CLOSING DOWN A COMPANY: STRIKE OFF OR WIND UP?
Updated: Apr 24, 2022
Company closures have increased significantly, mainly precipitated by the pandemic of Covid-19, economic downturn and rapid market changes. When the business of a company reaches the stage of closure, the business of a company will gradually stop being operational and eventually become inactive. So what happens next?
In these circumstances, there are 2 common methods for closure of a company, which are Striking Off or Winding Up.
STRIKING OFF A COMPANY
Striking off the name of a company from the register requires you to make an application to Suruhanjaya Syarikat Malaysia (SSM). Many say that striking off a company is a simple and efficient way of closing down a company. However, there are some criteria that need to be fulfilled prior to striking off a company, which may make striking off not an easy process.
To strike off the name of a company from the register of SSM:
the company not carrying on business or not in operation;
must get consent from the majority of the shareholders;
has no assets and liabilities at the time when the application is made;
has never has a bank account or has closed all bank accounts;
has no outstanding tax or other liabilities including compound with any Government Department or Agency such as Employees’ Provident Fund (“EPF”), Inland Revenue Board (“IRB”), Social Security Organisation (“SOCSO”), Royal Customs of Malaysia (“RCM”); and Human Resource Development Fund Malaysia (“HRDF”) etc.;
has no outstanding penalties or compound under the Companies Act 2016;
has updated the latest information with SSM;
is not involved in any legal proceedings within or outside Malaysia;
does not have any charges in the Register of Charges;
has not made any return of capital to shareholders;
is not a holding company;
is not a Guarantor Corporation.
Beside it is cheaper way for closure of a company and quicker speed of the process, the other benefits of striking off a company is that directors of a company are allowed to change their mind regarding the previous closure of their company. Directors can apply to the Court for recommencement of their business within 7 years after the name of their company has been struck off.
However, this method does have a couple of potential pitfalls. These include:
the CCM having the final say in the strike off decision;
anyone who suffers grievances from the strike-off having an open legal avenue to reinstate the company within seven (7) years; and
after a company is struck off the Register, the company will dissolve and cease to exist. The company will no longer be able to conduct any form of business or transactions. However, the liability of every director, officer or shareholder of the company will continue and may be enforced as if the company had not been dissolved. In other words, even if a company is struck off, any past misconduct or breaches of law that relate to a director, officer or shareholder of the company will still be enforceable against them.
Wish to know more about striking off a company?
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Want to lower your chances of getting caught by these pitfalls?
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WINDING UP A COMPANY (VOLUNTARY OPTIONS)
Winding up a company is also known as ‘liquidation’, is longer and more complex than simply striking off a company. So at first glance, it can look less appealing than a strike of. It is a process by which a company is brought to an end whereby the assets and property of the company will be redistributed. The responsibility of winding up of a company lies with the liquidator. When a liquidator has already been appointed, all the powers of directors and shareholders shall cease. The liquidator will take charge to ensure that the company is properly dissolved.
However, in some circumstances, winding up a company may be more appropriate for your business.
For example, your shareholders might want to benefit from the proceeds gained by the company after selling off the assets. But as we mentioned in the previous section – if your shareholders receive any capital from the company, the company won’t be eligible to apply for strike-off.
In this case, a company wind-up might be your best option.
Generally, the voluntary options for winding up a company in Malaysia are either:
a members’ voluntary liquidation (“MVL”); or
a creditors’ voluntary liquidation (“CVL”).
While you need to appoint a liquidator for both options, in an MVL (where the company must be financially solvent), the surplus of the company will distribute to shareholders upon the settlement of the debts and expenses. By contrast, in a CVL (where the company is not financially solvent), the proceeds realised from selling off the assets will be paid to the creditors.
MEMBERS’ VOLUNTARY LIQUIDATION (“MVL”)
MVL is an efficient way to liquidate a solvent company (i.e. realization from all assets are sufficient to repay all liabilities). To initiate the process, majority of the directors will have to execute and lodge the Declaration of Solvency (“DS”) with the SSM.
The DS is a written declaration from the directors which states that an inquiry into the affairs of the company has been made AND at a meeting of the directors formed the opinion that the company will be able to pay its debts in full within a period not exceeding 12 months after the commencement of the liquidation. After which, a meeting of the shareholders will be held. At this meeting, the shareholders will pass a resolution to liquidate the company and to appoint a Liquidator to facilitate the liquidation administration. MVL will commence on the date of the passing of the said resolution.
During the MVL administration, the Liquidator will carry out his/her duties which include taking control of the assets, realization of assets, settlement of creditors, to obtain necessary clearances from statutory bodies and lastly, to distribute surplus funds/or even assets directly (if any) back to the shareholders. The Liquidator must prepare and submit “Liquidator’s accounts” to the SSM and the Official Receiver every 6 months.
If the liquidation process takes more than a year, an annual meeting of members will be held to report on the winding-up processes undertaken to date. An MVL typically takes between 1-2 years to complete, depending on how long it takes to obtain tax clearance from the IRB.
However, after receiving tax clearance, the liquidator shall prepare the final account and convene a final meeting to finalise the liquidation process.
If you believe an MVL is the right option for your company, save time and skip the complexity by using our professional liquidation services. Our team of corporate secretarial experts will help you to dissolve your company quickly and effectively.
CREDITORS’ VOLUNTARY LIQUIDATION (“CVL”)
In the event if the company is insolvent but wishes to avoid a compulsory liquidation initiated by the creditors, the directors and shareholders may consider CVL.
CVL allows the company to be wound up/liquidated voluntarily whilst being insolvent (i.e. company is unable to pay off all its debts). Similar to MVL, directors and shareholders will initiate the process and nominate a Liquidator. However, at the creditor’s meeting, the creditors have the right to either agree to the person nominated by the members/shareholders or to nominate their own candidate to act as Liquidator.
Upon appointment, the Liquidator will carry out his/her duties, which amongst others may also include the realization of assets and distributions to creditors. However, in view that the company is insolvent, the distribution to creditors will most likely be on a pro-rated basis.
The advantage of a CVL as compared to compulsory winding up/liquidation is that the company may nominate their own Liquidator (subject to the approval from creditors) and therefore, making the entire process of bringing an end to the company more efficient and cost effective.
If you believe an CVL is the right option for your company, save time and skip the complexity by using our professional liquidation services. Our team of corporate secretarial experts will help you to dissolve your company quickly and effectively.