New business ventures hit the market each year and each one of them hopes to reach the limelight. Sadly very few survive battling the fierce competition in the market. It is very surprising to know that as per statistics a total of 42,406 companies have been wound up in Malaysia between a period of 2014-2019.
Risks in business are unavoidable and omnipresent. Once you have realized that your business opportunity is no longer viable, it is important to know how to tackle the situation effectively.
Having a strong understanding of the liquidation process will help you to shut down your company with very fewer hassles.
What is liquidation?
Liquidation is an event that occurs when a company becomes incapable of paying back its financial obligations.
Often companies will reach a point where they cannot continue the business due to unexpected reasons.
If the company has a long list of debts to settle and there is no way to solve the debt, opting for liquidation will be an ideal choice
Liquidation is typical in cases where an insolvent business is forced to shut down as per the direction of the court. All the assets are sold to get enough funds. The funds generated will be, in turn, used to settle all the outstanding debts.
If the assets are not enough to pay back the debt, secured creditors will be given the first priority.
Contrary to popular belief, liquidation does not happen only in insolvency. In some instances, a business might decide that it will not be wise to continue further. All the assets and properties would be sold off to settle any pending financial obligations.
Top reasons for company liquidation
Following are some of the key reasons for choosing liquidation:
- All business activities have stopped
- Issues in the internal management
- DIspute with the shareholders
- Breach of any statutory provisions, including any offence, committed
- Business failure due to excessive competition
- Huge financial liabilities due to high-risk ventures
- Faulty financial management
- Huge credit liabilities
- Lack of enough resources to keep the business running
- Failure of clients to make the payment at the right time
What are the different types of liquidation?
Liquidation can broadly be classified into two, i.e. voluntary and compulsory liquidation.
Compulsory liquidation is initiated through a court order by the creditors. Voluntary liquidation is initiated by the board of directors, but the control of the liquidation process can either be with the creditors or the board.
To initiate the process of striking off, each director of the company will have to produce a declaration stating that the company has not carried on business nor has commenced any new business since its incorporation.
The declaration should also state that the company has no assets, liabilities or pending dues.
Once the declaration has been made, the shareholders will carefully review the application.
After successfully reviewing the declaration, an application will be submitted to SSM Malaysia.
The whole process of submitting and approval will take about 6 to 12 months.
Once a company has been struck off, it can be restored after 15 years from the date of striking off. If this is required, a court order is necessary.
MVL-Members’ Voluntary Liquidation
This is a voluntary process in which the company’s shareholders together pass a resolution that the company should be wound up and a liquidator should be appointed.
MVL applies to companies that are solvent and able to pay its debts in full within 12 months after the onset of winding up.
The MVL process has to be initiated by the shareholders.
- The Director of the company has to lodge a Declaration of Solvency with the SSM.
- It has to then be executed at the Board of Directors’ Meeting.
Once the two processes are complete, a liquidator will be appointed by the shareholders to liquidate all the company’s assets and to file the necessary notifications that are prescribed under the Companies Act with SSM
The Liquidator will have to
- Announce the details of liquidation such as the appointment of Liquidator and final meeting through the print medium. Preferably through a newspaper which has circulation throughout Malaysia.
- Distribute/dispose of all the assets, settle all the liabilities and obtain clearance from the relevant authorities.
The entire process of MVL takes about 2 years to complete. This is very much dependent on clearance obtained from customs, SOCSO, IRB, EPF etc.
Can a liquidation be reversed?
Once the company has been dissolved, an application can be made by the Liquidator or any person interested for an order to make the declaration void with valid reasons. The court will thoroughly verify the application and the applicant will be called for hearing. If the court is convinced, an order to nullify the liquidation will be produced.
If the court delivers such an order, thereupon proceedings will be undertaken as if the company had not been dissolved.
Liquidation by the creditors
This is applicable for insolvent companies that are not in any position to pay off the debts, primarily due to financial difficulties.
In such a situation, the company can call a meeting and put forward a proposal for the voluntary winding up of the company.
Creditors can assume control of the liquidation process since the company is insolvent.
A liquidator will then be appointed by the creditors to liquidate all the assets of the company and pay off the debts,
Compulsory winding-up is when a petition to wind-up the company is presented to the Court.
Compulsory liquidations are usually initiated by the creditors of the company, or at times by a disputing shareholder.
An application for winding up will be submitted to the court. If the court is convinced after the hearing, a winding-up order will be produced.
As this is not a voluntary process initiated by the directors of the company, the whole process of liquidation will be undertaken by a liquidator appointed by the court
Any failure to obey the directions of the liquidator can result in serious consequences.
Process of liquidation
The whole agenda of liquidation is to sell all the assets of the company as soon as possible to pay off the maximum number of creditors. Once the process is complete, the company will cease to exist.
The method of liquidation is dependent on whether the company was voluntarily liquidated or forcefully taken up by the creditors.
At first, a liquidator will be appointed to supervise the entire process of liquidation.
Generally, the process is conducted as per the following steps:
- Compile a list of all the creditors who need to be paid back.
- All the assets of the company are identified, evaluated and assessed for liquidation value.
- All the present and future contracts and promises made to other companies will be stopped.
- The employees of the company will be settled.
- The company assets will be sold off to realize its value.
- The creditors are paid in order of their priority.
- Surplus cash will be distributed among the shareholders.
- The name of the company will be struck off from the official register.
What is the difference between a receiver and a liquidator?
A receiver may not necessarily seek to liquidate the company but a liquidator’s task is to liquidate the company.
A liquidator is appointed in the process of liquidation, whether voluntary or compulsory.
On the other hand, a receiver can be appointed by a debenture-holder even prior to liquidation.
What are the effects of winding up a company in Malaysia?
Once a company has wound up for liquidation, the following effects are noticed:
- All the business activities of the company will completely cease.
- All the employment contracts will be terminated with immediate effect.
- The power of the directors of the company will cease.
- All the shares and assets of the company can no longer be transferred or disposed of.
Winding up and liquidation signifies the silent demise of a company.
It is understandably bound to be a painful process for the employees and directors alike, as it takes years of hard work to build a company and keep it running.
If your company has mountains of debt with no means to pay back, it would be wise to jump off the sinking ship with whatever you can grab rather than trying to scoop out the water.