Winding Up in Accounting: What It Means and How It Works

Winding up in accounting means closing a company in a structured way by selling assets, paying debts, and distributing any remaining balance to shareholders.

In Malaysia, many companies shut down each year because maintaining compliance costs more than staying idle. Yet, skipping formal closure can lead to surprise tax notices or late penalties from SSM and LHDN.

This guide explains what winding up really means, how it works under Malaysia’s Companies Act 2016, and what accountants record during the process so you can close your business the right way.

What Does “Winding Up” Mean in Accounting?

Winding up means closing a company in a structured and legal way. It involves ending business operations and settling all remaining financial obligations.

In accounting, this means:

• Converting assets into cash
• Paying off all liabilities and taxes
• Distributing any surplus to shareholders

Once completed, the company’s legal existence ends and it is struck off from the register.

In Malaysia, all winding-up activities must comply with the Companies Act 2016, overseen by SSM and, when necessary, the High Court.

Why Do Companies Go Through Winding Up?

Companies wind up when continuing operations is no longer practical or financially sustainable.

Common reasons include:

• Insolvency
• Expired objectives
• Prolonged inactivity or shareholder disputes. 

In some cases, a company might voluntarily close even if solvent, for example, after completing its business purpose or merging with another entity.

“Winding up makes sure debts are paid, stakeholders are protected, and financial closure happens transparently.”

What Are the Types of Winding Up in Malaysia?

Malaysia recognises two main types of winding up, voluntary and compulsory.

How Is Winding Up Recorded in Accounting Books?

Liquidation accounting differs from standard operations because the focus shifts to cash recovery and settlement.

Typical Accounting Entries:

These entries reflect the conversion of assets into cash, the settlement of all obligations, and the distribution of any remaining funds. 

Once these are posted, the books are closed permanently.

What Happens to Assets, Liabilities, and Shareholders During Winding Up?

Assets are sold, liabilities are cleared, and any remaining value is returned to shareholders.

In practice:

• Fixed assets and inventory are liquidated (sold for cash).
• Creditors and tax authorities are paid first.
• Any surplus after liabilities is distributed to shareholders based on shareholding proportion.

For example, if Company ABC Sdn. Bhd. sells its assets for RM150,000 and owes RM100,000, the remaining RM50,000 will be shared among its shareholders.

“In its 2022 Service Delivery Report, SSM records that 2,914 companies were wound up in 2022.” – SSM annual report.

What Are the Legal Steps in a Winding-Up Process?

Each  winding-up process in Malaysia involves documentation, legal notices, and reporting to the SSM or the High Court, depending on whether it is voluntary or compulsory.

1. Resolution or Petition Filed

For a voluntary winding up, shareholders pass a special resolution at a general meeting and lodge a copy with SSM within 7 days

For compulsory winding up, the following body will file a court petition:

• Creditor
• Director
• Regulatory body

A notice of the resolution or petition must be published in a local newspaper and submitted to SSM within 7 days.

2. Appointment of a Licensed Liquidator

A licensed liquidator, often a professional accountant approved by the Ministry of Finance Malaysia, is appointed to take control of the company.

Their role includes securing assets, reviewing financial statements, and representing the company during court proceedings if required.

3. Asset Realisation

The liquidator identifies, values, and sells all company assets, such as properties, inventory, and receivables.

All sales must be properly documented, with proceeds deposited into a dedicated liquidation account.

Assets charged under loans or debentures must first satisfy secured creditors before general distribution.

4. Payment of Debts and Liabilities

The liquidator follows a strict payment hierarchy:

• Secured creditors (banks and lenders with collateral)
• Employees’ wages and EPF contributions
• Tax authorities (LHDN, SOCSO)
• Unsecured creditors (suppliers, vendors)

This step creates fair treatment and compliance with Malaysian labour and tax laws.

5. Distribution of Surplus to Shareholders

If funds remain after all debts are paid, the balance is distributed to shareholders according to their shareholding percentage.

For instance, if RM80,000 remains and a shareholder owns 40% of the company, they receive RM32,000.

6. Final Accounts, Audit, and Dissolution

• The liquidator prepares final accounts and reports detailing all transactions and distributions.
• These must be lodged with SSM and LHDN, followed by a public notice announcing the company’s intended dissolution.
• After regulatory clearance, SSM strikes off the company’s name, officially ending its legal existence.

“In Malaysia, even small private companies (Sdn. Bhd.) must appoint an approved liquidator to handle the process professionally.”

After a winding up is completed and final accounts are lodged, the company is dissolved under the Companies Act 2016. 

Example: Final Accounts and Liquidation Statement

This RM70,000 is distributed to shareholders according to their ownership percentage. All transactions are then closed, marking the company’s dissolution.

Differences Between Winding Up and Liquidation

While both terms are used interchangeably, winding up is the overall legal process, and liquidation is the accounting component within that process.

What Should Businesses Do Before Winding Up?

Proper preparation helps avoid disputes, delays, and regulatory penalties.

Before filing, companies should:

• Reconcile all accounts and tax filings with LHDN.
• Notify suppliers, employees, and clients.
• Appoint an independent liquidator with professional indemnity insurance.
• Secure necessary approvals from shareholders or creditors.
• Prepare a statement of affairs listing all assets and liabilities.

Common Mistakes or Misunderstandings About Winding Up

Companies in Malaysia  often mismanage the winding-up process due to poor understanding or missing formalities. So let’s address some of it.

Confusing Winding Up with Bankruptcy

Winding up applies to companies, not individuals.

Many business owners assume the two are the same, but bankruptcy is governed by the Insolvency Act 1967, while winding up falls under the Companies Act 2016.

For example, a sole proprietor in Ipoh who cannot pay debts may be declared bankrupt. 

However, a private limited company (Sdn. Bhd.) in Penang must go through court-supervised liquidation, not personal bankruptcy proceedings.

Assuming Directors Are Free from Liability

Company closure does not erase personal accountability.

Directors may still face penalties for 

• Unpaid taxes 
• EPF
• Wrongful trading

Under Section 540 of the Companies Act 2016, regulators such as LHDN and SOCSO can pursue directors personally.

Example: A Johor-based logistics firm wound up in 2023, but its directors were later held personally liable for unremitted EPF deductions.

Neglecting Employee Rights

Employees come first during liquidation.

Section 527 CA 2016 treats employees as priority creditors, meaning any:

• Unpaid wages
• Leave compensation
• EPF contributions 

Must be cleared before paying suppliers or investors.

Failing to do so can trigger JTK or land the firm in very hot water on major news outlets.

Forgetting to File Closure Documents

Stopping operations is not the same as legal closure.

Without proper filings, the company remains “alive” in the SSM system and continues to attract penalties for unsubmitted annual returns and Form C tax filings.

“This mistake is common among small Sdn. Bhd. companies when accountants leave or annual submissions lapse.” – Accounting.my Accountant, Miss Wong

In some cases, directors are blacklisted from managing future companies due to outstanding records.

Not Consulting Professionals

DIY closures often create  much bigger problems later.

Winding up involves financial, tax, and legal procedures that must align perfectly. Licensed liquidators and tax agents follow strict compliance with SSM, LHDN, and MOF requirements.

Skipping expert guidance can lead to missing key filings like:

• Statement of affairs
• Final liquidation accounts
• LHDN tax clearance letters

Take it from us, these omissions will delay closure by months and trigger SSM rejection.

Winding Up Is the Final Chapter in a Company’s Story

Many businesses in Malaysia stumble at the final hurdle, leaving loose ends in their financial statements, unfiled tax returns, or unresolved audit issues. 

These oversights can trigger penalties, delay dissolution, or even expose directors to personal liability.

That is where Accounting.my can help.

Our audit and compliance team specialises in assisting companies that are preparing for or undergoing winding up. We help you:

• Conduct final statutory audits before liquidation.
• Reconcile outstanding accounts and verify liabilities.
• Prepare closure-ready financial statements and liquidation reports.
• Liaise with LHDN, SSM, and auditors to secure final clearance.
• Ensure compliance with the Companies Act 2016 and related tax laws.

Whether your business is solvent, inactive, or facing financial pressure, our audit services ensure your company closes cleanly, confidently, and in full legal compliance.