves a written notice is given or to secure or compound
such sum to the satisfaction of the creditor.
 An insolvent company will cease business and go into liquidation after
being wound up by the court. The company will be struck-off from the
register of companies and the assets of the company will be liquidated
or sold off. The proceeds of the sale will be distributed according to
law.

Winding Up
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☺ S211 CA: two modes of winding up:
1 – Voluntary winding up by:
- members
- creditors
2 – By the court.
☺ S254 CA: a company may be wound up voluntarily
- When the period, if any, fixed for the duration of the company by the
memorandum & articles (M & A), or the event, if any, occurs, on the
occurrence of which the M & A provide that the company is to be
dissolved and the company in GM has passed resolution to voluntary
winding up.
- If the company so resolves by special resolution.

Members’ Voluntary Winding Up
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S257 CA:
 Directors lodged a declaration of solvency. The company will be able to pay
its debts in full within a period not exceeding 12 months after the
commencement of the winding up.
 The declaration must be supported by a Statement of Affairs of the
company showing, in the prescribed form:
i) the assets of the company & the proceeds expected from their
realization.
ii) the liabilities of the company
iii) the estimated expenses of winding up.
 A director who makes a declaration without having reasonable grounds for
the opinion shall be imprisonment for 3 years or RM10,000 fine or both.

Members’ Voluntary Winding Up
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 Members’ can appoint the liquidator.
 If a liquidator believes that the company will not pay its debts
in full within stated time, he/she must immediately call a
meeting of creditors.
 At the meeting, creditors will consider a statement of assets &
liabilities & may appoint another person as a liquidator.

Creditors’ Voluntary Winding Up
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☞ S260 CA:
☺ Rules for calling & conduct the meeting of creditors:
i. It must be at a time & place convenient to the majority of
creditors.
ii. It must be advertised in a local newspaper.
☺ The directors must arrange for the preparation of statement of affairs.
☺ One director & the secretary must attend that meeting to explain the
company’s affair & reasons for its present condition.

Winding Up by the Court
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☞ S217(1) CA: a company may be wound up under an order
of the Court on the petition of:
1) the company
2) any creditor, including a contingent or prospective
creditor
3) a contributory
4) the liquidator
5) the Minister pursuant to (S205, S218 (1) d)
6) Bank Negara Malaysia

Winding Up by the Court …
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☞ S218(1) CA: Circumstances in which company may be wound up by court:
1. The company has by special resolution resolved that it be wound up by the
Court.
2. Default is made by the company, in lodging the statutory report or in
holding the statutory meeting.
3. The company does not commence business within a year from its
incorporation or suspends its business for a whole year.
4. The number of members is reduced in the case of a company (other than a
company the whole of the issued shares in which are held by a holding co)
below two.

Winding Up by the Court…
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5. The company is unable to pay its debts.
6. The directors have acted in the affairs of the company in their own interests
rather than in the interests of the members as a whole.
7. An inspector appointed under Part IX has reported that he is of opinion:
- That the company cannot pay its debts & should be wound up.
- That it is in the interests of the public @ s/holders @ creditors that
the company should be wound up.
8. When the period, if any, fixed for the duration of the company by the M &
A expires, or the event, if any, occurs on the occurrence of which the M & A
provide that the company is to be dissolved.

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9. The court is of opinion that it is just & equitable that the company be
wound up.
10. The company has held a licence under the Banking & Financial Institution
Acts or the Islamic Banking Act, and that licence has been revoked or
surrendered.
11. The company has carried on Islamic banking business, licensed business or
scheduled business or it has accepted, received or taken deposits in
Malaysia, in contravention of the Islamic Banking Act and BAFIA.

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☞ S218(2) CA - Definition of Inability to Pay Debts:
 The company unable to settle debts exceeding RM500 &
the company has for 3 weeks thereafter neglected to pay
the sum or to secure or compound for it to the reasonable
satisfaction of the creditors.
 Execution or other process issued on a judgement of the
company is returned unsatisfied in whole or in part.
 It is proved to the satisfaction of the court that the
company is unable to pay its debts.

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S219 CA - Commencement of winding up by the Court:
 Where before the presentation of the petition a resolution
has been passed by the company for voluntary winding
up, the winding up of the company shall be deemed to
have commenced at the time of the passing of the
resolution.
 Unless the court on proof of fraud or mistakes thinks fit
otherwise to direct, all proceedings taken in the voluntary
winding up shall be deemed to have been validly taken.
 In any other case the winding up shall be deemed to have
commenced at the time of the presentation of the petition
for the winding up.

Appointment of Liquidator
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 A liquidator is an authorized person who will deal with the
assets and liabilities of the company including the bank
account and employees of the company.
 Once the liquidator has been appointed, the directors cannot
bind the company. The directors will be removed from
office.
 S8 CA – The liquidator must be either Official Receiver or
an approved company auditor.
 Power and duties of the liquidator are:
- To realize the assets of the company.
- To pay creditors.
- To distribute any remaining assets to shareholders.

Appointment of Liquidator
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 S10CA – Disqualification of liquidators:
a) If he is not an approved liquidator
b) If he is indebted to the company that is deemed to be
related to the company exceeding RM2,500.
c) If he is an officer of the company
d) If he becomes bankrupt

Provisions Applicable to
Every Mode of Winding Up
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 S277 (1) CA – every liquidator shall keep proper books in
which he shall cause to be made entries or minutes of
proceedings at meeting
 creditor or contributory can inspect the books.
 S277 (2) CA – The Court shall take cognisance of the conduct
of liquidators
 If any complaints from creditors Court can take action
against liquidator.
 S283 CA – Where a company is being wound up every invoice,
order of goods or business letter issued by or on behalf of the
company or a liquidator of the company or a receiver of the
property of the company….. shall have the words “in
liquidation “ added after the name of the company

Provisions Applicable to
Every Mode of Winding Up
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 S284 (2) CA – when a company has been wound up the liquidator shall
retain the books & papers for a period of 5 years from the date of
dissolution of the company and at the expiration of that period may
destroy them
 S286 (1) CA – Where liquidator has in his hands:
- any unclaimed dividend or other moneys remained unclaimed for
more than 6 months from the date payable;
- any unclaimed or undistributed moneys after making final
distribution.
he shall pay those moneys to the Official Receiver to be placed to the
credit of the Companies Liquidation Account.
 S287 (1) CA – Unless expressly directed to do so by the Official
Receiver, a liquidator shall not be liable to incur any expense in relation
to the winding up of the co unless there are sufficient available assets.

Liability as Contributories of
Present and Past Members
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a) if he has ceased to be a member for 1 year or more before the
commencement of the winding up.
b) in respect of any debt or liability of the company contracted after he
ceased to be a member.
c) unless it appears to the Court that the existing members are unable to
satisfy the contributions required to be made by them.
d) Company limited by shares – no contribution shall be required from
any member exceeding the amount, if any, unpaid on the shares in
respect of which he is liable as a present or past member.
☞ S214 CA – A past member shall not be liable to contribute:

Unlimited Liability of Directors
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a) if he has ceased to hold office for a year or more before
the commencement of the winding up.
b) in respect of any debt or liability of the company
contracted after he ceased to hold office.
c) unless the court deems it necessary
☞ S214 (2) CA – A past director shall not be liable to make
further contribution:

Creditors
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 S291 CA – creditors should lodge their proof of debt with
the liquidator.
 Creditors are classifies into:
1. Secured creditors.
2. Unsecured creditors – preferential creditors.
3. Deferred creditors.

Secured Creditors
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☺ These creditors usually have the right to take possession of the asset in
order to sell it so that debt can be paid out of the proceeds.
☺ Creditors who have a legal charge. E.g mortgage or lien over some
specific asset.
☺ If the asset realized > debt, the surplus must be paid to the liquidator.
☺ If the asset realized < debt, the undischarged balance rank as an
unsecured creditor.

Secured Creditors
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☺ Two types of charge:
1. Fixed charge:
- charged on any specific assets.
- example: mortgage on buildings or other property.
2. Floating charge:
- Secured on any asset (not specific).
- example: debenture.
- S294 CA – a floating charge created within 6 months of the
commencement of the winding up shall, unless it is proved that the
company immediately after the creation of the charge was solvent,
be invalid except to the amount of any cash paid to the company at
the time of or subsequently to the creation of & in consideration
for the charge together with interest on that amount at the rate of
5% per annum.

Unsecured Creditors
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 Those creditors who have not taken steps to protect themselves.
 However, the law gives some unsecured creditors priority/preference
over the others.
 S292 (1) CA - Priority creditors (preferential):
(a) The costs & expenses of the winding up. Example:
- taxed costs of a petitioner payable;
- remuneration of the liquidator;
- costs of any audit carried out pursuant S 281.
(b) All wages @ salary:
- whether or not earned wholly or in part by way of commission;
- including any amt of payable;
- not exceeding RM1,500 for the services rendered within a
period of 4 months before the commencement of the winding
up.

Unsecured Creditors (cont…)
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S292 (1) CA - Priority creditors (preferential): (cont…)
(c) All amounts due in respects of worker’s compensation accrued
before the commencement of the winding up.
(d) All remuneration payable to any employee – vacation leave, in the
case of his death to any other person in his right, accrued in respect
of any period before the commencement of the winding up.
(e) All amounts due in respect of contributions payable during 12
months next before the commencement of the winding up (eg: EPF)
(f) The amount of all federal tax.

Deferred Creditors
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1) Preference share in arrears.
2) Dividend payable.
3) Calls in advance.

Order of Payment
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1. The costs & expenses of the winding up - S292 (1) (a) CA.
2. Creditors secured by specific charge.
3. Preferential creditor S292 (1) CA:
(b) wages @ salary accrued
(d) remuneration payable
(e) contributions payable
4. Creditors secured by a floating charge.
5. Preferential creditor S 292 (1) CA:
(c) worker’s compensation.
(f) federal tax.
6. Unsecured creditors / general unsecured claims.
Note: If the funds that remain for the general unsecured creditors are
not sufficient to settle all claims, the available money must be
divided proportionately.

Statement of Affairs
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☺ Show assets & liabilities on the date of winding up – at a
realizable value.
☺ SA is only an estimate of the outcome of the winding up.
☺ Requirement to prepare a Statement of Affairs is based on
assumption that the company’s accounting records are
incorrect, incomplete or both.
☺ Example – See Illustration 1 : Delima Bhd

The Rights of Contributories
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☺ Any assets remaining after the discharge of all liabilities
belong to the s/holders.
☺ The following problems in this area can be identified:
- forfeiture of shares
- deferred shareholders
- shareholders within a class
- preference shares
☺ Distributed to s/holders in accordance with their
contractual rights.

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 Ranking :
1) Deferred Creditors
2) Capital refund – according to M & A company
 Capital refund – preferential (use value stated in
memorandum):
1) Preference shares
2) Ordinary shares
3) Deferred shares
(If not stated – used nominal value & to exclude forfeiture of shares)

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☞ Illustration 2:
Assume that after discharging all liabilities, the liquidator of EZY Bhd has
RM300,000 available for distribution to its shareholders.
Share capital: RM
6%, 20,000 Preference Shares RM10, fully paid 200,000
100,000 Ordinary Shares - A, RM1, fully paid 100,000
100,000 Ordinary Shares - B, RM4, paid to 50 sen 50,000
50,000 Deferred Shares, RM1, fully paid 50,000
The articles of company provide preference for the refund of capital, as follows:
1. Preference shares;
2. Ordinary shares;
3. Deferred shares.
Calculate the distribution to the shareholders.

Solution to Illustration 2:
Cash surplus 300,000
(-) Distribution to preference shareholders 200,000
Balance to distribute to ordinary shareholders 100,000
Ordinary shareholders - A 100,000
Ordinary shareholders - B 50,000
150,000
Deficiency / loss (50,000)
Distribute deficiency/loss to ordinary shareholders:
No distribution to be made to deferred shareholders.
Nominal value % Share of loss Paid up Refund
Ord. SH - A 100,000 20% 10,000 100,000 90,000
Ord. SH - B 400,000 80% 40,000 50,000 10,000
500,000 50,000 100,000
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Illustration 3:
Assume that after discharging all liabilities, the liquidator of TARA Bhd has
Share capital:
6%, 40,000 Preference Shares, RM1, paid to 50 sen 20,000
100,000 Ordinary Shares, RM1, paid to 75 sen 75,000
() Call in arrears Ordinary Shares (20,000)
75,000
Call in arrears for 20,000 units of Ordinary Shares, amounting to RM4,000
(RM0.20 per shares) had not been received & the company resolved to forfeit
these shares. Capital refund preferential is not stated in the articles of the
company.
Calculate the distribution to the s/holders.

Preferenc
e
40,000 1/3 11,000 20,000 9,000
Ordinary 80,000 2/3 22,000 60,000 38,000
120,000 33,000 47,000
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Cash surplus 31,000
Call in arrears 20,000
Not paid & forfeit 4,000
Payment received 16,000
Cash available for distribution 47,000
(-) Distribution to: preference shareholders 20,000
ordinary shareholders
[(100,000 – 20,000) x 0.75] 60,000

Distribute deficiency/loss to ordinary shareholders:
Pref. SH 40,000 1/3 11,000 20,000 9,000
Ord. SH 80,000 2/3 22,000 60,000 38,000
120,000 33,000 47,000
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Illustration 4:
Assume that after discharging all liabilities, the liquidator of LARA Bhd has
Share capital: RM
5%, 10,000 Cumulative Preference Shares RM10, fully paid 100,000
500,000 Ordinary Shares, RM1, fully paid 500,000
200,000 Deferred Shares, RM1, fully paid 200,000
800,000
Dividend for Preference Shareholders had not been paid since 2 years ago.
According to the company’s articles, the Preference Shareholders are not
preferred as to return of capital, however they will receive the dividend in
arrears.

Cash surplus 900,000
(-) Dividend in arrears (5% x 100,000 x 2 yrs) 10,000
Balance for distribution 890,000
Distribution to:
Preference shareholders 100,000
Ordinary shareholders 500,000
Deferred shareholders 200,000 800,000
Surplus after distribution 90,000
Nominal value % Share of surplus
Preference 100,000 1/8 11,250
Ordinary 500,000 5/8 56,250
Deferred 200,000 2/8 22,500
800,000 90,000
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Accounts of Receipts & Payments
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☺ Prepared by the liquidator.
☺ S 281(1) - Liquidator must lodge this accounts to the Registrar at six-
monthly interval & also within one month of completion of the winding
up.
☺ S 281 (3) – The books & records of the liquidator are available for audit
& that the accts of receipts & payments can be inspected by interested
persons.
☺ Form 75 (Liquidator’s account of receipts & payments):
Account receipts and payments
Sales of assets Liquidator’s expenses*
Creditors
Distribution to shareholders
* Follow the order of payment.BKAF3063 FAR III A132

Closing the Accounts of the Company
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☺ All accounts must be closed at the end of the winding up.
☺ Procedures – prepare the accounts:
- Liquidation
- Shareholders’ distribution
☺ Accounts for sales, purchases, etc up to the
commencement of the winding up can be transferred to
Trading and Income statement accounts or to the
Liquidation account.

Closing the Accounts of the Company
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☺ Use liquidation acct:
- Close nominal acct (sales, COGS, expenses)
- Close assets acct (except cash)
- Pay creditors
- Liquidation cost
- Close equity account (retained profit & reserves)
- Close liquidation account
☺ Use Shareholder’s distribution acct:
- Transfer balances (close) liquidation account
- Close paid up share capital account
- Cash distribution to shareholders
☞ Example – Delima Bhd
☞ Closing the Account of Receipts and Payments to creditors and
shareholders:

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End of Chapter 10

Topic 10 winding-up_a141

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