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

COMPULSORY WINDING UP

VOLUNTARY WINDING UP

SUPERVISION BY COURT

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 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.

PREFERENCE SHAREHOLDERS

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.

PREFERENTIAL CREDITORS

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 PLEDGED (list ‘A’)

ESTIMATED REALISABLE VALUE

(Rs.)

Balance at Bank

Cash in hand

Debtors

Leasehold Property

Plant & Machinery

Investments

Other Assets

ASSETS SPECIFICALLY 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

GROSS LIABILITIES 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 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 Salaries due for five months Managing director’s remuneration Bills payable Debtors --- good --- doubtful(estimated to produce rs. 62,000) --- bad Bills receivable (good rs. 10,000) Bank overdraft Land (estimated to produce rs.5,00,000) Stock (estimated to produce rs.5,80,000) Furniture and fixtures Cash in hand Estimated liability for bills discounted Secured creditors holding first mortgage on land Partly secured creditors holding second mortgage on land Weekly wages unpaid

3,50,000 20,000 30,000 1,06,000 4,30,000 1,30,000 88,000 16,000 40,000 3,60,000 8,20,000 80,000 4,000 60,000 4,00,000 2,00,000 6,000

Liabilities under workmen’s compensation Act,1925 Income tax due 5000 9% Mortgage debentures of 100 each interest payable to 30th June and 31st December, paid 30th June, 2008 Share capital : 20,000 10% preference share s of rs. 10 each 50,000 Equity shares of rs. 10 each General reserve since 31st December, 2004

2,000 8,000 5,00,000 2,00,000 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.

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 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 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 Summary of Gross Assets: Rs. Specifically pledged 5,00,000 Others 11,66,000 -----------------

Estimated Realisable value

4,000

10,000 4,92,000 5,80,000 80,000

-------

------------------------11,66,000

--------------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: 20,000 10% Preference shares of Rs. 10 each fully paid (as per list F) 50,000 equity shares of Rs. 10 each fully paid (as per list G) Estimated Deficiency as regards contributories (as per list H)

Gross Liabilities

Rs.

5,20,000 32,000

5,03,750

6,90,000 ------------ 17,25,750

32,000

11,34,000

5,03,750 6,30,000 6,90,000

59,750

2,00,000 5,00,000 7,59,750

DEFICIENCY ACCOUNT (LIST H)

PARTICULARS AMOUNT PARTICULARS AMOUT

TO EXCESS OF ASSET OVER CAPITAL TO NET TRADING ASSSET TO PROFITS AND INCOME OTHER THAN TRADING PROFITS TO DEFICENCY

1,00,000 4,50,.000 1,40,000 7,59,750

BY NET TRADING LOSSES AFTER DEPRICIATION , TAXATION ETC BY LOSSES OTHER THAN TRADING LOSSES SEPECULATION LOSS 50,000 PENALTY IMPOSED BY EXISCE AUTORITIES 3,50,000 BY ASTIMATED LOSSES NOW WRITTEN OFF B/R 6,000 DEBTORS 1,56,000 STOCK 2,40,000 CONTIGENT LIABILTY 60,000

5,87,750 4,00,000 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

Receipts Amount (Rs.)

Payments Amount (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)

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

Assets Realised Surplus from secured creditors(80,500-50,000) Call on equity share(C=I,400sh. @1)

Rs. 3,39,500 30,500 1,400

Liq. Expenses Liq. Remuneration Preferential creditors Unsecured creditors Preference Sh. Holder Equity Sh. Holder A=2000sh.@24 B=16,000sh.@9

Rs. 15,000 - - - - - 5,800 88,200 2,00,000 48,000 14,400

3,71,400 3,71,400

Working notes:

1. Calculation of preferential & unsecured creditors

PREFERENTIAL UNSECURE

D

Salaries of 4 clerks @ Rs.1000 (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

4,000 1,800

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 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 = 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)

Total No. of Equity shares