Liquidation Of An Insolvent Company

Generally, a Company is commercially insolvent where it is unable to pay its debt when such debt falls due or where it has no asset or insufficient assets to meet its current liabilities.

Below are some of the common questions regarding winding up of an insolvent Company.

1. If a Company is insolvent or trading unprofitably, can the Company be wound up by a Court order?

   Yes, it may be wound up by a Court order based on just and equitable ground.

2. What are the common reasons for winding up an insolvent Company by Court?

   Among others:

   1. the Company suffers from a financial inability to carry on business;
   2. the continuation of the undertakings by the Company have become in a practical sense impossible;
   3. the Company has lost its capital and is constantly making losses and could not pay its debts;
   4. the Company practically had ceased to carry on business and continuation was practically impossible; and
   5. the Company has practically lost all its reserves and has never really made profits since it begins operations and there is no reasonable hope that the object of trading at a profit could be attained.

3. Who can apply to Court for a winding up order?

   Company, creditor, shareholder and such other persons specified in Section 464 of the Companies Act 2016.

4. What are the procedures involved in the winding up by Court?

   Briefly, a Petition and verifying affidavit have to be filed in Court. After that, there will be advertisement of notice of petition in local newspapers and government gazette. There are other procedures to be complied with. At the hearing of Petition, if all papers are in order, the Court may grant an order to wind up the Company. The Court will also appoint a liquidator to wind up the affairs and distribute the assets of the Company.

5. Who will be drafting and preparing the winding up application and the relevant documents and attending to the hearing at Court?

   A qualified lawyer is required to draft and prepare the relevant documents and attend to the Court hearing.

6. What a director is required to do after obtaining the winding up order?

   The director is required to submit a Statement of Affairs of the Company in the prescribed form to the liquidator who may hold personal interviews with the director for the purpose of investigating the Company’s affairs.

7. Who will deal with the claims of creditors after obtaining a winding up order?

   Once a Company is wound up, the liquidator will deal with the respective claim of the creditors who must submit a proof of debt to the liquidator.

8. Why need to wind up or liquidate a dormant Company that is insolvent?

   Amongst others:

   1. Once the Company has been wound up and liquidated, you can save on secretarial, audit and accounting fees every year.
   2. As no legal action can be initiated against a Company that is in liquidation, you can focus your efforts elsewhere.
   3. As the liquidator will deal with the Company’s creditors, you can avoid the hassle of dealing with some aggressive creditors.

9. Apart from Court order, any other way to wind up an insolvent Company?

   Yes, the Company may be wound up through creditors’ voluntary winding up at the instance of the directors of the Company.

10. What are the procedures involved in the creditors’ voluntary winding up?

    Briefly, the directors of a Company will summon a meeting of members and a meeting of creditors. At the meeting of members, a resolution for winding up will be passed. A private liquidator will thereafter be appointed to wind up the affairs and distribute the assets of the Company, subject to payment of the liquidator’s fees to be agreed upon by the parties.

11. Can an insolvent Company be wound up by way of members’ voluntary winding up?

    No, members’ voluntary winding up is only applicable to solvent Company (which generally has more assets than the liabilities).

This article is written by our Partner, Wai Chong Khuan