Sometimes winding up your company is the only solution
There are any number of reasons why a company may need to or will be compelled to dissolve and wind up its operations. The company could have ceased its business activities, or it could have been the subject of a corporate restructuring exercise or it is unable to pay its debts. In some cases, winding up results from a management deadlock or minority shareholders oppression. Regardless of the reason, a company may be wound up– voluntarily or compulsorily, with the aim to collect and realise its assets for distribution (to creditors in priority, and any balance to members.
Is “winding up” the same as liquidation?
There are some slight differences between the two words, but they are quite closely linked together. When the decision has been made to “wind up” a company, its long-term relationships and obligations to customers, suppliers, and employees must be ended and severed, and its affairs should also be put in order.
Once all these relationships have been severed and the obligations are fulfilled, then the company’s assets come under the control of a liquidator – who will be in charge of liquidating or selling off all the assets in order to pay any debts that the company owes. Any proceeds left over after the settlement of debts (including expenses and costs of the winding up process) will then be distributed to the company’s members according to their rights and interests, or otherwise dealt with per the company’s constitution. Once that is done, the company is formally dissolved and ceases to exist as a legal entity.
Voluntary winding up
Voluntary winding up of a company under Section 290(1)(b) of the Companies Act (Cap 50)[1] requires a special resolution for winding up passed at an Extraordinary General Meeting.
If it is proposed that the company be wound up voluntarily, the directors of the company need to consider the company’s affairs and in particular whether the company will be able to pay its debts.
To proceed as members’ voluntary winding up, the majority of directors must be willing to issue a declaration, per Section 293(1) of the Companies Act (Cap 50) that they are of the opinion that the company will be able to pay its debts in full within 12 months of the commencement of the winding up process. This declaration should be attached with a statement of the company’s affairs showing: (a) the company’s assets and the total amount expected to be realised upon liquidation; (b) the company’s liabilities; and (c) the estimated expenses of winding up.
On the other hand, if the majority of directors consider that the company will not be able to pay its debts, they should convene an Extraordinary General Meeting to pass a special resolution for winding up and (as the company is insolvent) to appoint a liquidator. A meeting of the company’s creditors must be summoned for the purposes of nominating a person to be liquidator, appointing members of a Committee of Inspection and to approve the costs of winding-up incurred to-date. Such winding up will proceed as a creditors’ voluntary winding up. Typically, the company appoints a liquidator who then summons the creditors’ meeting. He will inform the creditors of the costs incurred to-date (including any urgent measure undertaken to safeguard the company’s assets) and that they may replace him with another liquidator.
If a company is solvent and it is able to comply with the conditions for striking-off (see Section 344 Companies Act (Cap 50) and Companies (Striking-Off) Regulations 2015), it can consider the alternative process of applying to ACRA for striking-off (instead of proceeding with liquidation).
What should I take note of during a voluntary winding up?
During a voluntary winding up, there are roughly 6 things that you should be aware of:
Firstly, all business conducted by the company must cease – except for activities deemed necessary for the beneficial winding up of the company. Every correspondence (e.g. invoices, order for goods and business letters) issued by the company after the passing of the resolution for winding up must have the words “in liquidation” added after the name of the company.
Secondly, the liquidator has no power to carry on the business with the intent of reviving the company or making a profit. His/her primary concern should be only carrying on the business of the company as far as required to sell it off. The liquidator in exercising any of the powers conferred on him/her, is subject to the court’s control. On the other hand, the liquidator may apply to the court to determine any question arising in the winding up, or to exercise any of the powers that the court may exercise if the company were subject to court winding up.
Thirdly, all powers that the directors in the company previously enjoyed will cease, unless the shareholders and liquidator have agreed that the directors should continue to enjoy their powers, but in a limited capacity and only in certain matters.
In addition, any transfer of shares in the company during the winding up process is prohibited and considered void, unless the liquidator agrees to it – which means that the membership of the company cannot be changed once the process of winding up has started.
If the company had previously bought from, or sold property to, a person who was a director of the company for cash, and if the transaction had taken place five years before the start of the winding up process, the company may recover any amount by which the property was overvalued or undervalued.
Lastly, a floating charge (i.e. a security taken over assets that the company is permitted to deal with, and which therefore varies in quantity and/or value at different times) which is created within 6 months of winding up commencement will be void except to the extent of the amount of cash advanced to the company at the time of creation or subsequently, together with interest at five per cent per annum.
Is there any eligibility criteria in order to be appointed as a liquidator?
In the case of a member’s voluntary winding up, any person[2] can be appointed to be the company’s liquidator, subject to the approval of the company’s shareholders. However, the person may not be appointed:
- If he is indebted to the company or related corporation for an amount of more than S$10,000;
- If he is an undischarged bankrupt, or if has either assigned his estate or made an arrangement with his creditors under any law relating to bankruptcy;
- If he is a person who was previously convicted of an offence involving fraud or dishonesty punishable with imprisonment for at least three months.
Also, the prospective liquidator must be a natural person and cannot be appointed as a liquidator unless he/she has first agreed to act as one. A prospective liquidator should preferably be a public accountant or someone who is generally compliant with the requirements set out by ACRA in its practice directions relating to “approved liquidator”[3] under Section 9 of the Companies Act (Cap. 50).
Compulsory Winding Up
The Court may order a company to be wound up upon the application of the company itself, a creditor to the company, a shareholder of the company, a liquidator, a judicial manager, or a Minister on grounds specified under the law.
What sort of circumstances would merit the Court to issue an order to wind up a company?
Under Section 254 of the Companies Act (Cap 50), the Court may order a company to be wound up for the following reasons:
- The company passes a special resolution agreeing to be wound up by the Court;
- The company defaults in lodging the statutory report, or in holding a statutory meeting;
- The company does not commence business within a year from its incorporation, or suspects its business for a whole year;
- The company has no member;
- The company is unable to pay its debts;
- The directors acted in their own interests, and failed in their duty to act in the interests of the members as a whole;
- When an inspector appointed by the Minister of Law reports that he is of the opinion that the company cannot pay its debts and should be wound up; or that it is in the interests of the public, shareholders or creditors that the company should be wound up;
- Upon the end of a period fixed for the duration of the company, or occurrence of an event, which – due to a clause stated in the company constitution – would trigger the company to be dissolved;
- The Court is of the opinion that it is just and equitable that the company be wound up;
- The company’s license for any law related to banking has been revoked, or has expired and not renewed;
- The company is carrying on, or has carried on banking business in Singapore in contravention of banking-related laws;
- The company has carried on multi-level marketing or pyramid selling in contravention of any law prohibiting such activities;
- A foreign corporate entity breaches the conditions of its registration; or
- The company is being used for an unlawful purpose, or for purposes that may negatively affect public peace, welfare or good order in Singapore, or against national security or interest.
The most cited ground for a winding up application is the company’s inability to pay its debts. A company is deemed to be unable to pay its debts if:
- A creditor has served a written demand requiring payment of a debt which exceeds S$10,000, and the debt is not paid within three weeks of demand;
- The execution of a judgment obtained by a creditor against the company remains unsatisfied in part or in whole; or
- The Court is satisfied by proof that the company is unable to pay its debts.
What should I take note of during a compulsory winding up?
A compulsory winding up is deemed to have commenced on the day that a winding up application is presented to Court (except where the company had earlier passed a resolution for voluntary winding up).
Following the presentation of a winding up application, the company, its creditors, or its shareholders may apply to restrain any pending legal proceedings against the company. When a winding up order has been made or a provisional liquidator has been appointed, no action or proceed shall be proceeded with or commenced against the company except by leave of court. Any disposition of the company property and any transfer of its shares after the process of winding up has commenced will also be void unless the Court orders otherwise.
As in a voluntary winding up, once the process has commenced, the company’s officers no longer have any power to carry on the company’s business. The liquidator takes over control of the company, and certain powers and duties of the court relating to company affairs may be delegated to the liquidator (for example, the settling of the lists of contributories and the rectifying of the register of members).
A floating charge (i.e. a security taken over assets that the company is permitted to deal with, and which therefore varies in quantity and/or value at different times) which is created within 6 months of winding up commencement will be void except to the extent of the amount of cash advanced to the company at the time of creation or subsequently, together with interest at five per cent per annum.
Within 14 days of the Court order, the directors and company secretary must deliver a statement of the company’s affairs to the liquidator, who will then make a report to the Court. This statement will contain details of the company’s assets and liabilities, and will allow the liquidator to carry out investigations into the company’s affairs.
What are the stages in the process of compulsory liquidation/winding up?
Broadly speaking, there are four main stages: (1) Pre-winding up; (2) Realisation of assets; (3) Adjudication of claims and distribution of dividends; and lastly (4) Release as Liquidator and dissolution of company.
First stage: Pre-winding up
Following the presentation of a winding up application, the applicant may propose the Official Receiver or an approved liquidator (as defined under Section 9 Companies Act (Cap. 50)) to be appointed as liquidator. The Court will issue a winding up order if it is satisfied that there are grounds to wind up the company.
Second stage: Realisation of assets
Within 14 days of a Court order for winding up, the directors and company secretary must deliver a Statement of Affairs regarding the company (setting out details of the company’s assets and liabilities) for the liquidator’s consideration and investigation.
The liquidator will carry out investigations into the company’s affairs, and then make a report to the Court. After the Statement of Affairs is filed, a summary of the company’s affairs will be sent to creditors and contributories.
The liquidator can seize and realise company assets such as:
- Any ready cash in hand, and in the banks/other financial institutions,
- Book debts as disclosed in the Statement of Affairs,
- Sale of office fittings and properties owned by the company,
- Call of unpaid capital, and
- Recovery of assets from dispositions made by the company.
Third stage: Adjudication of Claims and Distribution of Dividends
During the winding down of the company, creditors can file Proofs of Debt with the liquidator, who will then adjudicate and decide if the claim is to be admitted or rejected. If the claim is rejected – either in part, or in whole – the creditor can appeal to Court against the liquidator’s decision within 21 days of being rejected.
Proceeds from the realisation and sale of company’s assets would be first paid out to the following creditors in the following order of priority:
- Costs and expenses of winding up;
- Wages or salary of employees including allowance or reimbursement (not exceeding an amount equivalent to five month’s salary or S$12,500, whichever is less);
- Retrenchment benefits or ex gratia payments under employment contracts (not exceeding an amount equivalent to five month’s salary or S$12,500, whichever is less);
- Any sums for workmen’s compensation under the Work Injury Compensation Act accrued before, on or after the commencement of winding up;
- Contributions payable by the company as employer under any written law relating to employees’ superannuation or provident funds or under any scheme of superannuation which is an approved scheme under the Income Tax Act (Cap. 134) (e.g. Central Provident Fund etc);
- All remuneration payable to any employee in respect of vacation leave, accrued in respect of any period before, on or after the commencement of winding up
- All tax assessed under any written law before the commencement of the winding up or assessed at any time before the time fixed for the proving of debts has expired
Once all preferential claims have been paid in full, the balance proceeds is distributed to all ordinary creditors. Any remaining sums after paying creditors will then be returned as capital repayments to the members, subject to the Court’s approval. The shareholders are paid in proportion to their respective interests in the company’s share capital.
Fourth stage: Release as liquidator and dissolution of company
Once all the assets have been liquidated, the liquidator will serve notice to creditors and contributories of his/her intention to apply for release and for the company to be dissolved, along with a summary of receipts and payments. The liquidator will then apply to the Court for the company to be dissolved – which will then release the liquidator from all liability related to his/her conduct in the course of winding up the company.
Any assets that were not realised prior to dissolution of the company will vest with the Official Receiver under Section 346 of the Companies Act (Cap 50). The Official Receiver may deal with these assets in any manner as he sees fit including selling the property.
[1] References to equivalent provisions of the Insolvency, Restructuring and Dissolution Act 2018 are expected to replace references to provisions of the Companies Act (Cap. 50) by the first half of 2019
[2] Once the Insolvency, Restructuring and Dissolution Act 2018 comes into force, a person will not be able to act as a liquidator of a corporation unless duly licensed as an insolvency practitioner
[3] Once the Insolvency, Restructuring and Dissolution Act 2018 comes into force, a person will not be able to act as a liquidator of a corporation unless duly licensed as an insolvency practitioner (and references to “approved liquidator” will be replaced accordingly with “insolvency practitioner”)
Have any questions?
If you have any questions about winding up your business, you can request for a quote with Sim Lin Piah or other lawyers. With Quick Consult, from a transparent, flat fee from $49, a lawyer will call you on the phone within 1-2 days to give you legal advice.
This article is written by Sim Lin Piah from Tan Peng Chin LLC and edited by Elizabeth Tan of Asia Law Network.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.