Topic 10 winding-up_a141

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Topic 10

WINDING UP

BKAF3063 FAR III A132

Chapter Outline2

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☞ Winding up:

► by order of the Court

► voluntary winding up

☞ Rights of a liquidator

☞ Proof of creditors

☞ Order of payment

☞ Rights to contributors.

☞ Statement of affairs

☞ Statement of receipts and payment.

☞ Liquidation accounts

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Winding Up3

Insolvent: When a company cannot pay its debt as and when it falls due.

S218(2) CA: a company shall be deemed insolvent if a creditor to whom a company owes more than RM500 and such sum is due for payment, serves a written notice is given or to secure or compound such sum to the satisfaction of the creditor.

An insolvent company will cease business and go into liquidation after being wound up by the court. The company will be struck-off from the register of companies and the assets of the company will be liquidated or sold off. The proceeds of the sale will be distributed according to law.


Winding Up4

☺ S211 CA: two modes of winding up:

1 – Voluntary winding up by:

- members

- creditors

2 – By the court.

☺ S254 CA: a company may be wound up voluntarily

- When the period, if any, fixed for the duration of the company by the

memorandum & articles (M & A), or the event, if any, occurs, on the

occurrence of which the M & A provide that the company is to be

dissolved and the company in GM has passed resolution to voluntary

winding up.

- If the company so resolves by special resolution.


Members’ Voluntary Winding Up5

S257 CA:

Directors lodged a declaration of solvency. The company will be able to pay

its debts in full within a period not exceeding 12 months after the

commencement of the winding up.

The declaration must be supported by a Statement of Affairs of the

company showing, in the prescribed form:

i) the assets of the company & the proceeds expected from their

realization.

ii) the liabilities of the company

iii) the estimated expenses of winding up.

A director who makes a declaration without having reasonable grounds for

the opinion shall be imprisonment for 3 years or RM10,000 fine or both.


Members’ Voluntary Winding Up6

Members’ can appoint the liquidator.

If a liquidator believes that the company will not pay its debts

in full within stated time, he/she must immediately call a

meeting of creditors.

At the meeting, creditors will consider a statement of assets &

liabilities & may appoint another person as a liquidator.


Creditors’ Voluntary Winding Up7

☞ S260 CA:

☺ Rules for calling & conduct the meeting of creditors:

i. It must be at a time & place convenient to the majority of

creditors.

ii. It must be advertised in a local newspaper.

☺ The directors must arrange for the preparation of statement of affairs.

☺ One director & the secretary must attend that meeting to explain the

company’s affair & reasons for its present condition.


Winding Up by the Court

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☞ S217(1) CA: a company may be wound up under an order

of the Court on the petition of:

1) the company

2) any creditor, including a contingent or prospective

creditor

3) a contributory

4) the liquidator

5) the Minister pursuant to (S205, S218 (1) d)

6) Bank Negara Malaysia


Winding Up by the Court …

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☞ S218(1) CA: Circumstances in which company may be wound up by court:

1. The company has by special resolution resolved that it be wound up by the

Court.

2. Default is made by the company, in lodging the statutory report or in

holding the statutory meeting.

3. The company does not commence business within a year from its

incorporation or suspends its business for a whole year.

4. The number of members is reduced in the case of a company (other than a

company the whole of the issued shares in which are held by a holding co)

below two.


Winding Up by the Court…

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5. The company is unable to pay its debts.

6. The directors have acted in the affairs of the company in their own interests

rather than in the interests of the members as a whole.

7. An inspector appointed under Part IX has reported that he is of opinion:

- That the company cannot pay its debts & should be wound up.

- That it is in the interests of the public @ s/holders @ creditors that

the company should be wound up.

8. When the period, if any, fixed for the duration of the company by the M &

A expires, or the event, if any, occurs on the occurrence of which the M & A

provide that the company is to be dissolved.


Winding Up by the Court…11

9. The court is of opinion that it is just & equitable that the company be

wound up.

10. The company has held a licence under the Banking & Financial Institution

Acts or the Islamic Banking Act, and that licence has been revoked or

surrendered.

11. 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 and BAFIA.



☞ S218(2) CA - Definition of Inability to Pay Debts:

The company unable to settle debts exceeding RM500 &

the company has for 3 weeks thereafter neglected to pay

the sum or to secure or compound for it to the reasonable

satisfaction of the creditors.

Execution or other process issued on a judgement of the

company is returned unsatisfied in whole or in part.

It is proved to the satisfaction of the court that the

company is unable to pay its debts.



S219 CA - Commencement of winding up by the Court:

Where before the presentation of the petition a resolution

has been passed by the company for voluntary winding

up, the winding up of the company shall be deemed to

have commenced at the time of the passing of the

resolution.

Unless the court on proof of fraud or mistakes thinks fit

otherwise to direct, all proceedings taken in the voluntary

winding up shall be deemed to have been validly taken.

In any other case the winding up shall be deemed to have

commenced at the time of the presentation of the petition

for the winding up.


Appointment of Liquidator14

A liquidator is an authorized person who will deal with the

assets and liabilities of the company including the bank

account and employees of the company.

Once the liquidator has been appointed, the directors cannot

bind the company. The directors will be removed from

office.

S8 CA – The liquidator must be either Official Receiver or

an approved company auditor.

Power and duties of the liquidator are:

- To realize the assets of the company.

- To pay creditors.

- To distribute any remaining assets to shareholders.


Appointment of Liquidator15

S10CA – Disqualification of liquidators:

a) If he is not an approved liquidator

b) If he is indebted to the company that is deemed to be

related to the company exceeding RM2,500.

c) If he is an officer of the company

d) If he becomes bankrupt


Provisions Applicable to Every Mode of Winding Up

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S277 (1) CA – every liquidator shall keep proper books in

which he shall cause to be made entries or minutes of

proceedings at meeting

creditor or contributory can inspect the books.

S277 (2) CA – The Court shall take cognisance of the conduct

of liquidators

If any complaints from creditors Court can take action

against liquidator.

S283 CA – Where a company is being wound up every invoice,

order of goods or business letter issued by or on behalf of the

company or a liquidator of the company or a receiver of the

property of the company….. shall have the words “in

liquidation “ added after the name of the company


Provisions Applicable to Every Mode of Winding Up

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S284 (2) CA – when a company has been wound up the liquidator shall

retain the books & papers for a period of 5 years from the date of

dissolution of the company and at the expiration of that period may

destroy them

S286 (1) CA – Where liquidator has in his hands:

- any unclaimed dividend or other moneys remained unclaimed for

more than 6 months from the date payable;

- any unclaimed or undistributed moneys after making final

distribution.

he shall pay those moneys to the Official Receiver to be placed to the

credit of the Companies Liquidation Account.

S287 (1) CA – Unless expressly directed to do so by the Official

Receiver, a liquidator shall not be liable to incur any expense in relation

to the winding up of the co unless there are sufficient available assets.


Liability as Contributories of Present and Past Members

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a) if he has ceased to be a member for 1 year or more before the

commencement of the winding up.

b) in respect of any debt or liability of the company contracted after he

ceased to be a member.

c) unless it appears to the Court that the existing members are unable to

satisfy the contributions required to be made by them.

d) Company limited by shares – no contribution shall be required from

any member exceeding the amount, if any, unpaid on the shares in

respect of which he is liable as a present or past member.

☞ S214 CA – A past member shall not be liable to contribute:


Unlimited Liability of Directors

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a) if he has ceased to hold office for a year or more before

the commencement of the winding up.

b) in respect of any debt or liability of the company

contracted after he ceased to hold office.

c) unless the court deems it necessary

☞ S214 (2) CA – A past director shall not be liable to make

further contribution:


Creditors20

S291 CA – creditors should lodge their proof of debt with

the liquidator.

Creditors are classifies into:

1. Secured creditors.

2. Unsecured creditors – preferential creditors.

3. Deferred creditors.


Secured Creditors21

☺ These creditors usually have the right to take possession of the asset in

order to sell it so that debt can be paid out of the proceeds.

☺ Creditors who have a legal charge. E.g mortgage or lien over some

specific asset.

☺ If the asset realized > debt, the surplus must be paid to the liquidator.

☺ If the asset realized < debt, the undischarged balance rank as an

unsecured creditor.


Secured Creditors22

☺ Two types of charge:

1. Fixed charge:

- charged on any specific assets.

- example: mortgage on buildings or other property.

2. Floating charge:

- Secured on any asset (not specific).

- example: debenture.

- S294 CA – a floating charge created within 6 months of the

commencement of the winding up shall, unless it is proved that the

company immediately after the creation of the charge was solvent,

be invalid except to the amount of any cash paid to the company at

the time of or subsequently to the creation of & in consideration

for the charge together with interest on that amount at the rate of

5% per annum.


Unsecured Creditors23

Those creditors who have not taken steps to protect themselves.

However, the law gives some unsecured creditors priority/preference

over the others.

S292 (1) CA - Priority creditors (preferential):

(a) The costs & expenses of the winding up. Example:

- taxed costs of a petitioner payable;

- remuneration of the liquidator;

- costs of any audit carried out pursuant S 281.

(b) All wages @ salary:

- whether or not earned wholly or in part by way of commission;

- including any amt of payable;

- not exceeding RM1,500 for the services rendered within a

period of 4 months before the commencement of the winding

up.BKAF3063 FAR III A132

Unsecured Creditors (cont…)


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S292 (1) CA - Priority creditors (preferential): (cont…)

(c) All amounts due in respects of worker’s compensation accrued

before the commencement of the winding up.

(d) All remuneration payable to any employee – vacation leave, in the

case of his death to any other person in his right, accrued in respect

of any period before the commencement of the winding up.

(e) All amounts due in respect of contributions payable during 12

months next before the commencement of the winding up (eg: EPF)

(f) The amount of all federal tax.

Deferred Creditors25

1) Preference share in arrears.

2) Dividend payable.

3) Calls in advance.


Order of Payment26

1. The costs & expenses of the winding up - S292 (1) (a) CA.

2. Creditors secured by specific charge.

3. Preferential creditor S292 (1) CA:

(b) wages @ salary accrued

(d) remuneration payable

(e) contributions payable

4. Creditors secured by a floating charge.

5. Preferential creditor S 292 (1) CA:

(c) worker’s compensation.

(f) federal tax.

6. Unsecured creditors / general unsecured claims.

Note: If the funds that remain for the general unsecured creditors are

not sufficient to settle all claims, the available money must be

divided proportionately.BKAF3063 FAR III A132

Statement of Affairs

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☺ Show assets & liabilities on the date of winding up – at a

realizable value.

☺ SA is only an estimate of the outcome of the winding up.

☺ Requirement to prepare a Statement of Affairs is based on

assumption that the company’s accounting records are

incorrect, incomplete or both.

☺ Example – See Illustration 1 : Delima Bhd


The Rights of Contributories28

☺ Any assets remaining after the discharge of all liabilities

belong to the s/holders.

☺ The following problems in this area can be identified:

- forfeiture of shares

- deferred shareholders

- shareholders within a class

- preference shares

☺ Distributed to s/holders in accordance with their

contractual rights.


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Ranking :

1) Deferred Creditors

2) Capital refund – according to M & A company

Capital refund – preferential (use value stated in memorandum):

1) Preference shares

2) Ordinary shares

3) Deferred shares

(If not stated – used nominal value & to exclude forfeiture of shares)


The Rights of Contributories

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☞ Illustration 2:

Assume that after discharging all liabilities, the liquidator of EZY Bhd has

RM300,000 available for distribution to its shareholders.

Share capital: RM

6%, 20,000 Preference Shares RM10, fully paid 200,000

100,000 Ordinary Shares - A, RM1, fully paid 100,000

100,000 Ordinary Shares - B, RM4, paid to 50 sen 50,000

50,000 Deferred Shares, RM1, fully paid 50,000

The articles of company provide preference for the refund of capital, as follows:

1. Preference shares;

2. Ordinary shares;

3. Deferred shares.

Calculate the distribution to the shareholders.



Solution to Illustration 2:Cash surplus 300,000(-) Distribution to preference shareholders 200,000Balance to distribute to ordinary shareholders 100,000

Ordinary shareholders - A 100,000Ordinary shareholders - B 50,000

150,000Deficiency / loss (50,000)

Distribute deficiency/loss to ordinary shareholders:

No distribution to be made to deferred shareholders.

Nominal value % Share of loss Paid up Refund

Ord. SH - A 100,000 20% 10,000 100,000 90,000

Ord. SH - B 400,000 80% 40,000 50,000 10,000

500,000 50,000 100,000

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Illustration 3:

Assume that after discharging all liabilities, the liquidator of TARA Bhd has


Share capital:

6%, 40,000 Preference Shares, RM1, paid to 50 sen 20,000

100,000 Ordinary Shares, RM1, paid to 75 sen 75,000

() Call in arrears Ordinary Shares (20,000)

75,000

Call in arrears for 20,000 units of Ordinary Shares, amounting to RM4,000

(RM0.20 per shares) had not been received & the company resolved to forfeit

these shares. Capital refund preferential is not stated in the articles of the

company.

Calculate the distribution to the s/holders.




Preferenc

e

40,000 1/3 11,000 20,000 9,000

Ordinary 80,000 2/3 22,000 60,000 38,000

120,000 33,000 47,000

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Solution to Illustration 3:

Cash surplus 31,000Call in arrears 20,000Not paid & forfeit 4,000

Payment received 16,000Cash available for distribution 47,000

(-) Distribution to: preference shareholders 20,000ordinary shareholders[(100,000 – 20,000) x 0.75] 60,000

Deficiency / loss (33,000)



Solution to Illustration 3:

Deficiency / loss (33,000)

Distribute deficiency/loss to ordinary shareholders:


Pref. SH 40,000 1/3 11,000 20,000 9,000

Ord. SH 80,000 2/3 22,000 60,000 38,000

120,000 33,000 47,000

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Illustration 4:

Assume that after discharging all liabilities, the liquidator of LARA Bhd has


Share capital: RM

5%, 10,000 Cumulative Preference Shares RM10, fully paid 100,000

500,000 Ordinary Shares, RM1, fully paid 500,000

200,000 Deferred Shares, RM1, fully paid 200,000

800,000

Dividend for Preference Shareholders had not been paid since 2 years ago.

According to the company’s articles, the Preference Shareholders are not

preferred as to return of capital, however they will receive the dividend in

arrears.



Solution to Illustration 4:Cash surplus 900,000(-) Dividend in arrears (5% x 100,000 x 2 yrs) 10,000

Balance for distribution 890,000

Distribution to:Preference shareholders 100,000Ordinary shareholders 500,000Deferred shareholders 200,000 800,000

Surplus after distribution 90,000

Nominal value % Share of surplus

Preference 100,000 1/8 11,250

Ordinary 500,000 5/8 56,250

Deferred 200,000 2/8 22,500

800,000 90,000

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Accounts of Receipts & Payments

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☺ Prepared by the liquidator.

☺ S 281(1) - Liquidator must lodge this accounts to the Registrar at six-

monthly interval & also within one month of completion of the winding

up.

☺ S 281 (3) – The books & records of the liquidator are available for audit

& that the accts of receipts & payments can be inspected by interested

persons.

☺ Form 75 (Liquidator’s account of receipts & payments):

Account receipts and payments

Sales of assets Liquidator’s expenses*

Creditors

Distribution to shareholders

* Follow the order of payment.BKAF3063 FAR III A132

Closing the Accounts of the Company38

☺ All accounts must be closed at the end of the winding up.

☺ Procedures – prepare the accounts:

- Liquidation

- Shareholders’ distribution

☺ Accounts for sales, purchases, etc up to the

commencement of the winding up can be transferred to

Trading and Income statement accounts or to the

Liquidation account.


Closing the Accounts of the Company

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☺ Use liquidation acct:- Close nominal acct (sales, COGS, expenses)- Close assets acct (except cash)- Pay creditors- Liquidation cost- Close equity account (retained profit & reserves)- Close liquidation account

☺ Use Shareholder’s distribution acct:- Transfer balances (close) liquidation account- Close paid up share capital account- Cash distribution to shareholders

☞ Example – Delima Bhd

☞ Closing the Account of Receipts and Payments to creditors and shareholders:


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End of Chapter 10


Topic 10 winding-up_a141

Education

Transcript of Topic 10 winding-up_a141