Liquidation is the legal process of winding up a company's affairs, converting assets to cash, paying creditors according to statutory priorities, and distributing surplus to shareholders. Upon liquidation commencement, the company ceases normal operations and the liquidator assumes control. Insolvency occurs when a company cannot pay debts as they fall due or when liabilities exceed assets. Under Section 466 of the Companies Act 2016, a company is deemed unable to pay debts if a creditor owed exceeding RM10,000 serves a statutory demand and the company fails to pay or secure within 21 days.
Members' Voluntary Liquidation applies to solvent companies where shareholders voluntarily wind up operations. Requirements include shareholders passing special resolution, directors making statutory declaration of solvency under Section 443, and appointment of liquidator. The solvency declaration must state directors have made full inquiry and formed opinion that company can pay debts in full within 12 months. Creditors' Voluntary Liquidation applies when shareholders resolve to wind up an insolvent company. The process begins with shareholders passing special resolution without solvency declaration. The company must convene creditors' meeting to appoint liquidator and establish committee of inspection. Creditors' choice of liquidator prevails if different. Compulsory liquidation involves court-ordered winding up following petition. Grounds under Section 465 include company resolved to wind up by court, company failing to commence business within one year or suspending business for whole year, members reduced below two, company unable to pay debts, or court satisfied it is just and equitable to wind up. Petitioners may include company, creditors owed exceeding RM10,000, contributories, liquidator, or Minister.
Voluntary liquidation commences upon passing resolution while compulsory liquidation commences upon petition presentation. Notice must be published and notified to Registrar. The liquidator must be a licensed insolvency practitioner under Insolvency Act 1967. Powers include taking possession of property, carrying on business so far as necessary, selling property, executing documents, proving claims, and investigating affairs and director conduct. Primary duties include realizing assets at best value, investigating claims and admitting or rejecting creditor proofs, maintaining proper accounts, distributing assets according to statutory priorities, and reporting to creditors, shareholders, and court or Registrar.
Section 527 establishes payment order from liquidation proceeds. Costs and expenses of winding up including liquidator's fees rank first. Secured creditor claims are satisfied from secured assets up to security value. Preferential debts under Section 530 paid in priority include employee wages and salaries for four months up to RM15,000 per employee, accrued leave entitlements, retrenchment compensation, and EPF contributions. Unsecured creditor claims rank equally and receive pro-rata distribution from remaining assets. Shareholders receive distribution only after all creditor claims are satisfied in full.
Upon recognizing insolvency, directors must cease trading that would worsen creditor positions, consider creditor interests, and seek professional advice. Section 588 imposes personal liability for fraudulent trading if business carried on to defraud creditors. Section 540 addresses wrongful trading where directors allowed company to incur debts without reasonable prospect of payment. Defenses include director took every step to minimize creditor losses or reasonably believed company was solvent. Additional liabilities arise from breach of fiduciary duties, preferences to certain creditors within six months, and failure to maintain proper accounting records.
Creditors must submit formal proof of debt detailing amount claimed, basis, and supporting documentation. The liquidator admits or rejects proofs and maintains register. Rejected creditors may appeal to court. Secured creditors may enforce security outside liquidation, prove for shortfall after realization, or surrender security and prove for full amount as unsecured. Creditors may appoint committee of inspection to supervise liquidator, approve significant transactions, and receive reports. Upon completing realization and distribution, liquidator prepares final accounts for approval. Following approval, liquidator applies to Registrar for dissolution. Registrar strikes off company three months after receiving notice. Upon dissolution, company ceases to exist.
Liquidation represents the formal process of winding up a company's affairs, realizing assets, and distributing proceeds to stakeholders according to statutory priorities. The Companies Act 2016 provides frameworks for both voluntary and compulsory liquidation in Malaysia. Understanding winding up procedures, director obligations, and creditor rights enables stakeholders to navigate the liquidation process while ensuring compliance with legal requirements throughout asset realization.