250. Liability as contributories of present and past members (winding up)

Question 1

250. Liability as contributories of present and past members

Answer 1

General overview
[250.01] Section 250(1) provides that past and present members shall be liable as contributories to contribute to the assets of the company an amount that is sufficient for the payment of its debts and liabilities, and the costs and expenses of the winding up of the company.

Question 2

Who are the contributories?

Answer 2

[250.02] A contributory is a present or past registered member who is liable to contribute to the assets of the company in the event of its winding up.

Question 3

What contributories are not liable for

Answer 3

[250.03] Subsection (1)(a)–(g) provide that a past member shall not be liable to contribute if he has ceased to be a member for one year or more before the commencement of winding up; or for any debt or liability contracted after he ceased to be a member; or where the court determines that the existing members are unable to satisfy the contributions required to be made under the Act.

Question 4

What contributories are liable for

Answer 4

[250.04] Subsections (1)(d) and (e) provide that in a company limited by shares, the liability of the contributions from the members shall not exceed the amount, if any, unpaid on the shares. In a company limited by guarantee, the contributory’s liability shall not exceed the amount he has undertaken to be liable by the assets of the company in the event of it being wound up. Subsection (4) further provides that a contributory in a company limited by guarantee shall, in addition to the amount undertaken by him, be liable to contribute to the extent of any sums unpaid on any shares held by him.

Question 5

Insurance policies

Answer 5

[250.05] Subsection (1)(f) provides that the members of any policy of insurance or other contract shall not be personally liable in a winding up of the company, if the policy of insurance or contract provides that his liability is restricted or that the funds of the company shall alone be made liable in respect of the policy or contract: s 250(1)(f).

Question 6

Dividends, profits, etc.

Answer 6

[250.06] Section 250(1)(g) is to be read with s 273(1) in respect of the distribution of any surplus amongst the contributories after paying off the creditors in full. If there are any dividends, profits or any sum due to a member from the company, it shall not constitute a debt from the company in a case of competition between him and the creditors of the company. However, if the creditors are paid in full, such dividends, profits or any surplus amount shall be distributed in the final adjustment of the rights of the contributories under s 273(1).

Question 7

Unlimited liability of directors

Answer 7

[250.08] A director may also be a contributory. The predecessor of this subsection (2) was s 148 of the Companies Act (Cap 174), Laws of the Colony of Singapore 1955 which provided that the liability of directors was unlimited. This subsection is not repealed because there may be some companies whose constitution provides for the unlimited liability of the directors. Exceptions are made for the unlimited liability of the company in subsection (3), viz, past directors who had ceased to hold office for a year or more before the commencement of the winding up, and any debt or liability arising in respect of a contract contracted by the company after he had ceased to hold office, and where the court considers, subject to the regulations of the company, that he should contribute in order to satisfy the debts and liabilities of the company, and costs and expenses of the winding up: s 250(2) and (3).

Question 8

251. Nature of liability of contributory

Answer 8

General overview
[251.01] A contributory’s liability to the company is in the nature of a debt due from him to the company. The liability of a shareholder of a company not registered under the Companies Act 1862 (UK) but wound up under it, to contribute to the assets of the company, is in the nature of a specialty debt: Re Muggeridge, Muggeridge v Sharp (1870) LR 10 Eq 443 .

Question 9

Creation of a debt on winding up

Answer 9

251.02] When a person is a shareholder in a company, and the company is ordered to be wound up, the Act immediately declares that this creates a debt, which accrued due when the shareholder’s liability commenced, but is payable when a call is made

Question 10

252. Contributories in case of death of member

Answer 10

General overview

[252.01] section 252(1) and (2) provide that the liability survives the death or bankruptcy of a contributory.

Question 11

Death of contributory

Answer 11

252.02] Subsection (1) provides that if a contributory dies, his personal representative shall step into the shoes of the contributory and be liable to contribute to the assets of the company in discharge of his liability.

Question 12

Bankruptcy of contributory

Answer 12

[252.03] Subsection (2) provides that where a contributory becomes bankrupt or has assigned his estate for the benefit of his creditors, his trustee in bankruptcy shall represent him as the contributory;

Question 13

253. Application for winding up

Answer 13

General overview

[253.01] Section 253 sets out the person(s) who may apply to the court for a compulsory winding up of the company.

Question 14

Who may apply

Answer 14

253.02] The following persons may apply for a compulsory winding up of the company: (a) the company itself; (b) any creditor including a contingent or prospective creditor; (c) a contributory, or his personal representative or official assignee of a bankrupt contributory; (d) the liquidator; (e) the Minister pursuant to s 241 or under s 254(1)(d) or (l); (f) the judicial manager appointed under Part VIIIA of the Act; (g) the Minister charged with the responsibility for finance against a bank; and (h) the Minister pursuant to s 254(1)(m).

Question 15

More than one petition may be filed

Answer 15

253.03] It is a settled legal principle that there is no prohibition against the filing of more than one winding up petition against a company at any one time.

Question 16

Exhaustive list

Answer 16

253.04] The list of persons who are entitled to apply under s 253(1) is exhaustive and no other person has locus standi to make an application for winding up. However, where the company such as a charity is to be wound up, the Attorney General under the Charities Act (Cap 37) may apply to do so. Or the Monetary Authority of Singapore may apply to wind up companies under its supervision such as banks, finance companies and insurance companies.

Question 17

Application by company

Answer 17

253.05] In essence, the company has to pass a special resolution by its members to present a compulsory winding up application pursuant to s 254(1)(a). Quaere: can directors present a winding up application? An indirect way is for directors to procure a members’ ordinary resolution authorising the board to present an application for winding up.

Question 18

Application by creditors

Answer 18

253.06] A creditor, secured or unsecured, may present a winding up application against the company. By far, this is the most common form of enforcing an undisputed debt. When a creditor presents an application for winding up, it is for the collective body of creditors as the official receiver will distribute the assets for the benefit of the body of unsecured creditors after paying the preferential creditors under s 328(1). The secured creditors will enforce their security against the property or assets of the company that are charged under the security issued by the company, and claim against the liquidator for the balance outstanding.

Question 19

Minister’s application

Answer 19

[253.10] The Minister may make an application in the following situations:

Statutory report or statutory meeting
[253.11] Subsection (2)(b) provides that only a contributory or the Minister may present a winding up application on the ground of the failure to lodge a statutory report or hold a statutory meeting pursuant to s 174. Such an application shall only be presented on the expiration of 14 days after the last day on which the meeting ought to have been held.

The company has no member
[253.12] See s 254(1)(d).

The company has carried on multi-level marketing
[253.13] Section 254(1)(l) expressly states that the court may order a winding up of the company that has carried on multi-level marketing or pyramid selling in contravention of any written law that prohibits such multi-level marketing and pyramid selling.

The company is being used for unlawful purpose(s) that are prejudicial to public interest
[253.14] See s 254(1)(m).

Security for costs
[253.15] The court shall not hear a creditor’s application, whether a contingent or prospective creditor, unless such security for costs has been given as the court thinks reasonable, and a prima facie case for winding up has been established to the satisfaction of the court: s 253(2)(c).

Company being voluntarily wound up
[253.16] Where a company is being voluntarily wound up, a court shall not order a compulsory winding up of the company unless it is satisfied that the voluntary winding up cannot be continued with due regard to the interests of the creditors or contributories

Question 20

254. Circumstances in which company may be wound up by Court

Definition of inability to pay debts

Answer 20

General overview
[254.01] Section 254(1)(a)–(m) set out the grounds for an application by the person(s) listed in s 253 to compulsorily wind up a company. The winding up process should not be abused to unfairly pressurise the debtor company to pay

Question 21

Procedure for winding up

Answer 21

254.02] A winding up application is commenced by issuing an originating summons under rules 22 and 23 of the Companies (Winding up) Rules (GN No S 184/1969). A company successfully struck off an applicant seeking relief under s 216 of the Act through presenting the petition as a winding up petition under the Companies (Winding Up) Rules (GN No S 184/1969)

Question 22

Stay of winding up proceedings

Answer 22

[254.04] Where the winding up application has already been filed in court, the debtor was allowed to oppose the proceedings and a stay of the winding up proceedings was granted pending the outcome of a suit between the parties

Question 23

Injunction against presentation of winding up proceedings

Answer 23

[254.05] On the other hand, whilst the parties are in dispute and the creditor threatens a winding up application, the debtor company may apply for an injunction to restrain the presentation of a winding up application

Question 24

Special resolution to wind up by court

Answer 24

[254.06] Subsection (1)(a) is rarely used because a voluntary resolution is much cheaper than going to court for a compulsory winding up. Even if the company is insolvent, a creditors’ voluntary winding up is still possible. Quaere: can directors present a winding up application? An indirect way is for directors to procure a members’ ordinary resolution authorising the board to present an application for winding up.

Question 25

Statutory report and statutory meeting

Answer 25

[254.07] See s 253(2)(b) where the application may only be made by a contributory or the Minister. Instead of a winding up order, the court may order that the statutory meeting be held or statutory report lodged, and costs paid by the persons who are responsible for the default: s 257(3).

Question 26

Failure to commence business within a year or suspends business

Answer 26

[254.08] No winding up order will be made under s 254(1)(c) unless the court is satisfied that there has been an intention on the part of the company to abandon its business or an inability to carry it on. This ground is seldom used as it is much easier and cheaper to allow the company to slide into dormancy and let the registrar strike out defunct companies under s 344 of the Act.

Question 27

Company has no member

Answer 27

[254.09] Previously, a contributory may apply to wind up a company where its members fall below two. Section 20A provides that a company shall have at least one member. If the sole member passes away, his personal representative may apply to court to act on his behalf to wind up the company.

Question 28

Company unable to pay its debts

Answer 28

[254.10] This is the most common ground upon which a creditor applies to court to wind up the company. As long as the company is unable to pay its debts, the creditor’s motive for filing a winding up order is irrelevant

Question 29

Presumption of insolvency

Answer 29

[254.11] Section 254(2) provides a deeming provision for the inability of a company to pay its debts as follows: (a) when a creditor by assignment or otherwise serves a statutory demand for a sum exceeding $10,000 then due on the company requiring it to pay the sum within three weeks, and the company neglected to pay the sum due or to secure or compound it to the reasonable satisfaction of the creditor; (b) when an execution or other process levied on a court judgment or order is returned unsatisfied in whole or in part; and (c) the court is satisfied that the company is insolvent.

Question 30

Statutory demand

Answer 30

[254.12] The essential elements of a statutory demand are: (a) a debt in excess of $10,000; (b) a written demand to the company or its authorised agent to pay the sum due; and (c) service of the demand on the company at its registered address

Question 31

Irregularities in statutory demand

Answer 31

[254.13] The Malaysian authorities have held that strict compliance with the statutory requirements need not be adhered to, so long as the creditor can prove that the company is insolvent

Question 32

Service at registered address

Answer 32

[254.14] Service at the registered company is good even if the company has moved without informing the Registry of Companies. A statutory demand for payment that was not served at the company’s registered office but somewhere else renders it irregular and defective and the irregularity and defect cannot be cured

Question 33

Misstatement or failure to specify amount due

Answer 33

[254.15] A statutory demand need not specify the exact sum due at the date of demand so long as it exceeds the statutory limit of RM500 under the Companies Act 1965 (Malaysia), and remains unpaid without reasonable grounds

Question 34

Disputed debts and cross-claims

Answer 34

[254.16] Where there is a genuine disputed debt, the creditor should not abuse the winding up process to bring improper pressure on the debtor

Question 35

Securing or compounding debt

Answer 35

[254.19] To “compound” for a debt is to accept an arrangement for payment of the amount of the debt or of a different amount. “To the creditor’s reasonable satisfaction” is intended to enable the creditor to be the sole judge of his satisfaction. It posits an objective test, viz whether in rejecting the debtor’s proposal for repayment, the creditor was acting reasonably in all the circumstances. If the test was wholly subjective, the legislature would have employed the phrase “to the creditor’s satisfaction”

Question 36

Interest on the debt

Answer 36

[254.20] In the compulsory winding up of an insolvent company, a claim for interest on a debt carrying interest could only be admitted up to the date of presentation of the petition

Question 37

Directors acted in their own interest that is unfair or unjust to other members

Answer 37

[254.21] A petition for winding up under s 254(1)(f) overlaps with s 254(1)(i) as the facts of the directors acting in their own interest that is unfair or unjust to other members often amount to the “just and equitable” ground for the court to wind up the company. In addition, the same facts of directors’ breaching their fiduciary duty and acting in their own interest may also ground an action in ss 216 or 216A of the Act. Thus, the mere existence of a suitable alternative remedy, such as under s 216 of the Act, was not a good ground for striking out a winding up petition which on the face thereof was founded on substantial grounds

Question 38

Pursuant to an inspector’s report under Part IX of the Act

Answer 38

[254.22] Refer to s 241 for the exercise of the Minister’s powers to apply for a winding up order against a declared company.

Question 39

“Just and equitable”

Answer 39

[254.23] Subsection (1)(i) is a very wide catch-all provision to enable a company to be wound up. Although most commonly used by members, creditors may also use it as a ground for winding up

Question 40

Loss of substratum

Answer 40

[254.24] A company that was incorporated for the purpose of manufacturing a coffee substitute out of dates, but could not acquire the German patent to do so, was wound up on this ground

Question 41

Minority members oppressed or treated unfairly

Answer 41

[254.25] If minority members have lost confidence in the directors on account of their lack of probity in the conduct of the company’s affairs, a winding up order may be made on the ground that it is just and equitable to do so

Question 42

Deadlock in management in quasi-partnership

Answer 42

[254.26] A deadlock in the management of a company would be a ground for winding it up because a family company, like a quasi-partnership, was a paradigm case for the application of equitable considerations to modify or restrain the exercise of legal rights

Question 43

Legitimate expectation to participate in management

Answer 43

[254.27] The “just and equitable” ground, by its very malleable nature, was capable of encompassing factual situations other than deadlock in management, the collapse of the substratum of the company and allegations of ouster from the decision-making process of the company. Where the company was an incorporated partnership, and one member orally promised to buy out the other if the latter wanted to exit, the unfair refusal to buy out the other at a reasonable price was a ground to wind up the company

Question 44

Failure to pay reasonable dividends

Answer 44

[254.28] The directors had a duty to consider the right of members to have profits distributed so far as was commercially possible; and that, accordingly, they had failed to meet the legitimate expectation of the members to receive reasonable dividends. The members could petition for a winding up on the “just and equitable” ground

Question 45

Company’s business carried on in a fraudulent manner

Answer 45

Nil

Question 46

Multi-level marketing or pyramid

Answer 46

[254.30] Subsection (1)(l) provides that the court may order the winding up of a company that has engaged in multi-level marketing or pyramid selling in contravention of any written law governing the same: see the Multi-Level Marketing and Pyramid Selling (Prohibition) Act (Cap 190).

Question 47

Foreign corporate entity registered under s 359(1)

Answer 47

[254.31] Act No 15 of 2017 introduced a new s 254(1)(la) which allows a court to wind up a foreign corporate entity that was registered as a company limited by shares under the new s 359(1), for breach of any of the conditions of registration imposed under that section.

Question 48

Unlawful purpose that is prejudicial to public interest

Answer 48

[254.32] For a winding up application to proceed under subsection (1)(m), a certificate issued by the Minister charged with the responsibility for national security that in his opinion, he is satisfied that the company concerned is being used for purposes against national security, shall be conclusive evidence that the company is being used for such purposes: s 254(3).

Question 49

Applicant cannot rely on his own bad conduct

Answer 49

[254.33] Where the applicant was the cause of the deadlock, his application for winding up may not be viewed favourably

Question 50

“Buy out” for s 254(1)(f) and (i)

Answer 50

[254.34] Act No 36 of 2014 introduced a more nuanced approach to the remedies that the court can grant under s 254(1)(f) and (i). Instead of winding up the company, the court may, if it is of the opinion that it is just and equitable to do so, order that the interests of the aggrieved member(s) be bought out by the company or by other member(s) on terms to the satisfaction of the court.

Question 51

Application by judicial manager

Answer 51

[253.09] An application may only be presented after the discharge of a judicial management order

Question 52

Application by a contributory

Answer 52

253.08] A contributory’s right to apply for a winding up of the company on any of the grounds in s 254(1)(a), (b), (c), (e) or (i) is subject to the conditions in s 253(2)(a); viz that the company has no members, or the shares or some of them were held by the contributory and registered in his name for at least six months out of the 18 months before the winding up application is made. This applies to his personal representative or his trustee in bankruptcy. This requirement prevents a person from acquiring shares in a company for the purpose of winding up a company. Where a fully-paid shareholder petitioned for compulsory winding up, he must show, on the face of the petition, a prima facie probability that there would be assets or surplus available for distribution amongst the shareholders