An Overview of Members Voluntary Liquidation (“MVL”) and Striking Off Companies in Malaysia
Members Voluntary Liquidation (“MVL”)
The concept of liquidation does not refer only to insolvent companies. In fact, it applies also to solvent companies that wish to wind up its operation due to various reasons. Redundancy of operations, taxation benefits, succession issues, resolving on-going conflicts among members, meeting original objectives, foreseeable economic downturn and changes in economic competitiveness are some of the typical reasons why these solvent companies decide to wind up their operations. In this context, liquidation of solvent companies is referred to as Members’ Voluntary Liquidation (“MVL”). The MVL is a preferred choice to wind up compared to Compulsory/Mandatory Winding Up as the latter, that applies only to insolvent companies may require a more dramatic approach, stringent, costly, and judicial/court’s intervention.
The provision of MVL is clearly prescribed in the Companies Acts 2016 (“the Act”) and the MVL is executed by a “Liquidator” appointed by majority of directors. The liquidator can be a Chartered Accountant or Reporting Accountant in Public Practice in Malaysia. In Malaysia, Chartered Accountants/Reporting Accountant in Public Practice refers to Accountants with public practice license issued by Malaysian Institute of Accountants. Further, at the interest of stakeholders, the appointed liquidator able to provide the most cost-effective and efficient methods for the complete dissolution of the company.
The crucial aspect of MVL is that majority of the directors must make a declaration of solvency. It is a written confirmation that the directors at the meeting of directors have formed an opinion that the company is able and will be able to pay its debts in full within the stipulated period after the commencement of the MVL. It is also important for the directors to take all reasonable steps in ensuring all liabilities are taken into accounts including contingent liabilities such as impending litigation, warranty claims, indemnities and guarantees. The solvency declaration must be accompanied with the company’s Statement of Affairs, a document containing a comprehensive evaluation of all liabilities (including contingent liabilities), assets and expenses for the winding up process for the purpose of the MVL.
The declaration of solvency must not be taken lightly by directors. Directors having made the solvency declaration without reasonable ground (when the debts have not been fully paid during the stipulated time of the MVL) will be subject to civil/criminal offence and upon conviction, be liable to imprisonment for a term not exceeding five years or a fine not exceeding three million ringgit or to both and in the case of a continuing offence, to a further fine not exceeding five hundred ringgit for each day during which the offence continues after conviction.
The MVL would have the following effect on the directors:
- S.445(2) – All the powers of the directors shall cease unless the liquidator or the company in a general meeting with the consent of the liquidator approves the continuance thereof.
- S.442(1) – The company, shall from the commencement of the winding-up cease to carry on its business, except so far as may be necessary for the beneficial winding-up thereof.
- S.442(2) – Any transfer of shares, except for transfer made with the sanction of the liquidator and any alteration in the status of members, made after the commencement of the winding-up, shall be void.
The appointed liquidator would execute the necessary liquidation plan including collection of receipts, settlement of liabilities, obtaining tax clearance and settlement of all pending taxes with LHDN, making public announcement through mainstream media, distribution of surplus assets, holding final meeting with relevant parties and finally submit the necessary returns with the Suruhanjaya Syarikat Malaysia (“SSM”) to allow for the dissolution of the company to take place. In exceptional circumstances and permissible by the laws, the appointed liquidator with corroboration with the directors of the company may take additional steps before initiating the dissolution of the company, this includes disposal of assets, sale of existing contracts, negotiate with suppliers, recovery of long outstanding debts and other similar activities on interim basis to support the dissolution of the company.
Alternative to a Members’ Voluntary Liquidation (“MVL”): Striking Off of Companies
An alternative approach to MVL is companies striking off from SSM registrar. Although it is a quicker and cheaper option (as it does not require the appointment of a liquidator), it is more difficult for a company to meet the threshold criteria to proceed straight to the striking off.
Here are some of the criteria:
(a) The Company has not commenced business since its incorporation date or the Company has not carried out business or ceased business operation for more than 12 months,
(b) all shareholders of the company must agree to strike off,
(c) the company must not be carrying on business or intent to carry a business,
(d) the company has no assets and liabilities,
(e) the company must have paid all fees and penalties payable under the Companies Act 2016,
(f) the company must have no outstanding legal proceedings and
(g) the company is not a guarantor company or a holding company or subsidiary of another corporate body.
In summary, both MVL and striking off companies provide an efficient and the cost-effective methods in the winding up of companies. The former requires pro-active and pre-emptive actions by directors when the companies are still in solvent state before a more complex, stringent, and costly method imposed by the court of law for insolvent companies, while the latter requires meeting straight forward pre-set conditions of the Act, in this case only suitable for dormant companies. Generally, two or more of yearly accounting losses on a back-to-back basis and/or cash flow mismatches over a period may give a good indication to cut further losses and to preserve paid up capital by considering a MVL.
The MVL that applies for solvent companies is by far the best alternative for those seeking optimum net realization value (NRV) of assets when executing a business closure. The moment a company is insolvent (transitioned from the state of solvent to insolvent), MVL will no longer legally applies (unless professionally intervened and restructured), thus making it difficult to realize the true value of assets in the disposal exercise for the purpose of maximizing financial return to the shareholders. This is largely due to the negative perception that potential buyers might have against insolvent companies. For example, business actions during insolvency often reflect desperation on the part of the insolvent company, thus lacking the bargaining power or the inability to dictate the best possible price. In such cases, bargaining or suppression of price on assets can be intense, and heavy compromise or haircut may be required to be made by the insolvent companies in meeting the demand of potential buyers. It is for these reasons that MVL is the most preferred method in dissolution of companies as opposed to the court related winding up exercise.
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At Megat Faizal Musa & Co, a Firm of Chartered Accountants and a Member Firm of Malaysian Institute of Accountants, we specialize in complex accounting/finance issues, corporate restructuring & recovery, due diligence, members’ voluntary liquidation, corporate turnaround of underperforming companies, mergers & acquisitions, family business advisory, internal auditing and other associated services.
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