Liquidation I

7/31/2019 Liquidation I

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Company Insolvencyand Liquidation I



Bankruptcy in Malaysia

http://www.allvoices.com/contributed-

news/6526835-many-companies-in-

malaysia-suffered-and-bankruptcy

http://www.allvoices.com/contributed-news/6526835-many-companies-in-malaysia-suffered-and-bankruptcy






















Lecture Outline

Lifecycle of a business

Why companies fail

Why companies need to be liquidated?

PN17 companies

Options for companies in financial difficulties

• Unsuccessful Restructuring

• Restructuring vs Liquidation

• Liquidation



Lifecycle of a business



Why companies

fail?



http://www.ehow.com/list_6500617_top-

reasons-companies-fail.html

http://www.ehow.com/list_6500617_top-reasons-companies-fail.html











Why companies need to be

liquidated?

Liquidity problems – turn assets into cash

without making loss

Solvency issues – current ratio

Viability of the business - ability not only

to survive but to thrive, i.e. generate

continuing sustainable profits.



How can we identify companies that are

in financial difficulties?



http://www.facebook.com/notes/myinvest

89-million-dollar-financial-blog/troubled-

listed-companys-in-malaysia-rated-as-pn-

17-and-pn4/126976063992012

http://www.facebook.com/notes/myinvest89-million-dollar-financial-blog/troubled-listed-companys-in-malaysia-rated-as-pn-17-and-pn4/126976063992012




































http://www.investopedia.com/articles/fina

ncialcareers/07/warning_signs.asp#axzz1f

9oLxv32

http://www.investopedia.com/articles/financialcareers/07/warning_signs.asp








PN17 companies

http://www.klmanagement.com.my/blog/pn17-listed-companies-in-financial-distress/

















Options for companies in

financial difficulties

Non-judicial options

◦ Debt restructuring

◦ Voluntary assets assignment

◦ Creditors committee management

◦ Transfer of assets

Capital restructuring

Liquidation



Options for companies in

financial difficulties (continued) Debt restructuring

Companies discuss/negotiate with the creditors on the

agreeable terms of the debts - the arrangement does not

have a legal status.

◦ The debtor may solicit an extension of due dates of its debt, ask for a decrease of

interest rate on debt / ask for modification of other terms of the debt contract.

◦ Creditors may agree to accept less than the face amount of their claims. The

advantage - immediate cash payment & assured of receiving most of their

receivables.

In Malaysia, Corporate Debt Restructuring

Committee (CDRC, est. 1998) is the body that

facilitate the restructuring of large corporate debts.



Options for companies in financial

difficulties (continued)

Voluntary assets assignment

The placement of debtor’s assets under

the control of trustee appointed by the

creditors.

The trustee sells the assets and liquidates

the debt.





Creditors committee of management

The debtor proposes a plan of settlement

i.e. a detailed document includes a

schedule of payments listing the specificdebts and the anticipated payments.

Creditors may appoint a trustee who

assumes management responsibility forthe debtor company. The trustee reports

to the creditors with recommendations

for the eventual settlement of claims.





Transfer of assets

Debtor transfer assets like receivables

or other financial instruments in an

effort to obtain quick cash.

E.g. factoring receivables at a

discount.



A legal way to “salvage” a company rather

than to liquidate it.



Capital Restructuring

The company is temporarily

protected from its creditors.

Creditors are encouraged

to negotiate new terms with

the company.



A legal way to “salvage” a company rather

than to liquidate it.



Capital Restructuring

Workers get to keep their

jobs.

Suppliers get to keep their

customer.

Customers get to maintain

their source of supply.



20-19



Capital restructuring The Companies Act 1965 allows the a company to reduce its

share capital or reconstruct its financial capital.

The company must fulfill the following requirements beforecarrying out the proposed scheme of capital reduction /reconstruction:

◦ The reduction of share capital must be authorised by its articlesof association;

◦ There must be a special resolution for the reduction /reconstruction with the required majority of the shareholdersvoting in favour of the proposed scheme;

◦ Approval of the court has been obtained.

Trustees are often appointed by the court to direct the

reorganization.





Capital restructuring

The company continues to operate while it

prepares a plan of reorganization, which servesas an operating guide during the reorganization.

The proceeding includes the actions that takeplace from the time the petition is filed untilthe company completes the reorganization.





Plan of Restructuring

Most restructuring plans include detailed

discussions of the following:

◦ Disposing of unprofitable operations.

◦ Restructuring of debt with specific creditors.

◦ Revaluation of assets and liabilities.

◦ Reductions or eliminations of claims of original

stockholders and issuance of new shares to creditors

or others.



Unsuccessful Restructuring

The major reason for unsuccessfulreorganizations is continuing losses fromoperations and no reasonable likelihoodof rehabilitation.

Another common reason is the inabilityto consummate a reorganization planbecause of the failure to dispose of an

unprofitable subsidiary. The debtorcompany then moves from restructuringinto liquidation.



Restructuring versus Liquidation

The major difference between arestructuring and a liquidation is that the

debtor continues as a business after a

restructuring, whereas the business doesnot survive a liquidation.



Liquidation

Refers to the process of winding up a limitedcompany.

In this process: the affairs of the company are brought to an end

assets are realised by a liquidator

creditors are paid off of the proceeds of realisation

remaining assets are distributed to shareholders

Relevant laws include: Companies Act 1965

Companies (Winding-Up) Rules 1972

The life of the corporation would beterminated.



Compulsory liquidation By order of the court.

Companies Act 1965 Sect 217 and 218



Voluntary liquidation

Member’s voluntary liquidation

◦ (section 257)

Creditor’s voluntary liquidation

◦ (section 260)



Members’ Voluntary Liquidation

Companies Act 1965 - Section 257 (2)Form 66: written declaration to be attached togetherwith Statement of Affairs.

Form 66 discloses:

◦ Company’s assets stated at estimated value to berealised .

◦ Company’s liabilities.

◦ Estimated surplus or deficiency before liquidation

costs.◦ Estimated liquidation costs.

The members will appoint the liquidator



Creditors’ Voluntary Liquidation

The company must call a meeting of thecreditors either on the same day or on the dayfollowing the day when the resolution for thevoluntary winding up is passed.

The notice of the meeting of the creditors shallbe sent to all creditors simultaneously with thenotice of the meeting of the company.

The directors must cause a statement of the

company’s affairs to be presented at thesemeetings.

The creditors, at their meeting, have the optionof appointing the liquidators.



Liquidator

Powers of the liquidator (CompaniesAct 1965 ,Sect 236)

Who can be a liquidator (Sect 10

Companies Act 1965)



Voluntary liquidation

Both will require the following actions: Statement of Affairs must be sent to the receiver or

liquidator within 14 days from the date of winding uporder. (Sect 234(3) of the Companies Act 1965)

Liquidator or Official Receiver shall cause a copy of the statement to be filed with the Court and lodgedwith the Registrar within 7 days of its receipt. (Sect234(3) of the Companies Act 1965).

Two forms need to be sent:◦ Statement of Affairs

◦ Deficiency Statement (list “O” 1 and “O”2)



Companies (winding up) Rules 1972

Rule 156 (2) - liquidator shall keep a book to be calledthe “Cash Book” in which he shall enter from day to dayreceipts and payments made by him.

Rule 160 - liquidator shall keep a separate account of the

trading if he caries on the business of the company. Inaddition, he shall incorporate in the Cash Book the totalweekly amount of the receipts and payments on theTrading Account.

Rule 161 - provides that the Trading Account must beprepared using format Form 82.

The liquidators are required to prepare statementsshowing the receipts and payments (according to formatForm 86).



Rule 176 - the winding-up is not concluded until thefunds or assets have either been distributed or paid intothe Companies Liquidation Account.

Rule 177 (1) - The statements summarising the receipts

and payments have to be prepared from the date of thewinding-up until the date when the winding-up isconcluded.

Sect 281 CA 1965 provides that the liquidator mustrelease lodge with the Registrar in prescribed form andverified by statutory declaration an account of hisreceipts and payments and a statement of the position inthe winding up.

Companies (winding up) Rules

1972…cont



Statement of Affairs

Planning report for the anticipatedliquidation of a company.

Basic accounting report made at thebeginning of the liquidation process to

present:◦ the expected realisable amounts from disposal of

the assets.

◦ the order of creditors’ claims.

◦ the expected amount unsecured creditors willreceive as a result of the liquidation.



Statement of Affairs

Purpose :

To display the assets & liabilities of the

debtor enterprise from a liquidation

viewpoint.

To approximate the estimated amounts

available to each class of claims.



Steps to prepare a Statement of Affairs

1. Prepare a balance sheet as of the most recent date possible.

2. Obtain estimates and appraisals of amountsthat are likely to be realised on various assets.

3. Prepare a listing of the pledge assets forspecific obligations.

4. Identify obligations not presently reflected onthe balance sheet but that are expected toemerge in the course of liquidation.



Deficiency Statement

List “O” 1 Winding-up order carried out within 3 years

from its formation

Shows the expenses involved in carrying out

business from the date of formation to thedate of winding-up.

List “O” 2

Winding-up order made from more than 3 years after the formation.

Shows surplus or deficiency of asset incomparison with equity and liability.



Classes of Creditors

A very important aspect of liquidation isdetermining the legal rights of each creditor

and establishing priorities for those rights.

There are three classes of creditors, whoseclaims have the following priorities: (1)

secured creditors, (2) creditors with priority,

and (3) unsecured creditors. The priority of claims determines the order

and source of payment to each creditor.



FullySecured

PartiallySecured

Unsecured With

Priority

Unsecured

TopPriority

Classification of Creditors

Common andpreferredstockholdersget what’s left

over.

Each level must bepaid in full prior tomaking distributionsto the next level.

Liquidation I

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