About Liquidation or Winding Up
What is liquidation or winding-up?
Liquidation is a process where the company’s assets are seized and realised, with the resulting proceeds used to pay off its debts and liabilities.
Any surplus is then distributed among the contributories of the company according to their rights and interests, or otherwise dealt with as the constitution of the company directs.
Upon the completion of the liquidation, the company goes into dissolution 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
Just distribution of assets
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?
Members’ voluntary 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.
The liquidation commences at the time of passing the resolution. It is adopted where the company is able to pay its debts in full within 12 months after the commencement of winding up. The directors of the Company are required to file a declaration of solvency.
Creditors’ voluntary winding up
If the company is not able to meet its liabilities, the company can 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.
Compulsory winding up
Under section 253 of the Companies Act (Cap. 50), the company itself, creditors, contributories, liquidator, judicial manager or the Minister may present a winding up application to the High Court.
The applicant has to pay a winding up deposit of $10,400 to the Official Receiver, and the Court may appoint the Official Receiver or an approved liquidator as the liquidator of the company.
The winding up is deemed to have commenced as at the date of the presentation of the winding up application.
Section 254(1) of the Companies Act (Cap. 50) states all the grounds under which the Court may liquidate a company. The common grounds for a company to be wound up by the Court include:
Inability to pay its debts
The company is deemed unable to pay its debts under section 254(2)(a) of the Companies Act (Cap. 50) if a company's creditor, who is owed more than S$10,000, has served a demand for the sum owing at the registered office of the company, and the company has not paid this sum for three weeks thereafter.
Just and Equitable
When the Court is of the opinion that it is just and equitable that the company be wound up.
What are the stages involved in a compulsory liquidation?
Click here to view the major stages involved in a compulsory liquidation.
What effects does liquidation have on the company and creditors?
a) Proceedings against the company
An application may be made to the Court to stay or restrain pending proceedings against the company at any time after the presentation of a winding up application and before a winding up order has been made.
No action or proceeding shall be proceeded with or commenced against the company except with the Court’s leave after a winding up order has been made.
b) Disposition of company assets
Any disposition or sale of the company’s assets, transfer of shares or alteration in the status of company’s contributories made after the commencement of the winding up by the Court is void without the Court’s sanction or approval.
The Court may allow the disposal of property for continuation of business or in the ordinary course of business, which may be beneficial not only to the company but also to the unsecured creditors. For example, sale of assets at full market value may also be validated if the transaction does not involve dissipation of the company’s assets.
A disposition or sale carried out in good faith in the ordinary course of business at a time when parties are unaware that a winding up application has been presented may be validated by the Court unless there were grounds for thinking that the transaction might involve an attempt to prefer the buyer.
c) Execution proceedings
After a winding up application has been presented, no creditor is allowed to take out or continue attachment or execution proceedings against the company. A creditor must complete execution before the winding up application has been presented. Otherwise, a creditor cannot retain the goods.
For example, goods under a writ of seizure and sale must be seized and sold; garnishee proceedings are completed on receipt of the debt. Landlords may not distrain for rent after the winding up application has been presented. However, if distress proceedings are completed before that date, landlords are entitled to net proceeds of sale of up to 12 months’ rent.
d) Floating charges
A floating charge created within 6 months of the commencement of the winding up shall be invalid, except to the amount of cash paid to the company at the time of or subsequently to the creation of the charge, together with the interest at 5% per annum.
The floating charge shall remain invalid unless the secured creditor is able to prove that the company was solvent after the creation of the floating charge.
Any floating charge given by the company in the 6-month period will, unless the company was solvent immediately, be invalid except to the extent that it was given to secure new money. Even if the floating charge is invalid, the debt will remain as an unsecured debt.
The proceeds of realisation of assets under a floating charge will first be used to pay certain priority claims in accordance with section 328 of the Companies Act (Cap. 50) before satisfying the claim of the lender secured by the floating charge.
e) Secured creditors
The rights of the secured creditor to deal or realise security over company assets are not affected by the winding up order. However the secured creditor is not entitled to interest on the debt if the security is not realised within 12 months of winding up or such further period as allowed by the Official Receiver.
What is the role of a liquidator in compulsory liquidation?
The powers of a liquidator for a compulsory winding up are set out in section 272 of the Companies Act (Cap. 50).
The role of the liquidator includes the following:
- Investigate into the affairs and assets of the company, the conduct of its officers and the claims of creditors and third parties
- Recover and realise the company’s assets in the most advantageous manner to the company
- Adjudicate the claims of the creditors and ensure an equitable distribution of the company’s assets in accordance to the provisions of the Companies Act (Cap. 50)
a) Realisation of assets
Company’s assets that may be realised by a liquidator include:
- Cash in hand and in the banks and all other financial institutions
- Book debts disclosed in the Statement of Affairs
- Sale of office fittings and properties owned by the company
- Call of unpaid capital
- Recovery of assets from dispositions made by the company. This includes things in action and transfers of shares after the commencement of the winding up not sanctioned by the Court as well as undue preferences given to certain creditors and transactions made to creditors at below valuation prior to winding up.
It must be noted that the liquidator shall not be liable to incur any expenses in relation to a winding up unless there are sufficient available assets.
A creditors’ meeting may be convened for the purpose of obtaining the creditors’ consent to pursue a claim that is worth pursuing and to meet the expenses of pursuing such a claim. Such claims would include undertaking legal proceedings for recovery of moneys.
b) Prosecution of company officers
Apart from the prosecution of directors or officers who fail to file the Statement of Affairs, delinquent directors and officers of the company in winding up can also be held liable for a range of offences including falsification of books, failure to keep proper accounts and fraudulent trading.
In addition, delinquent officers can also be made personally liable in damages for misfeasance or breach of trust against the company on the application of the liquidator to the Court for assessment of damages against guilty officers, and the Court may also direct that prosecution be instituted for any criminal liability on the part of the officers found liable.
c) Adjudication and admission of claims of the creditors
Creditors may file their Proofs of Debt (Form 77) with the liquidator once the company is in liquidation.
The claims are then adjudicated and admitted or rejected accordingly. If any claim is rejected either in part or in whole, the liquidator will send a notice of rejection to the creditor, stating his reasons for the rejection. Any creditor who is dissatisfied with the liquidator’s decision may appeal to the Court within 21 days to set aside the liquidator’s decision.
d) Distribution of assets
The proceeds from the realisation of the company’s assets will first be paid to the preferential creditors as set out in section 328 of the Companies Act in the following order:
- Costs and expenses of winding up, including the taxed costs of applicant and the remuneration of the liquidator
- Wages or salary including allowance or reimbursement*
- Retrenchment benefits or ex gratia payments under employment contracts*
- All amounts due in respect of workmen’s compensation under the Work Injury Compensation Act (Cap 354) accrued before, on or after the commencement of winding up
- Contributions payable by the company as employer
- 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
*The amount payable shall not exceed an amount that is equivalent to five months’ salary or S$12,500, whichever is lesser.
After payment of these preferential claims in full, the balance is then paidpari passu (i.e. paid out equally) to all ordinary creditors. When all creditors have been paid, the liquidator makes a capital repayment to shareholders with the leave of Court. The shareholders are paid in proportion to their respective interests in the company’s share capital.
e) Release and dissolution
Upon the completion of the liquidation, the liquidator applies to the Court for the company to be dissolved and to be released as liquidator where it discharges the liquidator from all liability in respect of his conduct in the course of winding up.
Any assets that were not realised prior to dissolution will vest with the Official Receiver under section 346 of the Companies Act. The Official Receiver may deal with these assets in any manner as he sees fit including selling the property.
What are the charges of the Official Receiver?
The fees chargeable by the Official Receiver are stipulated in the Schedule under the Fees (Winding up and Dissolution of Companies and Other Bodies) Order 2005:
(i) Administrative Fee;
(ii) Realisation Fee; and
(iii) Distribution Fee.
Liquidator’s Account of Receipts and Payments/ Statement of the Position in the Winding Up of an Entity
Private Liquidators can download a Guide on filing the Liquidator’s Account of Receipts and Payments/ Statement of the Position in the Winding Up of an Entity (for compulsory and voluntary windings up) here(373 KB).