DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER TWELVE, 2013 CHAPTER TWELVE:WINDING UP OF A COMPANY What is Winding Up of A Company?

The process by which a company is dissolved is known as winding up or liquidation of the company. When a company is wound up, its business is closed down, its assets are sold off and all the moneys of the company are collected. Then, the liquidator pay to the creditors on priority basis from the company assets. If there is any balance, the members of the company are paid. At the end of the whole process, the company ceases to exist. Types of Winding Up There are two types of winding up of a company and they are: i. Winding up by the court ii. Voluntary winding up Winding Up by the Court Winding up by the court is also known as compulsory winding up. Some persons may petition to the court for winding up of a company on certain grounds. The persons who are entitled to file a petition to the court for compulsory winding up are as follows: i. The company itself; ii. The creditors; iii. The contributory; iv. The personal representative of a deceased contributory; v. The liquidator of a company; vi. Various Ministers on specified grounds; vii. Bank Negara; viii. The Registrar of Companies. Grounds for Winding Up by Court If a person is entitled to petition in the court for compulsory winding up of the company, the court may order for winding up on any one or more of the following grounds. A petition for winding up must state the grounds on which it proposes to wind up the company. The grounds for compulsory winding up petition are as follows: 1. The company by special resolution resolved that it be wound up by the court. [Section 218 (1)(a)] 2. The company is in default to hold statutory meeting and to lodge statutory report. [Section 142 of CA] If the court thinks it proper it may instead of making a winding up order, may order that the statutory meeting be held or the statutory report be lodged to the Registrar of Companies and that the legal costs are to be paid by the persons who are responsible for the default. [Section 221 (3) of CA] 3. If the company does not commence its business within one year or suspends its business for one year from the date of its incorporation.

DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER TWELVE, 2013 2 However, the court will make a winding up order only when it is satisfied that the company has an intention to abandon its business or it is unable to carry on the business. In Re Tomlin Patent Horse Shoe Co. Ltd, 1 Chitty J. in the High Court of England held that the court will not make a winding up order unless it is satisfied that there has been an intention on the part of the company to abandon its business or inability to carry it on. 4. When the number of members in the company has been reduced to below two. 5. When 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 the interests of the members of the company or in any other manner whatever which appears to be unfair or unjust to other members. [Section 218(1)(f) of the Companies Act 1965] 7. When an inspector appointed under part IX of Companies Act has recommended that the company be wound up. [Section 218 (1)(g) of Companies Act] The court will order winding up under this section only if the inspector is of the opinion that the company cannot pay its debts or that it is in the interest of public, shareholders or creditors to wind up the company. 8. When the time fixed for the companys existence has expired. [Section 218 (1)(h)] 9. When the court is of the opinion that it is just and equitable to wind up the company. [Section 218 (1)(i)] On the following circumstances the court may wind up a company on the ground of just and equitable. Where the main object of the company cannot be achieved or has been departed from; Where the companys business is carried on in fraudulent manner. Where a company in reality is no more than an incorporated partnership and its members can no longer continue to work in association with one another. iv. Where the minority members have been oppressed or treated unfairly by the controlling members and the minority members have just lost confidence in the management. 10. If 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 1983 or the Banking and Financial Institutions Act 1989 as the case may be. 11. If the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public order, good order or morality in Malaysia. 12.If the company is being used for any purpose prejudicial to national security or public interest. Voluntary Winding Up Members or creditors of a company may voluntarily wind up the company for certain reasons. This is known as voluntary winding up. Voluntary winding up is of two types such as: i. ii. iii.

(1886) 55 LT 314 at 316

DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER TWELVE, 2013 i. Members voluntary wind up ii. Creditors voluntary winding up

Members Voluntary Winding Up When the members wish to wind up the company voluntarily is known as members voluntary winding up. Members voluntary winding up is only possible when the company is solvent. If the company is insolvent, then members voluntary winding up not possible. That time members voluntary winding up is converted into creditors voluntary winding up. Before the commencement of the members voluntary winding up, the directors must make a written declaration that they have inquired into the affairs of the company and are of the opinion that the company would be able to pay the creditors in full within one year after the commencement of the winding up proceeding. Creditors Voluntary Winding Up Creditors voluntary winding up is only possible if the company is insolvent and not able to pay back the debts of creditors in full. However, the creditors cannot initiate the creditors voluntary winding up. In fact, the members voluntary winding up is converted into the creditors voluntary winding up if the liquidator is of the opinion that the company is unable to pay its debts in full. Appointment of Liquidator For compulsory winding up a liquidator is appointed by the court. For voluntary winding up, a liquidator is appointed by the members of the company. Powers, Functions and Duties of Liquidator In both voluntary and compulsory winding up a liquidator is appointed. In compulsory winding up, a liquidator is appointed by order of the court when it makes the order for winding up. In voluntary winding up, the liquidator is appointed by the general meeting of members. When a company is placed in liquidation, the liquidator replaces the board of directors as an organ of the company and assumes all the powers of the board of directors. Section 236 of the Companies Act 1965 provides the powers and functions of liquidators as follows: i. ii. iii. iv. v. vi. To carry on business of the company so far as it is necessary for the beneficial winding up of that business; To make compromises with creditors and contributories with respect to their claims and liabilities; To bring or defend legal proceedings in the name of the company and to appoint a solicitor to assist; To sign documents on the companys behalf and use its common seal for that purpose; To appoint an agent to do any business that the liquidator is unable to do, or that it is unreasonable to expect the liquidator to do in person; Proper administration The liquidators first duty is to administer the company properly. He has to open a bank account. Any money he receives on behalf of the company should be deposited to this account;

DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER TWELVE, 2013 vii. viii. ix. x. xi. xii.

He will acquaint with the companys affairs; He will collect the assets of the company; He will preserve the assets of the company until they can be realized; He will then realize the assets of the company; He will then distribute the assets of the company among the creditors and members; He will report of breach of the Companies Act by the directors or any other persons to the court. Breach may include; false statement, fraud etc. xiii. When he has realized and distributed the companys assets to the creditors and members, he may apply to the court for an order that he be released and that the company be dissolved. [Section 239 of CA] xiv. Within one month of ceasing to act as liquidators, he must lodge with the Registrar and official Receiver; an account of the conduct of the liquidation explaining how the companys property has been distributed. [Section 281 of the Companies Act] xv. To do all such other things as are necessary for winding up the affairs of the company and distributing its assets. TAKEOVERS AND MARGERS 1. What is takeover? 2. What is merger? 3. Sources of takeover and merger laws. The sources of takeover and merger laws are as follows: i) Securities Commission Act 1993. ii) The Code of Takeovers and Margers 1998 (The Takeovers code). iii) Practice Notes issued by the Securities Commission in relation to the code. iv) Bursa Malaysia Listing Rules. v) Foreign Investment Committee Guidelines. 4. Objectives of the takeover Code. The purpose of takeovers Code and different regulations is to ensure that takeover bids are conducted fairly. The Code ensures fair treatment of shareholders in the target company. In many cases the offeror company (the takeover company) enables an investor to obtain a greater price for his shares and to invest the proceeds to obtain a higher income than if the company remained under its original management. The Takeovers Code ensures that safeguards for the protection of shareholders are observed. 5. Procedure for takeovers The Takeovers Code provides detailed procedure for takeover. The offeror company must follow the following rules: i) The offer is not regarded hostile; ii) The offer application is submitted to the Securities Commission (SC) before incurring a general offer obligation; iii) The remaining shareholders in the target company (Offeree company) are less than 30 in number and carry less than 33 percent of the voting shares in the offeree company; iv) The value of the remaining voting shares based on the offer price is less than RM 10 million. 6. Normal takeover Normal takeover is to takeover another company in a friendly manner. It should not be hostile takeover. In normal takeover, a proposal is made by the offeror company to the target company to takeover the company by offering higher share price than the market share price. 7. Compulsory takeovers

DR. MD. ABDUL JALIL, COMPANY LAW, CHAPTER TWELVE, 2013 5 The offeror company has already acquired 90% of the shares in the target company. (Section 34 of Securities Commission Act). The offeror must within two months give prescribed notice of its wish to acquire the outstanding shares held by the dissenting minority shareholders (Section 34(1) of the Securities Commission Act). A compulsory acquisition of shares in the target company can be opposed by 10% dissenting shareholders (minority shareholders) in the court. The courts are reluctant to set aside a compulsory acquisition because acceptance by the holders of 90% shares strongly indicates that the takeover offer is fair.2 A compulsory acquisition was successfully opposed in Re Bugle Press Ltd [1960] 3 All ER 791, where 90 percent shareholders formed a company for the purchase of remaining 10% shares for getting a takeover. This was done in order to acquire compulsorily the ten percent shareholding of a minority shareholder. It was held that even though the price was fair, this was an improper use of the compulsory acquisition procedure.3 Note: Students are required to read the above points from the book written by Shanthy Rachangan et al, Principles of Company Law in Malaysia, Kuala Lumpur: Malayan Law Journal, 2002, Chapter 18. 8. Islamic Perspective of Winding up of a Company. Islamic law requires that the winding up procedure should be fair and just and the majority shareholders will not act mala fide. The winding up procedure should be in the interest of creditors and shareholders of the company. No fraud or mala fide intention should be involved in the appointment of a liquidator. The liquidator should be an honest person and must have adequate knowledge of company law and company business. Surah al-Nisa (4): 58, 135; Surah al-Araf (7):29. In a hadith prophet (s.a.w.s) said: A truthful businessmen will remain with prophets, pious men and martyrs in jihad in the Day of Qiamah. (Sahih Bukhari). In another hadith prophet (s.a.w.s.) said: There are three types of judges and among them only one type of judges will enter paradise and the other two types of judges will go to hell fire. The judge who could understand the fact and truth of the case and decided fairly and justly will go to paradise; the judge who could not understand the fact and truth of the case and decided wrongly will go to hell fire; and the judge who could understand the real fact and truth of the case, but decided wrongly with mala fide intention or for other reasons will go to hell fire. (Sahih Muslim). Dr. Md. Abdul Jalil E-mail: abduljalil@iium.edu.my HP: 0183231612

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Shanty Rachangan et al, Principles of Company Law in Malaysia, Kuala Lumpur: Malayan Law Journal, 2002, at p. 576. Shanty Rachangan, et al, Ibid.