Professional Documents
Culture Documents
LIQUIDATION
Liquidation or winding up is a Legal
term and refers to the procedure
through which the affairs of the
company are wound up by law.
Winding up of a company has been
defined in the Companies Act 1956 as
“ the process whereby its life is ended
and its property is administered for the
benefit of its creditors & members. An
Administrator called the Liquidator is
appointed and he takes control of the
company, collects its assets , pays its
debts & finally distributes any surplus
among the members in accordance
with their rights.
MODES OF LIQUIDATION
MODES OF
LIQUIDATION
FRAUDULENT PREFERENCE
Fraudulent preference takes place when one creditor is preferred to another
creditor in the matter of payment of his dues. It has been made in the
provisions of section 531 that every transfer of property or money made with
in 6 months before the commencement of winding up which amounts to
fraudulent preference is invalid.
VOLUNTARY TRANSFER
All voluntary transfers made by the company within a period of
one year or before the presentation or petition for winding up or
the passing of a resolution for voluntary winding up, are void as
against the liquidator.
EMPLOYEES & OFFICERS
According to section 444, a winding up order operates as a notice
of discharge to the employees & officers of the company, except
when the business of the company is being continue.
INTEREST ON LIABILITIES
Interest on liabilities is payable upto the date of actual payment if
the company is solvent. But if the company is insolvent, interest on
liabilities is payable upto the date of commencement of insolvency
proceedings.
ORDER OF PAYMENT
The amount received from the assets not specifically pledged & the
amounts contributed by the contributories must be distributed by
the liquidator in the following order:
Expenses of winding up including the liquidators remuneration
Creditors secured by the floating charge on the assets of the
company
Preferential creditors
Unsecured creditors
The surplus, if any, amongst the contributories (i.e. preference
shareholders & equity shareholders) according to their respective
rights & interests.
PREFERENCE SHAREHOLDERS
Preference shareholders get the priority over the equity shareholders as
regards the payment of their capital & the dividend payable upto the ate of
winding up. The holders of cumulative preference shares are entitled to arrears
of dividend if there is a surplus after the return of the amount of the equity
shareholders or if the Articles state that arrears of preference dividend are to
be paid before anything is paid to equity shareholders.
EQUITY SHAREHOLDERS
Any surplus left after making payment to preference shareholders is distributed
among the equity shareholders if all the shares are equally paid up. But if the
shares are called in unequal proportions, the liquidator should see that the
capital contribution by the shareholders should be the same.
It may be remembered that calls in advance will have priority in
repayment over the paid up share capital of that class.
PREFERENTIAL CREDITORS
Under Section 530 of the Companies Act , the following creditors
are treated as preferential creditors:
all revenues, taxes, cesses & rates payable to the government or
local authority will be treated as preferential creditors provided
that it must become due within 12 months before the date of
winding up.
4 months salary & wages due to the employees of the company will
be treated as preferential provided that it must become due within
12 months before the date of winding up. Maximum of Rs. 20000
will be treated as preferential creditors.
All accrued holiday remuneration payable to an employee due to
termination of his employment is treated as preferential.
The person who advances money for making the payment under
(ii) & (iii) mentioned above will be treated as preferential.
Any sum payable by the company under the Employees State
Insurance Act, 1948 will be treated as preferential provided
that it must become due within 12 months before the date of
winding up.
Compensation payable by the company under Workmen
Compensation Act, 1923 is treated as preferential.
Any sum payable by the company to its employees from a
Providend Fund, Pension Fund, Gratuity Fund or any other
fund maintained foe the welfare of the employees.
the expenses of investigation held Under Section 235 or 237
will be treated as preferential.
FORMAT OF STATEMENT OF AFFAIRS
ASSETS NOT SPECIFICALLY ESTIMATED
PLEDGED (list ‘A’) REALISABLE VALUE
(Rs.)
Balance at Bank
Cash in hand
Debtors
Leasehold Property
Plant & Machinery
Investments
Other Assets
ASSETS ESTIMATED DUE TO DEFICIENCY SURPLUS
SPECIFICALLY REALISABLE SECURED RANKING AS CARRIED TO
PLDGED (list VALUE CREDITORS UNSECURED LAST COLUMN
‘B’) Rs. Rs. Rs. Rs.
Freehold
property
In 2004 , the company earned profit of rs. 4,50,000 but thereafter it suffered
trading losses totaling Rs. 5,84,000 .The company also suffered a speculation loss of
Rs. 50,000 during the year 2005 . Excise authorities imposed a penalty of Rs.
3,50,000 in 2006 for evasion of tax which was paid in 2007.
Assets Estimated
Realisable value
Assets not specifically pledged ( as per list A)
Cash in hand 4,000
Bills Receivable 10,000
Trade Debtors 4,92,000
Stock 5,80,000
Furniture and Fixtures 80,000
Assets specifically pledged (as per List B)
estimated due to deficiency surplus
realisable secured ranking as carried to
value creditors unsecured last column
Rs. Rs. Rs. Rs.
Land 5,00,000 6,00,000 1,00,000 ---- -------
Estimated total assets available for preferential creditors , debenture holders ------------------------
secured by a floating charge and unsecured creditors 11,66,000