Winding Up a Company
Liquidation, or the winding up of a company, is a process where the company’s assets are seized and realised (converted into cash), with the proceeds from the seized assets being used to pay off the company’s debts and liabilities.
It ensures a fair distribution of the company’s assets amongst its creditors and members/shareholders, and terminates the company’s existence once all its debts and liabilities have been paid off (i.e. once it has been wound up).
Winding up should not be confused with striking off. While striking off is another way of closing a company, it is suited for companies which are not actively in business and do not have any assets or liabilities. If your company is insolvent, it can only be wound up and not struck off.
A company can be wound up while it is still solvent, or after it has become insolvent. Solvent companies can voluntarily apply to be wound up through a “members’ voluntary winding up”. On the other hand, there are 2 ways in which insolvent companies can be wound up:
- Voluntarily applying to be wound up through a “creditors’ voluntary winding up”
- Being involuntarily wound up (e.g. upon application of a creditor) by an Order of Court through a “compulsory winding up”
Determining the Solvency of a Company
One must know the solvency of a company, in order to determine how it is to be wound up.
A solvent company is one that is able to pay its debts in full, within a period not exceeding 12 months. When a company is unable to pay its debts, it is deemed as insolvent.
Under the Companies Act, a company is deemed unable to pay its debts if:
- A creditor has served a statutory demand on the company for a sum of more than S$10,000, and the company fails to pay the sum, or to secure or compound it to the creditor’s reasonable satisfaction, 21 days from the date that the demand was served (until 19 October 2020, these thresholds have been respectively increased to S$100,000 and 6 months due to COVID-19);
- A creditor tries to enforce a court judgment or order for a certain sum of money against the company, but is unable to recover the entire sum; or
- It is proven to the court’s satisfaction that the company is unable to pay its debts (taking the company’s contingent and prospective liabilities into consideration).
Winding Up of a Solvent Company: Members’ Voluntary Winding Up
Reasons why a solvent company may consider closing its business may include:
- The cessation of the company’s business activities;
- The company not being profitable enough to sustain itself;
- The owner(s) no longer having any meaningful use for the company;
- Irreconcilable disputes amongst shareholders that make continued operations of the company unfeasible or impractical;
- Corporate or financial restructuring of the group to which the company belongs;
- The company is a dormant one, and the owner(s) do(es) not want to incur ongoing compliance and maintenance costs; or
- Where the company (or its officers) have breached their statutory duties (such as director’s duties), or have committed an offence.
As mentioned above, the company must be solvent in order to qualify for a members’ voluntary winding up. And in addition, the company must also be able to pay its debts in full within 12 months after the commencement of the winding up.
How to commence a members’ voluntary winding up
1. File a Declaration of Solvency with an attached statement of affairs
The Declaration of Solvency should state that:
- The directors have made an inquiry into the company’s affairs; and
- At a meeting of directors, they have formed the opinion that the company will be able to pay its debts in full within a period of time that is not more than 12 months after the commencement of the winding up.
A statement of affairs should also be attached to the Declaration of Solvency. This statement has to be made up to the latest practicable date before the making of the Declaration, and show:
- The company’s assets and the total amount expected to be realised from the assets;
- The company’s liabilities; and
- The estimated expenses of winding up.
2. Pass a special resolution for winding up the company
Once the Declaration of Solvency has been filed with ACRA, a special resolution for the purpose of winding up the company will have to be passed within 5 weeks.
The special resolution will be passed in an Extraordinary General Meeting (EGM) of the company’s members.
After the special resolution has been passed, it must be:
- Filed with ACRA via the BizFile+ portal within 7 days; and
- Advertised in at least 1 Singapore newspaper within 10 days.
3. Appoint a liquidator
The company will need to hold an EGM to appoint at least 1 liquidator to begin winding up the affairs of the company and distributing its assets.
A members’ voluntary winding up may also be subsequently converted into a creditors’ voluntary winding up if the liquidator forms the opinion that the company will not be able to pay its debts in full within the period stated in the Declaration of Solvency (see step 1 above).
Winding up of an Insolvent Company
As mentioned above, there are 2 methods of winding up an insolvent company:
- Creditors’ voluntary winding up
- Winding up by order of court
Creditors’ voluntary winding up
If the company’s directors believe that the company cannot continue business because of its liabilities, and no Declaration of Solvency is filed, they may opt for a creditors’ voluntary winding up.
Despite what the term “creditors’ voluntary winding up” may suggest, it is the company who applies to wind up the company in a creditors’ winding up, and not its creditors. The creditors merely have a say in whether the company should be wound up and who should be appointed as the company’s liquidator.
The procedure for a creditors’ voluntary winding up is the similar as that for a members’ voluntary winding up. However, other steps also involved in the process include:
- Appointment of a provisional liquidator
- Holding of a creditors’ meeting
Appointment of provisional liquidator
Before appointing the provisional liquidator, the company will have to file a declaration with the Official Receiver (i.e. a Ministry of Law official who regulates the voluntary winding up of companies) that:
- The company’s liabilities cause it to be unable to continue its business; and
- Meetings with the company and its creditors have been fixed to occur within 1 month of the date of that declaration.
And after appointing the provisional liquidator, the notice of appointment of the provisional liquidator, and a copy of the declaration filed with the Official Receiver, must be advertised within 14 days of the appointment in at least 4 local daily newspapers, one each published in the English, Chinese, Malay and Tamil languages.
The provisional liquidator’s appointment will last for 1 month or until a liquidator has been appointed for the company, whichever occurs first. It is also possible for the Official Receiver to extend the provisional liquidator’s appointment to more than 1 month as required.
Holding of a creditors’ meeting
The company has to hold a meeting of the company’s creditors on the day (or the day after) that the resolution for the winding up is to be proposed (as mentioned in step 2 above).
The notice of the creditors’ meeting must be sent:
- Together with a statement showing the names of all creditors and the amounts of their claims;
- By post;
- Simultaneously with the sending of the notices of the meeting of the company (see step 2 above); or
- On a date that will give creditors at least 7 days’ notice of the creditors’ meeting.
The notice of the creditors’ meeting has to be advertised in a Singapore newspaper at least 7 days before the date of the meeting.
The creditors’ meeting also has to be held at a time and place that is convenient to the majority in value of the creditors.
Winding Up by Order of Court
A party other than the company can apply to the court to have the insolvent company wound up.
Who is entitled to apply to have a company wound up by the court?
Those entitled to apply to court to wind up the company include:
Procedure for applying to court to wind up the company
The Supreme Court has set out the procedure for the compulsory winding up of a company by the court.
Unlike the voluntary winding up of a company (whether through a members’ voluntary winding up or creditors’ voluntary winding up), the procedure for a compulsory winding up is commenced by filing an Originating Summons in court.
Alternative Reasons for Getting a Court Order to Wind Up a Company
Apart from insolvency, a company can also be compulsorily wound up by the court for other reasons. These include:
- The company has failed to lodge a statutory report or hold a statutory meeting;
- The company did not commence business within a year from its incorporation, or has suspended its business for a whole year;
- The directors had acted in the affairs of the company in their own interests rather than in the interests of the members as a whole;
- The company had carried on multi-level marketing or pyramid selling in contravention of any written law that prohibits such activities;
- The company was being used for an unlawful purpose or for purposes prejudicial to public peace, welfare or good order in Singapore or against national security or interest; or
- The court is of the opinion that it is just and equitable that the company be wound up.
Just and equitable grounds for winding up a company
It is possible to wind up a company on just and equitable grounds. However, this ground is not limited to any particular conduct, and there are many ways in which it can be invoked.
Some examples of when it might be considered just and equitable to wind up a company include:
- When the company’s main objects cannot be achieved (substratum of the company has been lost);
- When there is deadlock in the management of the company;
- When a minority shareholder of the company has applied for it to be wound up due to oppression by majority shareholders of the company; or
- When the company is carrying on business in a fraudulent manner.
Order of Payment in the Winding Up Process
Once winding up has commenced, and the company’s assets have been converted into cash, the liquidator will then distribute the money to creditors of the company in a certain order.
The order of payment is as follows, subject to the amount of funds available for distribution:
- Secured creditors (with fixed charges)
- Preferential creditors under the Companies Act, in the following order:
- The costs and expenses of the winding up, and the remuneration of the liquidator;
- The wages and salaries of employees of up to 5 months, including any amount payable by way of allowance or reimbursement under any contract of employment, award or agreement relating to the conditions of employment of any employee;
- Retrenchment benefits due to employees (subject to a maximum of S$12,500 per person);
- Employees’ work injury compensation, if any;
- CPF contributions due to employees (up to 12 months’ worth per person);
- Pay in lieu of an employee’s unconsumed vacation leave, or in the case of his death, to any other person in his right; and
- The company’s total assessed taxes (including GST).
- Secured creditors (with floating charges)
- Unsecured creditors
- Members of the company
If a company does not have enough funds to pay off its unsecured creditors, the debts owed to them may be reduced in equal proportions, or left unpaid entirely.
What Happens After the Company Has been Fully Wound Up?
Once the affairs of the company have been fully wound up, the liquidator has to draw up an account to show how the winding up has been conducted, as well as how the company’s property has been disposed of.
The liquidator will then call an EGM to present and explain the account to the attendees. Within a week after the meeting, the liquidator must lodge a return with ACRA and the Official Receiver stating that the meeting has been held, with a copy of the account attached.
Once 3 months has passed after the lodging of the return, the company will be dissolved. However, the company’s liquidator, or any other interested person, may apply to court to have the company’s dissolution declared as void at any time within 2 years after the date of dissolution.
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