Corporate Rescue Mechanism & Winding Up: A New Dimension

Corporate Rescue Mechanism & Winding Up: A New Dimension

DR HARIATI MANSOR

3 April 2017

Fakulti Undang-Undang UiTM Shah Alam

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Winding up

• Liquidation /winding up of a company is the process by which its assets are collected, its debt paid and the surplus, if any, distributed among its members.

• Until this process is completed, the company remains in existence as a legal entity.

• A company is wound up for various reasons and the most obvious and common reason is that the company is insolvent i.e. unable to pay its debt.

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• In such cases, liquidation is the process whereby the company’s assets are realized and distributed to creditors in payment of the debts due to them.

• Section 432 (211)recognises two modes of winding up: • Voluntary winding up

• Compulsory winding up

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Grounds to wind up a company;section 465 (218)

• (1) The Court may order the winding up if— (a) the company has by special resolution resolved that it be wound up by the Court; (b) default is made by the company in lodging the statutory report or in holding the statutory meeting; (c) the company does not commence business within a year from its incorporation or suspends its business for a whole year; (d) 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 company) below two;

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• (e) the company is unable to pay its debts; (f) 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, or in any other manner whatsoever which appears to be unfair or unjust to other members; (g) an inspector appointed under Part IX has reported that he is of opinion—

• (i) that the company cannot pay its debts and should be wound up; or

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Inability to pay its debt: s465(1)(e) s218 (1) (e)

• Under section 466(1); 218(2) a company is deemed to be unable to pay its debt for the purpose of section 218(1) in three different situations:

• The company fails to pay a debt after being served a notice by a creditor which complies with section 466(1)(a); 218(2)(a);

• an execution or other process issued on a judgment, decree or order of any court in favour of a creditor of the company is returned unsatisfied in whole or in part; section 466(1)(b)

• the court after taking into account any contingent and prospective liabilities of the company, is satisfied that the company is unable to pay its debt. (Datuk Mohd Sari bin Datuk Hj Nuar v Idris Hydraulic (M) Bhd [1997] 5 MLJ 377 section 466(1)( c)

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Significance of winding up

• Section 219-commemencement of winding up – at the time of presentation of the petition

• Section 467 commencement of winding up shall be deemed at the date of the winding up order

• Section 472; section 223 & Section 224

• Section 529 section 294

• Section528; section 293

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Corporate Rescue Mechanism

• Part 3 Division 8

• Corporate Voluntary Arrangement

• Judicial Management

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Arrangements and Reconstructions

• Sections 365-371 CA 2016 (section 176 CA 1965)

• Restraining Order – section 368- for a period of not more than three months and the Court may on the application of the company extend this period for not more than 9 months..

• (section 176(10) - …for a period of not more than ninety days or such longer period as the Court may for good reason allow…

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Corporate Voluntary Arrangement

• The director of a company (other than company under JM or winding up) may make a proposal to the company or creditors for voluntary arrangement (section 396 (1))

• A judicial manager and liquidator may also make a proposal (section 396(3)

• The proposal include the appointment of a nominee for the purpose of supervising the process

• Voluntary arrangement = composition in satisfaction of a company's debts or a scheme of arrangement of a company’s affairs. Section 394

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• The directors shall submit to the nominee appointed documents setting out the terms of the proposal and statement of company’s affairs containing the particulars of creditors debts, liabilities and assets. (section 397(1)

• The nominee shall indicate to the directors his opinion on the reasonable prospect of the proposal being approved and implemented , whether company has sufficient funds during proposed moratorium to carry on its business and the meetings of company ad its creditors shall be summoned to consider the proposal. Section 397(2); Insolvency Act 1986 section2(2) 28 days


Moratorium section 398

• Commence automatically from the time of filing of documents listed in the section by the company to the court

• Eight schedule – a moratorium shall remain in force for a period of 28 days from the time it commences

• Extension for not more than 60 days (subject to consent of nominee, members and 75% creditors)

• Paragraph 17 list down effects of moratorium- suspension of legal process and other matters


Judicial Management

• option which is open to a financially stricken company.

• protection is given against any legal proceedings or steps taken to enforce any security over the company’s assets and will begin as early as when the application for Judicial Management is made.

• Section 410 & section 411

• the Judicial Management procedure will give them a chance of obtaining a greater recovery of the debts owed as the Judicial Managers will try to nurse the company back to solvency


• Application to the Court may be made by the company , directors or its creditors if the company or its creditors consider that the company is or will be unable to pay its debts and there is a reasonable probability of rehabilitating the company or of preserving all or part of its business as going concern or the interests of creditors are better served than in winding up. (section 404-section 405)

• Once the application is made and until it is dealt with by the Courts, no resolution can be passed to wind up the company. Further, no legal action can be commenced against the company and no steps can be taken to enforce any security over the company’s assets by creditors except with the leave of Court. (section 410)

• If the Court is satisfied that the company is or will be unable to pay its debts and that the making of the order will likely ensure the survival of the company, or the whole or a part of its undertaking as a going concern or that it is likely that a more advantageous realisation of the company’s assets would be effected than on a winding up, the order for Judicial Management would be granted. (section 405)


• Once an order has been made a receivership ends and an application for winding up is dismissed. (Section 411)

• No resolution of winding up

• No other proceedings or commencement of other legal process except with consent of Judicial Manager or leave of court

• No step shall be taken to enforce security except with consent of Judicial Manager or leave of court

• No steps to transfer shares or alter status of members except with consent of Judicial Manager or leave of court

• Section 411(4)

• Duration of judicial management remain in force for a period of 6 months (extension of another 6 months on application by Judicial Manager) section 406


Documents

Corporate Rescue Mechanism & Winding Up: A New Dimension