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  • Writer's pictureRajvin Singh Gill

Closing down a financially sound business in Malaysia - Procedure and Key Legal Considerations

Most of us are aware of the process in setting up a company in Malaysia. It is illustrated as follows:


What about the flipside of it? i.e. the process in closing down a company. Specifically, the closing down of a financially sound company.


Firstly, a company may close down as a result of being struck off by the Companies Commission of Malaysia. This occurs when the company is shown to be, amongst others, dormant and does not hold any assets.


The other way is by winding up the company. Now, it must be noted that there are two types of winding up: (i) Members’ voluntary winding up; and (ii) Creditors’ Voluntary winding up. The differences between these two types of winding up are as follows:

Members' Voluntary Winding Up

Creditors' Voluntary Winding Up

A voluntary process but key requirement is that company is solvent and able to meet its liabilities.

A voluntary process but is inadvertently an admission on part of the company directors that the business is insolvent and no longer viable

For the purpose of this article, focus is made on the Members’ Voluntary Winding UP.


Now, you must also be thinking. Why would someone (or a group of people) decide to wind up a solvent company? There are actually many reasons for it. Some of them being:


> The shareholders intend to establish a new venture and may have decided to shift 100% focus on the same;


> The company is a foreign owned company, and the foreign parent company may have decided cease its operations in Malaysia;


> The shareholders are no longer on good terms.


Procedure

  • Company members need to vote on a resolution to wind up the company and for the appointment of a liquidator.

  • Preparation of a written Declaration of Insolvency for the purpose of its execution at the Board of Directors meeting.

  • Company members are required to appoint a liquidator.

  • The Solvency Declaration must be submitted to the Companies Commission of Malaysia· The company stops all activities, except those essential for the winding-up procedure.

  • The liquidator assumes control of all company matters and begins the winding-up process

Key legal Considerations


Exit Due Diligence

Often an overlooked step in the winding up process, an exit legal due diligence is vital to ensure that the commencement of a company’s closure does not expose the company to legal liabilities under its contracts. This is because in most commercial contracts, it is an event of default in the event that winding up process has commenced (voluntary or involuntarily).

Further, certain contracts may lay out the procedure to be carried out when a company wishes to wind up. For instance, a commercial contract may specify several steps that the company must take prior to winding up and this may include, amongst others, obtaining the necessary consent from the other party(ies) or arranging for a replacement party to the contract, within a specified number of days.


Employee Termination benefits.

Regard must also be made to any statutory and contractual requirements pertaining to the payment of termination benefits to employees as a result of a redundancy due to the winding up.

For workers earning an income of RM2,000.00 or lower, the payment of termination benefits by the employer is mandated under the Employment (Termination and Lay-Off Benefits) Regulations 1980 (“1980 Regulations”). Regulation 6 stipulates the formula in calculating the termination benefits payable to an employee. The provision is reproduced for ease of reference:


‘6. Amount of termination or lay-off benefits payment (1) Subject to the provisions of these Regulations, the amount of termination or lay-off benefits payment to which an employee is entitled in any case shall not be less than—

(a) ten days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for a period of less than two years; or

(b) fifteen days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for two years or more but less than five years; or

(c) twenty days’ wages for every year of employment under a continuous contract of service with the employer if he has been employed by that employer for five years or more, and pro-rata as respect an incomplete year, calculated to the nearest month.’


As for workers earning more than RM2,000.00, the payment of termination benefits would usually be governed by their contract of employment. If the contract is silent on this, then it is up to the employer whether to pay and to determine the amount of termination benefits payable. A good yardstick of the quantum can be found in the case of EQUANT INTEGRATION SERVICES SDN BHD (IN LIQUIDATION) v. WONG WAI HUNG [2012] 1 LNS 1296, where the Court of Appeal held, inter alia, a compensation amounting to a salary of one month to one year of service is a standard industry labour practice.


Although such employers have the discretion whether to pay employment benefits, it is advisable that they exercise the same with caution. This is because, the Industrial Court have substantially relied on the Code of Conduct for Industrial Harmony (“Code of Conduct”). The Code is meant to promote security of employment by encouraging employers to, among others, provide retirement, retrenchment and sick pay schemes alongside existing statutory provisions. For instance, in the case of PENGKALEN HOLDINGS BHD V JAMES LIM HEE MENG [2000] ILJU 9, the Industrial Court found that the former employee’s company had breached the Code of Conduct for the failure to give a notice of termination and to provide termination benefits to the employee.


Payment of statutory deductions

Employers are to ensure that the relevant statutory contributions required of it, under the Employee Provident Fund Act 1991 (“EPF Act”) and the Employee Social Security Act 1969 (“SOCSO Act”) have been made.

However, employers are not required to contribute statutory contributions on termination benefits paid out. This is because, “Wages” is defined under the EPF Act to mean all remuneration in money, due to an employee under his contract of service or apprenticeship, and includes any bonus, commission or allowance. The following are expressly excluded from the definition:

  • service charge;

  • overtime payment;

  • gratuity;

  • retirement benefit;

  • retrenchment, lay-off or termination benefits;

  • any travelling allowance or the value of any travelling concession; or

  • any other remuneration or payment as may be exempted by the Minister.

Although the SOCSO Act does not contain similar provision, it is generally believed that termination benefits are not subject to SOCSO contribution as well.


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If you wish to know more about the key steps and considerations in closing down a business in Malaysia, please feel free to reach out to us for a complementary consultation

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