Liquidation of Companies Meaning: Liquidation is the legal procedure by which a company comes to an end. The term Liquidation mean The process of law where by a company is wound up to terminate its corporate life When a company liquidated then all its assets realised and uncalled liabilities to be called up. Creditors claim are to be settle and if there is any surplus in hand then it is to be distributed to its members called shareholders. MODES OF WINDING UP OR LIQUIDATION OF COMPANY: 1. Voluntary Winding Up: When the members and creditors decide to wind up the company without the intervension of the court, it is known as voluntary winding up of a company. It could be in following circumstances: (i) If the period fixed for the duration of the company has been expired or an event on the occurrence of which the company is to be wound up has occurred and company in general meeting has passed an ordinary resolution requiring the company to be wound up. (ii) If the company passes a special resolution that the company may be wound up voluntarily. Voluntary winding up are of two types: (a) By its Members: Members voluntary winding up applies to solvent companies and a declaration of solvency is necessary to be made within 5 weeks immediately preceeding the date of resolutions for winding up. The declaration must specify the director s opinion that the company has no doubt or it will be able to pay debts in full within three years of the commencement of the winding up. (b) By the creditors: Creditors voluntary winding up applies to insolvent companies. In such case, the company calls a meeting of the creditors on the same day or the next day following the day fixed for company s general meeting for passing the resolution for winding up. 2. Compulsary Winding Up: A compulsory winding up occur by an order of the court made on a petition filed by the company, its creditors or shareholders etc. It could be in following circumstances: (i) If the company has, by special resolution, resolved to be qound up by the court. (ii) If the default is made in delivering the statutory reports to the registrar as in holding the statotury meeting. (iii) If the company does not commence its business within a year from its incorporation or suspends it business for a whole year.
(iv) If the number of members reduced, in case of public company below seven and in case of private company below two. (v) If the company is unable to pay its debts. A company is deemed unable to pay its debt when it does not pay a debt not less than 500 Rs. Within three weeks of demand. (vi) If the court is of the opinion that it is just and equitable that the company should be wound up. 3. Winding Up under the supervision of court: After passing a resolution for the voluntary winding up, the court may, at any time, make an order that voluntary winding up shall continue but subject to such supervision court and with such liberty for creditors, contributories or others to apply to the court, and generally on such terms and conditions as the court think fit. Lists to be attached to the statement of affairs: List A. Gives a complete list of assets not specially pledged or mortgaged List B. Gives the list of assets which are specially pledged in favour of fully secured and partly secured creditors List C. Gives the list of preferential creditors List D. Gives the detail of debentureholders and other creditors having a floating charge on the assets List E. Gives the detail of amount due to unsecured creditors List F. Gives the value of shares held by various preference shareholders List G. Gives the detail of amount payable to equity shareholders List H. Shows deficiency or surplus as per statement of affairs
Format of Statement of Affairs Assets Assets Not Specifically pledged as per List A Cash in Hand Cash At Bank Furniture & Fixture Plant & Machinery Sundry Debtors Stock Bills Receivable Calls in arrears Total No.1 Assets Specifically pledged as per List B Name of Estimated Due to Deficiency Surplus Assets Realisable Value Secured Creditors (a) (b) Total No.2 Summary of Gross Assets Gross realisable value of assets specificall pledged Add: Other Assets Total Gross Assets Less: from Total No.2 Gross Liability amount Liabilities name (a) Secured creditors as per List B (b) Prefrencial creditors as per List C (c) Debentureholders secured by floating changes or any other asset as per List D (d) Unsecured Creditors as per List E (other liabilities) Balance will deficiency or Surplus Note: If surplus comes then this account will stopped here but if deficiency comes then we will also less the amount of Share capital (e) Amount of Share capital as per List F Amount Balance of Deficiency
In case Balance Sheet of the company on the date of liquidation is not given then it is necessary to prepare a Balance Sheet before the preparation of Deficiency or Surplus Account. While preparing balance sheet, following points are to be taken into account. All assets are to be recorded at their book value. Contingent liabilities ( like liability on bill discounted) are not to be recorded in Balance Sheet. Difference on Assets side treated as excess of capital and liabilities over assets and on liabilities side it is treated as excess of assets over capital and liabilities. So it is transferred to Deficiency or Surplus Account. Liquidator s Final Statement of Account has two sides, debts is receipts side and credit side is payment side. On receipts aide following receipts are shown: (i) Amount realised on sale of assets (which include full realised value of secured assets or surplus from secured assets after payment to secured creditors) (ii) Cash in hand and at bank (iii) Calls from shareholders On payments side, payments are made in the following order. (i) Payment to secured creditors (but if surplus from secured creditors recorded on debit side, then this payment is not to be shown) (ii) Liquidation expenses (iii) Liquidator s Remuneration (iv) Payment to creditors having a floating charge on the assets of the company. Interest on debentures should be paid upto the date of actual payment to the debentureholders. But if the company is insolvent, interest is payable upto the commencement of insolvency proceedings. (v) Payment to preferential creditors (vi) Payment to unsecured creditors (vii) Amount paid to preference shareholders (viii) Amount paid to equity shareholders Liquidator s Remuneration: (i) Remuneration on assets realised: in case remuneration calculated on assets including surplus from secured assets. But if liquidator realised the secured assets then he is entitled to remuneration on the full realised value of secured assets. Assets include cash and bank also except if specially mentioned. (ii) Remuneration on payment to unsecured creditors. Unsecured creditors include preferential creditors also. But if it is specified that remuneration on payment to unsecured creditors other than preferential creditors, then remuneration on preferential creditors will not be given. Some time amount available for payment to unsecured creditors is less than their total amount due. In that case liquidator s remuneration will be calculated as: Amount available for unsecured creditors and remuneration x Rate 100+Rate (iii) Remuneration on payment to shareholders. In this case remuneration will be calculated as: Surplus amount left after payment to unsecured creditors x Rate 100 + Rate
While preparing receiver s statement of account, preferential creditors are paid before the payment to debentureholders. While drafting B list of contributories, only those shareholders are liable to pay the unpaid amount who had transferred their holding within one year before the date on which proceedings of winding up commenced. They will pay the amount payable to those outstanding creditors who were in existence when they were the shareholders of the company or uncalled amount on their shares whichever is less. Preferential creditors are in the nature of unsecured creditors, but these creditors have priority of claim over other unsecured creditors under section 530 of the Companies Act 1956 The following are the preferential creditors. (i) Any amount due to the government or local authority in the form of revenues, taxes and rates which are payable by the company within 12 months before the date of commencement of winding up. (ii) All salaries and wages including earned by way of commission of an employee in respect of services rendered to the company and due for a period not exceeding four months within the twelve months before the commencement of winding up. In this case maximum preferential claim will be Rs. 20000 per claimant and excess if any will treated as unsecured creditors as per list E (iii) Any compensation payable to any workman under the provisions of industrial Dispute act 1947 provided the amount payable to any one claimant will not exceed Rs. 20000 (iv) All accrued holidays remuneration becoming payable to any employee on the termination of his employment before or by the winding up order (v) All types of compensation due under workmen s Compensation Act 1923 (vi) All sum due to employee in the form of provident fund, pension fund, gratuity fund or any other fund maintained for the welfare of the employee. (vii) The expenses of investigation held under 235 or 237 in so far as these are payable by the company. Difference between Final Statement of Account and Balance Sheet Points Final Statement of Account Balance Sheet 1. It is prepared when a company is wind It is prepared yearly i.e at the end of up each accounting year 2. 3. 4. 5. It is prepared by the liquidators after realisation of assets and payment of all liabilities It is prepared in the form of account i.e. debit side for receipt side and credit side for payment side It shows how much amount realised on sale of assets and how the different types of liabilities are paid in an order. Reserves and surplus and fictitious assets It is prepared by the concerned person of the accounting department It is prepared in the statement form in which left side for liabilities and right side for the assets It shows the financial position of an existing company on a particular date. Reserves and surplus and fictitious
are not to be show in final statement of account. assets are to be shown in Balance Sheet. 6. 7. 8. Liquidator submits Final Statement of Account to the company or court as the case may be. All assets and liabilities are recorded at their realised and paid value respectively. Final Statement of Account is not the part of Final Accounts of the company. A copy of Balance Sheet is submitted by the company to Registrar of company and also to its shareholders All Assets and liabilities are recorded at historical cost. Balance Sheet is the part of final statements of the company.