'Liquidation' or 'Wind up' in a nutshell

This is a simple introduction to the winding up of companies. 'Liquidation' or 'winding up' are synonymous. There are two types of winding up: voluntary and pursuant to an order of court.
In a voluntary winding up, the company concerned must call a general meeting of its shareholders to pass a resolution to wind itself up voluntarily. This voluntary winding up may be for a variety of reasons, such as the company concerned has achieved its objective or has decided to cease business. A voluntary winding up may be either a members' voluntary winding up or a creditors' voluntary winding up. In the case of a members' voluntary winding up, the directors of the company concerned have to make a declaration of solvency. In the absence of the declaration of solvency, the winding up proceeds as a creditors' voluntary winding up where a meeting of creditors must be called. The difference is that in the latter case, the company's creditors get to appoint the liquidator, whereas in the former case, the shareholders of the company concerned appoint the liquidator.
A winding up by the court is initiated by the presentation of a petition to the court. In most cases, such a petition is usually presented by a creditor of the company due to the company being unable to pay its debts. In making a decision on the creditor's petition, the court must be satisfied that: (a) the debt of the creditor is undisputed (for example, the debt is a judgment sum or the company has made an admission of the debt or made part payment towards the debt), and (b) the company is commercially insolvent, that is the company does not have assets available to meet its current liabilities.
In special cases, a shareholder of the company may present a winding up petition to wind up the company on just and equitable grounds – for example, if there is a deadlock in the management of the company.
When making an order to wind up the company, the court appoints a liquidator. The liquidator can be either the official receiver (a civil servant) or a licensed private liquidator.
The role of the liquidator is to collect the assets of the company concerned, dispose of these assets and from the sale proceeds, pay off creditors of the company. Certain creditors are preferential creditors and the debts due to them (termed 'preferential debts', such as liquidation expenses, EPF contributions and federal taxes) have to be paid first before the balance can be used to settle the debts of unsecured creditors on a pro-rated basis. Any surplus after having satisfied the liquidation expenses and all creditors of the company, can be distributed to the shareholders, again on a pro-rated basis. At the end of the whole process, the company is dissolved and then ceases to exist.

Contributed by Heng Yee Keat of Christopher & Lee Ong (www.christopherleeong.com)