Insolvency, Winding Up and Corporate Rescue
What is tested
Insolvency and rescue questions test the difference between cash-flow and balance-sheet insolvency, the winding-up routes, and the rescue mechanisms introduced by the CA 2016.
Core rules
- A company is insolvent if it cannot pay its debts as they fall due; balance-sheet insolvency is liabilities exceeding assets.
- Winding up may be members' voluntary (declaration of solvency), creditors' voluntary (no such declaration), or compulsory by court order. Grounds include inability to pay debts, a special resolution, and failure to comply with statutory requirements.
- On winding up, the liquidator collects assets, adjudicates claims, investigates voidable transactions (unfair preferences, undervalue transactions) and distributes according to the statutory priority.
- Corporate rescue: a corporate voluntary arrangement (CVA) is available to eligible private companies and requires 75% creditor approval by value, with a moratorium. Judicial management is a court-supervised rescue with a moratorium, run by a judicial manager. A scheme of arrangement requires 75% in value and a majority in number of creditors, plus court sanction.
Worked example
A company owes RM2 million, holds assets of RM800,000, but has a viable contract that could restore cash flow. Immediate winding up would produce a large shortfall. The board should consider judicial management or a CVA. If 75% of creditors by value support a CVA and the company is eligible, the moratorium can hold off claims while a rescue plan is implemented.
Traps
Confusing CVA with a scheme of arrangement; assuming directors retain control in judicial management; ignoring preferential and secured claims; continuing to incur debts when insolvent; missing the creditor thresholds.