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Liquidation of company

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

COMPULSOR VOLUNTARY SUPERVISION


Y WINDING WINDING UP BY COURT
UP
Section 425 (1) of the companies act
provides that a company can be liquidated
in any of the following three ways :
 COMPULSORY WINDING UP BY THE COURT
 VOLUNTARY WINDING UP BY THE MEMBERS
 WINDING UP UNDER THE SUPREVISION OF COURT
 Generally the provisions of the Act with respect to the
winding up apply to winding up of a company whether it be
by the court or voluntary or subject to the supervision of the
court [Section 425 (2)]
CONSEQUENCES OF WINDING UP

The following are the consequences of winding up:


 An officer called a liquidator is appointed & he takes over the
administration of the company. He may be appointed by High
Court, members or by the creditors as the case may be.
 The powers of the board of directors will cease & will now
vest the liquidator.
 Winding up order or resolution of voluntary winding up shall
operate as a notice of discharge to all the members of the
company. Members of company are called
CONTRIBUTORIES.
 Liquidator of the company will prepare a list of
contributories who be made liable to contribute to the
assets of the company in case assets are not sufficient to
meet the claims of various claimants . In case there is a
surplus in the assets, the liquidator of the company will
prepare a list of those members, who are entitled to share
this surplus.
 Liquidator of the company will collect & realise its assets
& distribute the proceeds among right claimants as per the
procedure of the law.
 Winding up ultimately leads to dissolution of the
company. The companies life will come to an end & it will
be no more an artificial person in the eyes of law.
CONTRIBUTORY
According to section 428 of the Companies Act, 1956, a contributory is
“every person liable to contribute to the assets of a company in the event of it
being wound up & includes a holder of fully paid up shares, & also any person
alleged to be contributory “
A Contributory can be either a present member or a past member.

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

ESTIMATED SURPLUS FROM ASSETS SPECIFICALLY PLEDGED


ESTIMATED TOTAL ASSESTS AVAILABLE FOR PREFRENTIAL CREDITORS,
DEBENTUREHOLDERS & UNSECURED CREDITORS

SUMMARY OF GROSS ASSETS AMOUNT

Estimated value of assets specifically pledged


Other assets
GROSS
LIABILITIE LIABILITIES AMOUNT
S Rs.
Rs.
Secured creditors (list ‘B’) to the extent it is secured
Preferential creditors (list ‘C’)
Estimated balance of assets available for debenture
holders
Debenture holders secured by floating charge (list ‘D’)
Estimated surplus/deficiency as regards debenture
holders
Unsecured creditors (list ‘E’)
liability for purchases
telephone rent o/s
bills payable
Estimated surplus/deficiency as regards creditors
(being diff. of gross assets & gross liabilities)
EXAMPLE REALAED TO STATEMENT OF
AFFAIRS
Q. The following information is extracted from books of lucky limited
on 31st July ,2010 on which date a winding up order was made.
Unsecured creditors 3,50,000
Salaries due for five months 20,000
Managing director’s remuneration 30,000
Bills payable 1,06,000
Debtors --- good 4,30,000
--- doubtful(estimated to produce rs. 62,000) 1,30,000
--- bad 88,000
Bills receivable (good rs. 10,000) 16,000
Bank overdraft 40,000
Land (estimated to produce rs.5,00,000) 3,60,000
Stock (estimated to produce rs.5,80,000) 8,20,000
Furniture and fixtures 80,000
Cash in hand 4,000
Estimated liability for bills discounted 60,000
Secured creditors holding first mortgage on land 4,00,000
Partly secured creditors holding second mortgage on land 2,00,000
Weekly wages unpaid 6,000
Liabilities under workmen’s compensation Act,1925 2,000
Income tax due 8,000
5000 9% Mortgage debentures of 100 each interest
payable to 30th June and 31st December, paid 30th June, 5,00,000
2008
Share capital :
20,000 10% preference share s of rs. 10 each 2,00,000
50,000 Equity shares of rs. 10 each 5,00,000
General reserve since 31st December, 2004 1,00,000

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.

From the foregoing information, prepare the Statement of Affairs


and the Deficiency Account.
SOLUTION
Unsecured Creditors as per List E : Rs.
Unsecured creditors 3,50,000
One month’s Salaries ( 4 month’ salaries are preferential) 4,000
Managing Director's Remuneration 30,000
Bills Payable 1,06,000
Bank Overdraft 40,000
Liability on Bills Discounted 60,000
Amount uncovered in respect of partly secured creditors
( Rs. 2,00,000 – Rs. 1,00,000 value of security of
second mortgage on land) 1,00,000
________
6,90,000
======
Preferential creditors as per List C : Rs.
Salaries for 4 months 16,000
Weekly wages 6,000
Liabilities under Workmen’s Compensation Act, 1925 2,000
Income Tax due ,000
------------
32,000
======
LUCKY LTD (IN LIQUIDATION)
STATEMENT OF AFFAIRS
As on July, 2008

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

Summary of Gross Assets: Rs.


Specifically pledged 5,00,000
Others 11,66,000
-----------------
--------------
16,66,000
--------------
Gross Liabilities
Liabilities
Rs. ( to be deducted from surplus or added to deficiency as the case
may be )
5,20,000 Secured creditors (as per list B ) to the extent to which claims
32,000 are estimated to be covered by assets specifically pledged 32,000
Preferential Creditors (as per list C)
Estimated balance of assets available for debenture holders
secured by a floating charge and unsecured creditors 11,34,000
Debenture holders secured by a floating charge (as per list D)
5,00,000
5,03,750 Interest due for 1 month (july,2008)@ 9% p.a. 3,750 5,03,750
6,30,000
Estimated surplus as regards debenture holders
6,90,000 6,90,000
Unsecured creditors (as per list E)
------------ Estimated deficiency as regards creditors ,being the difference
17,25,750 between gross liabilities and gross assets 59,750

Issued and called up capital:


20,000 10% Preference shares of Rs. 10 each fully paid (as per list F) 2,00,000
50,000 equity shares of Rs. 10 each fully paid (as per list G) 5,00,000
Estimated Deficiency as regards contributories (as per list H) 7,59,750
DEFICIENCY ACCOUNT (LIST H)
PARTICULARS AMOUNT PARTICULARS AMOUT

TO EXCESS OF ASSET OVER 1,00,000 BY NET TRADING LOSSES AFTER 5,87,750


CAPITAL DEPRICIATION , TAXATION ETC
TO NET TRADING ASSSET 4,50,.000 BY LOSSES OTHER THAN
TO PROFITS AND INCOME TRADING LOSSES
OTHER THAN TRADING SEPECULATION LOSS 50,000
PROFITS 1,40,000 PENALTY IMPOSED BY EXISCE
TO DEFICENCY 7,59,750 AUTORITIES 3,50,000 4,00,000
BY ASTIMATED LOSSES NOW
WRITTEN OFF
B/R 6,000
DEBTORS 1,56,000
STOCK 2,40,000
CONTIGENT
LIABILTY 60,000 4,62,000
LIQUIDQTORS FINAL
STATEMENT OF ACCOUNTS
 The main job of the liquidator is to collect the assets of the
company & realise them & distribute the money realised among
right claimants.

 For this purpose he maintains a cash book for recording the


receipts & payments & is required to submit an abstract of the
cash book to the court in case of compulsory winding up & to
the company in case of voluntary winding up.

 The liquidator is also required to prepare an account known as


the Liquidator’s Final Statement of accounts after the affairs of
the company are fully wound up.
LIQIDATOR’S FINAL STATEMENT OF
ACCOUNT
Amount Amount
Receipts (Rs.)
Payments (Rs.)
To Assets Realised :- By Legal Charges
-- Cash at Bank By Liquidation Expenses
-- Cash in Hand By Liquidator Remuneration
-- Marketable Securities By Preferential Creditors
-- Bills Receivable By Debenture -holders (having
-- Trade Debtors a floating charge on the
-- Stock in trade assets of the co.)
-- Freehold property By Unsecured Creditors
-- Plant and Machinery By Preference Shareholders
-- Furniture and Fittings By Equity Shareholders
To Surplus from Securities (42500 shares @ Rs. 1.50)
held by Secured Creditors
To Proceeds of calls made on
contributories (on 7500
Equity shares @3.50)
Example of Liquidators final statement of
Accounts
 Ex: Bekar Ltd. Went into voluntary liquidation. The details regarding
liquidation are as follows:
 Share Capital:
1. 2,000 8% preference shares of Rs.100 each(fully paid up)
2. ClassA-2,000 equity shares of Rs.100 each (Rs.75 paid up)
3. ClassB-1,600 equity shares of Rs.100 each (Rs.60 paid up)
4. ClassC-1,400 equity shares of Rs. 100 each (RS.50 paid up)
 Assets including machinery realized Rs.4,20,000.
 Liquidation expenses amount to Rs.15,000.
 Bekar Ltd. Has borrowed a loan of Rs.50,000 from Patel Brothers against
the mortgage of machinery (which realized Rs.80,500). In the books of the
company salaries of four clerks for four months at a rate of Rs.300 per month
& salaries of four peons four three months at a rate of Rs.150 per month, are
outstanding. In addition to this, the company’s books show the creditors worth
Rs.87,400. Prepare liquidator’s statement of receipts & payments.
SOLUTION:
Liquidator’s Statement Of Receipts & Payments
Rs. Rs.
Assets Realised 3,39,500 Liq. Expenses 15,000
Surplus from Liq. Remuneration -----
secured Preferential 5,800
creditors(80,500- 30,500 creditors 88,200
50,000) Unsecured creditors 2,00,000
Call on equity 1,400 Preference Sh.
share(C=I,400sh. Holder 48,000
@1) Equity Sh. Holder 14,400
A=2000sh.@24
B=16,000sh.@9
3,71,400 3,71,400
Working notes:
1. Calculation of preferential & unsecured creditors
PREFERENTIAL UNSECURE
D
Salaries of 4 clerks @ Rs.1000 4,000 800
(salary of Rs.200/clerk in excess of preferential amount of
Rs.800 treated as unsecured)
Salaries of 4 peons @ Rs.450 1,800
87,400
Other unsecured creditors
5,800 88,200
2 . Calculation of amount returnable to equity shareholders or Receivable from Equity
Shareholders:
Rs.
Assets Realised 4,20,000
Less: Payments: Rs.
Secured creditors 50,000
Liquidation Expenses 15,000
Preferential Creditors 5,800
Unsecured Creditors 88,200
1,59,000
Balance available for shareholders 2,61,000
Amount available for Shareholder 2,61,000
Less: Capital to be returned to preference shareholder 2,00,000
Balance available for equity shareholder 61,000
Less: Equity share paid up:
Class A- 2,000 equity shares @ Rs. 75 = 1,50,000
Class B- 1,600 equity shares @ Rs. 60 = 96,000
Class C- 1,400 equity shares @ Rs. 50 = 70,000
3,16,000
Loss to be borne by equity shareholders 2,55,000

Therefore loss per equity share= Total Loss


Total No. of Equity shares
= 2,55,000/5,000
= Rs. 51
CLASS A B C
Paid up Rs. 75 60 50
Loss per share 51 51 51
-------------------------------------------------------------------------------------
Called / returned Rs. 24 9 (1)

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