2. 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.
3. 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.
4. MODES OF LIQUIDATION
MODES OF
LIQUIDATION
COMPULSO
RY
WINDING
UP
VOLUNTAR
Y WINDING
UP
SUPERVISI
ON BY
COURT
5. 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)]
6. 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.
7. 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
8. 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
9. 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.
10. 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.
11. ⚫ 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.
SHAREHOLDERS
12. 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
PREFERENTIAL CREDITORS
13. 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 CompensationAct, 1923 is treated as
preferential.
Any sum payable by the company to its
employees from a Providend Fund, Pension Fund,
14. FORMAT OF STATEMENT OF
AFFAIRS
ASSETS NOT SPECIFICALLY
PLEDGED (list ‘A’)
ESTIMATED
REALISABLE VALUE
(Rs.)
Balance at Bank
Cash in hand
Debtors
Leasehold Property
Plant & Machinery
Investments
Other Assets
15. ASSETS
SPECIFICALL
Y PLDGED
(list ‘B’)
ESTIMATED
REALISABLE
VALUE
Rs.
DUE TO
SECURED
CREDITORS
Rs.
DEFICIENCY
RANKING AS
UNSECURED
Rs.
SURPLUS
CARRIED TO
LAST
COLUMN
Rs.
Freehold
property
SUMMARY OF GROSS ASSETS AMOUNT
Estimated value of assets specifically pledged
Other assets
ESTIMATED SURPLUS FROM ASSETS SPECIFICALLY
PLEDGED
ESTIMATED TOTAL ASSESTS AVAILABLE FOR PREFRENTIAL
CREDITORS, DEBENTUREHOLDERS & UNSECURED CREDITORS
16. GROSS
LIABILITIE
S
Rs.
LIABILITIES AMOUNT
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
17. 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
18. Liabilities under workmen’s compensation
Act,1925 2,000
Income tax due
5000 9% Mortgage debentures of 100 each 8,000
interest payable to 30th June and 31st December,
paid 30th June, 2008
5,00,000
Share capital :
20,000 10% preference share s of rs. 10 each
50,000 Equity shares of rs. 10 each 2,00,000
General reserve since 31st December, 2004 5,00,000
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.
19. 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
20. LUCKY LTD (IN LIQUIDATION)
STATEMENT OF AFFAIRS
As on July, 2008
Assets
Assets not specifically pledged ( as per list A)
Cash in hand
Bills Receivable
Trade Debtors
Stock
Furniture and Fixtures
Assets specifically pledged (as per List B)
estimated due to deficiency
surplus
carried to
last
column
realisable secured ranking as
value creditors unsecured
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
Estimated
Realisable value
4,000
10,000
4,92,000
5,80,000
80,000
-------
----------------------
--11,66,000
21. 16,66,000
Liabilities
( to be deducted from surplus or added to deficiency as the case
may be )
Secured creditors (as per list B ) to the extent to which claims
are estimated to be covered by assets specifically pledged
Preferential Creditors (as per list C)
Estimated balance of assets available for debenture holders
secured by a floating charge and unsecured creditors
Debenture holders secured by a floating charge (as per list D)
5,00,000
Interest due for 1 month (july,2008)@ 9% p.a.
3,750
Estimated surplus as regards debenture holders
Unsecured creditors (as per list E)
Estimated deficiency as regards creditors ,being the difference
between gross liabilities and gross assets
Issued and called up capital:
Gross
Liabilities
Rs.
5,20,000
32,000
5,03,750
6,90,000
------------
17,25,75
0
32,000
11,34,00
0
5,03,750
6,30,000
6,90,000
59,750
2,00,000
20,000 10% Preference shares of Rs. 10 each fully paid (as 5,00,000
22. DEFICIENCY ACCOUNT (LIST H)
PARTICULARS
AMOUNT
PARTICULARS AMOUT
TO EXCESS OF ASSET 1,00,000 BY NET TRADING LOSSES 5,87,750
OVER CAPITAL AFTER DEPRICIATION ,
TO NET TRADING ASSSET 4,50,.000 TAXATION ETC
TO PROFITS AND INCOME BY LOSSES OTHER THAN
OTHER THAN TRADING TRADING LOSSES
PROFITS 1,40,000 SEPECULATION LOSS
TO DEFICENCY 7,59,750 50,000 4,00,000
PENALTY IMPOSED BY
EXISCE AUTORITIES
3,50,000
BY ASTIMATED LOSSES
NOW WRITTEN OFF
B/R 6,000
DEBTORS 1,56,000 4,62,000
STOCK 2,40,000
CONTIGENT
LIABILTY 60,000
23. 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.
24. LIQIDATOR’S FINAL STATEMENT
OF ACCOUNT
Receipts Amount
(Rs.)
Payments Amoun
t
(Rs.)
To Assets Realised :-
-- Cash at Bank
-- Cash in Hand
-- Marketable Securities
-- Bills Receivable
-- Trade Debtors
-- Stock in trade
-- Freehold property
-- Plant and Machinery
-- Furniture and Fittings
To Surplus from Securities
held by Secured
Creditors
To Proceeds of calls made
on
contributories (on 7500
Equity shares @3.50)
By Legal Charges
By Liquidation Expenses
By Liquidator Remuneration
By Preferential Creditors
By Debenture -holders
(having
a floating charge on the
assets of the co.)
By Unsecured Creditors
By Preference Shareholders
By Equity Shareholders
(42500 shares @ Rs. 1.50)
25. Ex
ampleof Liquidators final statement of
Accounts
Ex: Bekar Ltd. Went into voluntary liquidation. The details
regarding liquidation are as follows:
Share Capital:
2,000 8% preference shares of Rs.100 each(fully paid up)
ClassA-2,000 equity shares of Rs.100 each (Rs.75 paid up)
ClassB-1,600 equity shares of Rs.100 each (Rs.60 paid up)
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.
27. Working notes:
1. Calculation of preferential & unsecured creditors
PREFERENTI
AL
UNSECUR
ED
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
Other unsecured creditors
1,800
87,400
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
28. 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
Class B- 1,600 equity shares @ Rs. 60
Class C- 1,400 equity shares @ Rs. 50
= 1,50,000
= 96,000
= 70,000
3,16,000 Total No. of Equity
Loss to be borne by equitsyhsahraerseholders
2,55,000
Therefore loss per equity share= Total Loss
= 2,55,000/5,000
= Rs. 51
