COMPULSORY WINDING UP



COMPULSORY WINDING UP

1. DEFINITION OF COMPULSORY WINDING UP
It is winding up by an order of the court which is initiated by the presentation of a petition by a person who is entitled to do so. The petition can be presented in the High Court of Malaysia. Two things must be shown before the court will make a winding up order on a petition:
  1. That the petitioner had the right to present the petition, and
  2. That one of the grounds set out in the Act as justifying a winding up has been made out.

The court may not make a winding up order unless it is satisfied that the voluntary winding up cannot be continued with due regard to the interest of the creditors or contributories.

2.WHEN CAN A COMPANY BE WOUND UP BY THE COURT?
Section 218 - Circumstances in which company may be wound up by Court.
(1) The Court may order the winding up if:
(a) the company has by special resolution resolved that it be wound up by the Court;
(b) the company has defaulted in lodging the statutory report or in holding the statutory
                        meeting;
(c) the company does not commence business within a year from its incorporation or suspends its business for a whole year;
(d) the number of members is reduced below two [in the case of a company (other than a company the whole of the issued shares in which are held by a holding company)];
(e) the company is unable to pay its debts;
(f) the directors have acted in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever which appears to be unfair or unjust to other members;
(g) an inspector appointed ‘under Part IX investigations’ has reported that he is of opinion-
(i) that the company cannot pay its debts and should be wound up; or
(ii) that it is in the interests of the public or of the shareholders or of the creditors that the company should be wound up;
(h) when the period ( if any) fixed for the duration of the company by the memorandum or articles expires.[ or the event, if any, occurs on the occurrence of which the memorandum or articles provide that the company is to be dissolved];
(i) the Court is of opinion that it is ‘just and equitable’ that the company should be wound up;
(j) the company has held a licence under the Banking and Financial Institutions Act 1989 or the Islamic Banking Act 1983, and that licence has been revoked or surrendered;
(k) 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; or
 (l) the company has held a licence under the Insurance Act 1996 and-
(i) that licence has been revoked;
(ii) Bank Negara Malaysia has petitioned for its winding up under subsection 58(4) of the Insurance Act 1996; or
(iii) an order under paragraph 59(4) (b) of the Insurance Act 1996 has been made in respect of it;
(m) 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; or
 (n) the company is being used for any purpose prejudicial to national security or public interest.

3. WHEN  A COMPANY UNABLE  TO PAY ITS DEBT?
[S 218 (2)]
A company is deemed to be unable to pay its debt if any one of the following three circumstances is shown to exist:
 (a) the petitioner has delivered to the company at its registered office, a written demand for payment of all         debt owing to him of at least RM500 and within the           ensuing three weeks, the company has neither paid the debt nor given security for the payment;

(b) a judgment has been obtained against the company for the debt and an attempt to obtain payment out of the company’s assets remain unsatisfied; or

(c) the court is satisfied that the company is unable to pay its debt.

4. WHO MAY PETITION FOR THE COMPULSORY WINDING UP OF A COMPANY?
Section 217(1) provides that the following persons may petition for the winding up of a company:
  1. The company itself
  2. Any creditor, including a contingent[1] or prospective creditor, of the company;
  3. A contributory[2] or any person who is the personal representative of a deceased contributory or the trustee in bankruptcy or the Official Assignee of the estate of a bankrupt contributory;
[1] dependant
[2] S 4: a person liable to contribute to the assets of the company in the event of its being wound up, and includes the holder of fully paid shares in the company and, prior to the final determination of the persons who are contributories, includes any person alleged to be contributory.
  1. The liquidator;
  1. The Minister pursuant to section 205 or on the ground specified in section 218(1)(d);
  1. Bank Negara Malaysia;
7. The Registrar on the grounds specified in section 218(l)(m) or (n),
Or of any two or more of those parties.

The term contributory include every person liable to contribute to the assets of the Company in the event of its being wound up. It includes the present members and certain past members of the company. It has been held that a holder of fully paid up share is a contributory and entitled to present a petition.

Section 217(2) provides exceptions whereby contributory may not present a petition on any of the grounds specified in section 218(a),(b),(c), (e) or (l) unless:
            i.          The number of members is reduced below two; or
            ii.          The shares allotted to the contributor, or have been held by him and registered in his name at least 6 months during the 18 months before the presentation           of the petition or have devolved on him through the             death or bankruptcy of a former holder

1.    Application by the company
Section 217(1) (a) allows the company to apply to have itself compulsorily wound up. The general meeting is the appropriate organ to determine that the company be wound up.

Application by a company for its compulsory winding up is quite rare. Usually, if the members wish to liquidate their company, they will do so by a voluntary winding up. A voluntary winding up does not involve a court hearing and so is cheaper. Furthermore, the members get to appoint the liquidator and have greater supervisory power over the conduct of the liquidation

On the other hand, a voluntary winding up can only be initiated by a special resolution which requires three quarters majority, whereas under s 217(1)(a), a compulsory winding up only requires an ordinary resolution. In some circumstances, the members may desire to place the company into liquidation as quickly as possible. If this is the case, a compulsory winding up may be preferred over a members’ winding up, because meetings at which ordinary resolutions are to be proposed require less notice than meetings at which it is proposed to pass special resolution.

2. Application by the creditors as a ground for compulsory liquidation
(Usually) The vast majority of applications for compulsory winding up are presented by creditors on the grounds contained in s 218 (1) (e) i.e. the company is unable to pay its debts.
S 217(1) (b) permits a creditor, a contingent or a prospective creditor to apply for a compulsory winding up. This section enables creditors to apply for a winding up even though their debts are not immediately due and payable at the date of the application.

In RE WILLIAM HOCKLEY LTD [1962] 1 WLR 555, it was held that a person who is owed a debt by the company, which is still unpaid at the date of the application for winding up, is a creditor.

The essential element here is that there must be a valid debt otherwise the fundamental requirement of a debtor-creditor relationship would not be fulfilled. Without ‘a valid debt’, the petition will be accordingly dismissed: JURUPAKAT SDN BHD V KUMPULAN GOOD EARTH (1973) SDN BHD [1988] 3 MLJ 49 and RE MERCHANISED CONSTRUCTION PTE LTD.

A contingent creditor is a person to whom a debt is owed, payment of which is only due on the occurrence of some future event. For example, in the COMMUNITY DEVELOPMENT PTY LTD V ENGWIRDA CONSTRUCTION CO (1969) 120 CLR 605, the High Court of Australia held that a builder whose debt only became payable on the outcome of arbitration proceedings is a contingent creditor and is therefore capable of filing a winding up application. This is so even though it was uncertain whether the builder would be successful in the arbitration.

A prospective creditor is a creditor to whom a debt is due but not immediately payable. For example, a person who sells goods on the basis of payment within 30 days after delivery is prospective creditor of the buyer for the debt during the 30days period.

The question of a person’s standing as a creditor usually arises when the company disputes the existence of the debt. The question of disputed debts also arises in the context of determining whether a company is deemed to be unable to pay its debt or whether it has failed to meet a statutory demand made pursuant to s 218(2)(a).

3.         Application by the contributories as a ground for liquidation [s 217(1)(c)]
Section 4(1) defines a contributory to include:
  1. A person liable as a member or past member to       contribute to the assets of the company in the event of             winding up; and
  2. A holder of a fully paid shares in the company

This definition of a contributory, in the case of a company limited by shares, includes persons who at the commencement of the winding up, held either fully paid or partly paid, even though strictly speaking, only a holder of partly paid shares is liable to contribute an amount on the winding up. Not only the contributories must hold the shares, their names must also be entered in the register of membership.

Under s 214, past members may also be liable to contribute to the assets of a company if they were members within one year of the commencement of winding up and the present members are unable to satisfy the full extent of their liabilities. Exceptions to this rule are set out in s 214(1). E.g. past member ceased to be a member for 1 or more years before the commencement of the winding up [(a) till (g)].

A deceased contributory’s personal representative is by virtue of s 216 also liable to contribute to the assets of the company on a winding up. Accordingly, the personal representative is also included within the definition of contributory even though not registered as a member.

S 215 states that a contributory’s liability is that of a specialty debt. This diminishes the effect of the Statute of Limitations as a specialty debt can be enforced within 20 years of the liquidator making the call. The debt accrues from the contributory at the time that he or she is liable and becomes payable at the time when calls are made to enforce that liability.

5. “JUST AND EQUITABLE" GROUNDS 

Most often used by members. Creditors may present a petition using this ground too. A petitioner who wishes to use this ground should do so expeditiously because undue delay may indicate that he has acquiesced[1] in the conduct complained of. Below are examples of situations where the court held that it is just and equitable to wind up the company (not exhaustive):
[1] to agree or comply with something in a passive or reserved way

1. If  the substratum of the company has gone i.e. the main object of the company cannot ever or no longer be achieved.
           
Case: RE GERMAN DATE COFFEE CO.
            The ‘principle/main’ object or objects of the company was the working of a German patent to manufacture coffee from dates. The company failed to acquire the German patent but acquire a Swedish one and established works in Hamburg where it manufacture coffee from dates without a patent. Some shareholder withdrew from the company when they discover that a German patent would not be obtained. The large majority wished the company to continue but two shareholders petitioned the court for a winding up order on the basis that the main object for which the company had been formed was impossible to carry out, it was just and equitable to wind up the company. Held that the whole substratum of the company was gone; the business was to make coffee from dates using the German patent in German and not to enter into the company on those terms. And so the company ought to be wound up.
           
2. If a ‘state of deadlock’ exists in the management of the company, a winding up may be ordered. The company is in reality no more than an incorporated partnership and the members can no longer continue to work in association with one another with one another. This situation is most likely to occur when the company has a small number of directors who are also the majority shareholders.
           
Case: RE YENIDGE TOBACCO CO LTD [1916] 2 Ch 426
            Rothman and Weinberg were the only shareholders and directors of the company. They were not getting along well. Rothman brought an action against Weinberg alleged fraud. Even though the company was still making large profits, it was ordered to be wound up as the circumstances showed that the two directors could not work together.

3. Where the company is like a small partnership based on mutual trust and confidence and that trust and confidence is broken, the court might consider it just and equitable to wind up the company. For example, where the majority members deliberately exclude the minority from participating in the management of the company, the minority may have the company wound up.
           
Case: EBRAHIMI V WESTBOURNE GALLERIES LTD & ORS [19730 AC 360
            The company was set up to take over a partnership business. The partners were Nazar and Ebrahimi. Both were shareholders and directors of the new company. No dividends were paid but the directors received remuneration for their services.
Nazar’s son joins the company as a shareholder and director later. The two Nazars controlled the company. They removed Ebrahimi from his post as director. He thereby lost his source of remuneration. Ebrahimi petitions for the winding up of the company.
                       
            Lord Wilberforce held that it was an indisputable inference that when Ebrahimi and Nazar set up the company, they did so on the basis that the nature of their relationship between them (i.e. equal partners in the business) would remain the same. Even though what the Nazars did was perfectly legal, it was just and equitable that the company be wound up.

4. Where the company’s business has been carried on in a fraudulent manner. If this happened and the shareholders have been misled into investing in the company, the shareholders may have the company wound up in order to get their money back.
           
Case: RE THOMAS EDWARD BRINSMEAD AND SONS LTD
The firm of John Brinsmead and Sons were noted piano makers. Three employees of the firm set up a company to manufacture pianos and sold these as the products of the firm. The firm obtained an injunction order restraining the company from using the name ‘Brinsmead’. It was held that the company was formed for the purpose of defrauding the firm and the company was wound up.

5. The situation in Lock v John Blackwoods. Where the directors failed to hold general meeting. Balance sheets, profit and loss account and reports were not submitted and the requirement regarding audit were not complied with. The objective was to keep the shareholder in dark in order to acquire their shares cheaply. There was justifiable lack of confident in the management and the court ordered the company to be wound up.

6. Winding up on ground of s 181 of the Companies Act.

6. EFFECT OF AN ORDER FOR COMPULSORY WINDING UP

If an order is made it is retrospective in effect to the date on which the petition was presented to their court which becomes the date of commencement of liquidation s 219(2).

Among the legal consequences of an order by the court for compulsory winding up are:

  1. The effective dismissal of the directors and employees.
  2. A stay of any execution of a judgment against the company and of any legal proceeding in which it is either plaintiff or defendant.
  3. A standstill on any disposition of assets or transfer of shares (unless approved by the court) from the date of commencement of liquidation: S 226. 
COMPULSORY WINDING UP COMPULSORY WINDING UP Reviewed by Kamaruddin Mahmood on 11:06:00 PTG Rating: 5

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