Liquidation or Company Winding Up
What is liquidation or winding-up?
The winding up or liquidation of a company is a process where a company’s assets are collected and sold, with the resulting proceeds used to pay off its debts and liabilities.
Any monies remaining after all debts, expenses and costs have been paid off are distributed amongst the shareholders of the company according to their rights and interests, or otherwise dealt with as the constitution of the company directs. When the winding up has been completed, the company is formally dissolved and it ceases to exist.
The purposes of a liquidation are:
· to ensure a just distribution of the company's assets among creditors and contributories
· to terminate the company's existence by its eventual dissolution
When a company is being wound up, the company’s business ceases to operate and its assets and affairs are handed over to an independent liquidator whose powers, duties and functions are regulated by the Companies Act (Cap 50).
The rights of unsecured creditors over the company’s assets are virtually “frozen” upon the commencement of the liquidation to avoid a further deterioration of the company’s financial position and proliferation of its liabilities.
Unsecured creditors are paid on a pari passu basis, i.e. they are paid out of the company’s assets equally. Any surplus is then distributed among the contributories of the company.
Reasons for winding up a company
· Company has ceased business activities
· Management deadlock
· Oppression - shareholders dispute under section 216 of the Companies Act (Cap. 50)
· Corporate or financial restructuring of the group to which the company belongs
· Minimise tax liabilities or maximise tax advantages for the group to which the company belongs
· Breach of statutory provisions, including offences committed
· Company acting outside its scope of activities
What are the various types of winding up?
Broadly speaking, a company can be wound up in one of two ways. First, the Court can compulsorily wind up a company. Secondly, the shareholders or the creditors of the company can themselves apply to wind up the company in proceedings known as “voluntary winding up”.
Voluntary Winding Up
Usually, a voluntary winding up is effected by the passing of a special resolution by the members of the company. The winding up commences at the time of passing the resolution.
No originating summons is filed in Court for the voluntary winding up of a company. This is dealt with by the Accounting and Corporate Regulatory Authority (ACRA) instead.
From the commencement of winding up, the company shall cease to carry on its business. However, the corporate powers of the company shall continue until the company is dissolved. The company’s shareholders cannot transfer their shares in the company without the sanction of the liquidator.
The two types of voluntary winding up are:
Members' Voluntary Winding Up
For this to happen, a company must be in a position to pay its debts in full within 12 months after the commencement of winding up.
The company’s contributories (also known as members or shareholders) may pass a resolution that the company be wound up and that a liquidator be appointed by the company.
The liquidation commences at the time of passing the resolution. The directors of the Company are required to file a declaration of solvency to the above effect.
Creditors’ Voluntary Winding Up
Where a company is unable to pay its debts and wishes to be wound up, it may do so by way of a creditors’ voluntary winding up. In addition to the requirement of a members’ resolution to wind up the company, the company must also convene a meeting with its creditors to consider its proposal for a voluntary winding up of the company.
If a resolution is passed in favour of the winding up, the company will appoint a liquidator, subject to any preference the creditors may have as to the choice of liquidator.
If no declaration of solvency is filed or if the liquidator is satisfied that the company is unable to pay its debts within the specified period of 12 months after the commencement of winding up, the winding up will proceed as a creditors’ voluntary winding up.