Creditors' Voluntary Winding Up and Director Liability

The moment a board realises the company cannot pay its debts, the legal question stops being “how do we close this” and becomes “what do we stop doing today”. Every additional order placed from that point is a debt a director may personally answer for.

What makes it a creditors’ winding up

Nothing is filed to choose this route. Section 444 defines it by absence: a voluntary winding up in which no declaration of solvency under s.443 has been made is a creditors’ voluntary winding up. A members’ winding up also converts into one under s.448 once the liquidator holds a s.447 creditors’ meeting because solvency has failed.

The first 30 days

Where the directors declare under s.440(1) that the company cannot by reason of its liabilities continue its business, and that meetings of the company and of its creditors have been summoned for a date within 30 days of the declaration, they must forthwith appoint an approved liquidator as interim liquidator once the declaration is lodged with the Registrar and the Official Receiver.

That interim appointment lasts 30 days, or such further period as the Official Receiver allows, or until a liquidator is appointed (s.440(3)), and must be advertised with a copy of the declaration in a national-language and an English newspaper within 14 days (s.440(4)). Where it is made before the resolution, s.441(1)(a) moves the commencement of the winding up back to the lodgement of the declaration — the date the six-month preference window in s.528 counts back from.

Who picks the liquidator

Section 449(1) requires the creditors’ meeting to be summoned for the same day as, or the next day after, the members’ meeting, with notices posted simultaneously.

Then s.450(2) settles the contest: where the creditors and the company nominate different persons, the creditors’ nominee is the liquidator. Only if the creditors nominate nobody does the company’s choice stand, and a director, member or creditor has 7 days to apply to Court for a different or joint appointment.

Directors’ powers cease on the appointment unless continued by the committee of inspection or the creditors (s.450(6)). Attachments and executions after commencement are void (s.451(1)), and no proceedings may be commenced or continued without leave of the Court (s.451(2)).

Personal exposure for trading on

This is the part directors ask about last and should ask about first.

Insolvent trading — s.539(3). An officer who knowingly was party to contracting a debt, and who at the time had no reasonable or probable ground of expectation — taking the company’s other liabilities into account — that the company could pay it, commits an offence punishable by up to five years’ imprisonment or a RM500,000 fine, or both.

Personal liability — s.540(2). Where a person has been convicted under s.539(3), the Court may, on the liquidator’s, a creditor’s or a contributory’s application, declare that person personally responsible without any limitation of liability for the whole or part of that debt.

Fraudulent trading — s.540(1) and (5). Where business was carried on with intent to defraud creditors, the Court may declare anyone knowingly party to it personally responsible for the company’s debts without limit; the offence carries up to ten years or RM1 million.

Books — s.539(1). Failing to keep proper books of account for the two years before the winding up is an offence for every officer: up to three years or RM500,000.

Undue preference — s.528. Any payment or transfer by a company unable to pay its debts, in favour of a creditor, is deemed a preference and deemed fraudulent and void where the winding up follows within six months. Paying the supplier you need most, or the director’s own loan account, is the textbook case.

Section 536 adds offences for officers who fail to deliver up property and books to the liquidator, or who concealed or falsified records in the twelve months before commencement — up to five years or RM3 million.

One more trap: under s.463, once a petition has been presented on the ground that the company cannot pay its debts, it cannot resolve to wind up voluntarily without leave of the Court. The voluntary route closes when a creditor moves first.

Who gets paid, and in what order

Section 527(1) ranks unsecured debts: winding-up costs and the liquidator’s remuneration; employee wages up to RM15,000 each for the four months before commencement; workers’ compensation; accrued vacation pay; employer social security and provident contributions for the twelve months before commencement; then federal tax. Section 527(4) lifts the wage, vacation-pay and contribution classes above floating charge holders. Directors’ loan accounts rank last.

Common mistakes

• Placing new orders while insolvent. That is the fact pattern s.539(3) and s.540(2) were written for.
• Paying selected creditors first. Section 528 can void the payment and claw it back.
• Assuming the company’s accountant becomes liquidator. Section 450(2) hands the choice to the creditors.
• Waiting for a petition. Section 463 removes the voluntary option once one is presented.
• Letting the books lapse in the final year. Section 539(1) makes that an offence for every officer.

What’s next

Stop incurring credit, preserve the books, and take advice from an approved liquidator before the next payment run. If the business is viable and only the balance sheet is not, look at corporate rescue first — judicial management, a scheme of arrangement and a corporate voluntary arrangement all become unavailable once the company goes into liquidation.