Dr.B.

Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

ADVANCED CORPORATE ACCOUNTING

Unit III
Chapter - 3: Liquidation of Companies

Meaning of Liquidation
A company, begin an artificial person. It is created by Company law ad dissolved by
law. The liquidation is a legal procedures followed by the company. Liquidating or winding
up or dissolution of a company is brought about and its assets realized and payment of debts
and when all the debts are paid off. It remaining balance paid to the members of shareholder
for the company.

Method of Winding up or Liquidation

1. By the Court - compulsory winding up (Sec. 433)
2. Voluntary winding up (Sec. 484 to 521)
a. Member’s voluntary winding up
b. Creditors’ voluntary winding up
3. Winging up subject to supervision of court (Sec. 522 to 527).

1. Winding up by the Court or Company Winding up (Sec 433)

a. If the company is unable to pay its debts
b. If the number of members is reduced in public company to private company
c. The court is to the opinion that it is Just about the company
d. If the company does not commence its business within a year from its
incorporation its business for a whole years.
e. The company has by special resolution resolved that the company be wound up
the court.
f. If default is mode in delivering the statutory report to the registrar or in holding
the statutory meeting.

2. Voluntary Winding up (Sec. 484 to 521)

Voluntary winding up of company under Sec. 484 is possible to following situations.

a. Fixed for the duration of the company by the Article of Association has expired.
b. It the company passes a special resolution to winding up the company voluntary.
A notice must be given by the company within 14 days of passing thereof by
advertisement in the official gazette, newspapers, circulating in the direct
registered office.
c. Article of Association expired. An ordinary resolution has to be passed by the
shareholders in the general meeting.

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

i. Members Voluntary Winding up

 The members of the company decide to windup even when financial position
is so sound that it can pay all its debts.
 The majority of the directors make a declaration given at a meeting of the
Board.
 This declaration of solvency must be made within five weeks immediately
preceding the date of the passing of resolution for winding up the company.

ii. Creditor’s Voluntary Winding up

 There is No “Declaration of solvency ins required for creditors winding up”.
 A meeting of the members of the company is called, the next day is fixed for
meeting of creditors of the company.
 The copy of the resolution passed in this meeting is sent to the register within
10 days of the date of resolution is passed.
3. Winding up Subject to Supervision of the Court (Sec. 522 to 527)
 The court may pass such an order an application made by a creditor, member
or a contributory or shareholder and the order is called supervision order and
court passed conditions as it thinks fit.
 The court has also power to appoint, remove and additional liquidator
appointment.

Order of Payment

1. Secured Creditors
Creditors one who holds some securities for debts due to him from the company
(Fledge, Mortgage, charge or lien).

2. Cost of Liquidation
a. Legal Charges
b. Liquidator’s remuneration
c. Cost of Winding up
3. Debenture holders with interest
4. Professional Creditors
i. A revenue taxes, cess and rate due from the company to the central or stat
govt. or legal authority. And due payable including advance income tax
payable within the 12 months next before (the commencement of winding up)
ii. All wages, salaries, payable part or full time work, commission to employees
due to period not exceeding 4 months, with in the 12 months next before the
winding up. Any compensation payable to workers under Industrial Dispute

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.
Act 1947.It should not exceed Rs. 1,000per month (but realized Rs. 2,000
from 17.12.1997). Any lump-sum payable to workers at retiring by worker.

iii. All accrued holding remuneration payable to employees or in the case of his
death to any other person in his right.
iv. Company to payable employees under the “Employees State Insurance” Act
1948.
v. Company payable to employees under the worker’s compensation Act 1923
vi. All sums due to an employees from the PF (Provided Fund), pension Fund,
Gratuity and any other fund for the welfare of the employees maintained by
company.
vii. Expenses of any investigation under (Sec. 233 or 237).
5. Unsecured Creditors
6. Preference Shareholders
7. Equity Shareholders.
A. Liquidator’s Final Statement of Accounts
Receipts Rs. Payments Rs. Rs.
Bank balance xxx 1. Legal Charges xxx
Cash in hand xxx 2. Liquidator’s Remuneration:
Marketable securities xxx (a). Assets Realized xxx
Assets realized: (b). Preferential Creditors xxx
Debtors xxx (c). Unsecured Creditors xxx xxx
Plant and Machinery xxx
Land and Building xxx 3. Liquidation Exp. xxx
Furniture xxx 4. Debenture with Interest xxx
Stock xxx 5. Preferential Creditors xxx
Any other assets xxx 6. Unsecured Creditors xxx
Surplus from secured assets xxx 7. Preference Share Capital xxx
Unpaid calls xxx 8. Equity Share Capital xxx
XXX XXX

Note:

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Calculation of Unsecured Creditors

Particulars Rs.
Creditors for goods 80,000
Bills payable 8,000
Loan from bank 20,000
Bank over draft 6,000
 Loan on security of machinery (40,000 – 32,000) 8,000

Contingent Liabilities
a. 20% expected to rank (31,000 x 20%) 6,200
b. 10% expected to rank (25,000 x 10%) 2,500

Unsecured Creditors 1,30,700

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Calculation of Unsecured Creditors

Preferential Unsecured
Creditors Creditors
Particulars
Rs Rs.
Trade creditors - 1,42,000
Provided fund of Workers 11,000 -
Gas Board for gas Supplied - 420
Dues to city corporation for local taxes 10,000 -
Salary of clerk for six months 30,000 -
Salary of peon for four months 6,000 -
Directors fees for four months - 8,000
Income tax due - 10,000
Compensation under workmen’s compensation act 9,000 -
Total 66,000 1,60,620

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Computation of Liquidators Remuneration

Particulars Rs Rs
Liquidator’s Remuneration
Less (a). Assets Realized Nil Nil
(b). Preferential Creditors - 2% 28 28
(1,400 x 3%)
(c). Unsecured Creditors – 2% 1,454 1,454
(Sufficient Amount not available)

(74,154 x 2/102)
Total Remuneration 1,482

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets realized: 1. Legal Charges Nil
Cash in Hand 21,500 2. Liquidator’s Remuneration
Land and Building 1,30,000 (a). Assets Realized – 2% 7,030
Plant and Machinery 1,80,000 (3,51,500 x 2%)
Furniture 20,000 (b). Preferential Creditors - 3% 600
(20,000 x 3%)
(c). Unsecured Creditors – 3% 3,899 11,529
(Sufficient Amount not available)

(1,33,870 x 3/103)
3. Liquidation Exp. Nil
4. Debenture with Interest 1,90,000
5. Preferential Creditors 20,000
6. Unsecured Creditors 1,29,971
(1,33,870 - 3,899)
3,51,500 3,51,500
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 3,51,500
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration (7,030 + 600) 7,630
3. Liquidation Exp Nil
4. Debenture with Interest 1,90,000
5. Preferential Creditors 20,000 2,17,630
Amount Available to Unsecured Creditors 1,33,870

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets realized: 26,000 1. Legal Charges Nil
2. Liquidator’s Remuneration
(a). Assets Realized – 3% 1,530
Excess of Secured 5,000 (26,000 + 25,000 = 46,000 x 3%)
Assets (b). Preferential Creditors – 1.5% 9
(25,000 – 20,000) (600 x 1.5%)
(c). Unsecured Creditors – 1.5% 423 1,962
(Sufficient Amount not available)

(28,609 x 1.5/101.5)
3. Liquidation Exp. 252
4. Debenture with Interest Nil
5. Preferential Creditors 600
6. Unsecured Creditors 28,186
(28,609 - 423)
31,000 31,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 31,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration (1,530 + 9 ) 1,539
3. Liquidation Exp 252
4. Debenture with Interest Nil
5. Preferential Creditors 600 2,391
Amount Available to Unsecured Creditors 28,609

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets realized: 36,000 1. Legal Charges Nil
2. Liquidator’s Remuneration
(a). Assets Realized – 4% 2,840
Excess of Secured 5,000 (36,000 + 35,000 = 71,000 x 4%)
Assets (b). Preferential Creditors – 2% 14
(35,000 – 30,000) (700 x 2%)
(c). Unsecured Creditors – 2% 727 3,581
(Sufficient Amount not available)

(37,094 x 2/102)
3. Liquidation Exp. 352
4. Debenture with Interest Nil
5. Preferential Creditors 700
6. Unsecured Creditors 36,367
(37,094 - 727)
41,000 41,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 41,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration (2,840 + 14 ) 2,854
3. Liquidation Exp 352
4. Debenture with Interest Nil
5. Preferential Creditors 700 3,906
Amount Available to Unsecured Creditors 37,094

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 10,000 1. Legal Charges Nil
Cash 1,000 2. Liquidator’s Remuneration
(a). Assets Realized – 4% 1,040
Secured Asset realized Nil (10,000 + 1,000 + 15,000 =26,000 x 4%)
(15,000 – 20,000)
(b). Preferential Creditors – 2% 100
(5,000 x 2%)
(c). Unsecured Creditors – 2% 76 1,216
(Sufficient Amount not available)

(3,860 x 2/102)
3. Liquidation Exp. 1,000
4. Debenture with Interest Nil
5. Preferential Creditors 5,000
6. Unsecured Creditors (3,860 - 76) 3,874
11,000 11,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 11,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration (1,040 + 100) 1,140
3. Liquidation Exp 1,000
4. Debenture with Interest Nil
5. Preferential Creditors 5,000 7,140
Amount Available to Unsecured Creditors 3,860

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Cash in Hand 20,000 2. Liquidator’s Remuneration
Land and Building 1,30,000 (a). Assets Realized – 2% 5,360
Plant and Machinery 1,10,500 (20,000 + 1,30,000 + 1,10,500 + 7,500
Furniture and Fittings 7,500 = 2,68,000 x 2%)
(b). Unsecured Creditors – 2% 2,640 8,000
Calls in paid 19,000 (Sufficient Amount not available)
(9,500 shares x Rs. 2)
(1,34,640 x 2/102)
3. Liquidation Exp. 2,000
4. Debenture with Interest 75,000
5. Preferential Creditors 70,000
6. Unsecured Creditors 1,32,000
(1,34,640 – 2,640)
2,87,000 2,87,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 2,87,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration 5,360
3. Liquidation Exp 2,000
4. Debenture with Interest 75,000
5. Preferential Creditors 70,000 1,52,360
Amount Available to Unsecured Creditors 1,34,640

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Machinery 51,000 2. Liquidator’s Remuneration
Stock 39,000 (a). Assets Realized – 2.5% 4,650
Sundry Debtors 58,500 (51,000 + 39,000 + 58,500 + 2,500 +
Cash 2,500 35,000 = 1,86,000 x 2.5%)
(b). Preferential Creditors – 2% 484
Excess of Secured Assets: Nil (24,200 x 2%)
(Land and Building) (c). Unsecured Creditors – 2% 2,366 7,500
(35,000 – 48,000) (Sufficient Amount not available)

(1,20,666 x 2/102)
3. Liquidation Exp. 1,000
4. Debenture with Interest Nil
5. Preferential Creditors 24,200
6. Unsecured Creditors 1,18,300
(1,20,666 – 2,366)
1,51,000 1,51,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 1,51,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration (4,650 + 484) 5,134
3. Liquidation Exp 1,000
4. Debenture with Interest Nil
5. Preferential Creditors 24,200 30,334
Amount Available to Unsecured Creditors 1,20,666

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Other Fixed Assets 40,000 2. Liquidator’s Remuneration
Stock 10,000 (a). Assets Realized (Fixed) 1,000
Debtors 20,000 (b). Preferential Creditors - 2% 200
Bills Receivables (Dishonored) Nil (10,000 x 2%)
Cash 5,000 (c). Unsecured Creditors – 2% 3,584 4,784
(Sufficient Amount not available)
Excess of Secured Assets: 20,000
(Machinery)
(1,20,000 – 1,00,000) (1,82,800 x 2/102)

Call Amount Collected 3. Liquidation Exp. 1,000

1,00,000
(5,000 Shares x Rs. 20) 4. Debenture Nil
5. Preferential Creditors 10,000
6. Unsecured Creditors 1,79,216
(1,82,800 – 3,584)
1,95,000 1,95,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 1,95,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration (1,000 + 200) 1,200
3. Liquidation Exp 1,000
4. Debenture with Interest Nil
5. Preferential Creditors 10,000 12,200
Amount Available to Unsecured Creditors 1,82,800

13
Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Plant & Machinery 25,000 2. Liquidator’s Remuneration
Stock 20,000 (a). Assets Realized - 3% 3,630
Cash in Hand 5,000 (25,000 + 20,000 + 21,000+
Debtors (60% out of Half) 21,000 55,000 = 1,21,000 x 3%)
(70,000 x ½ = 35,000) (b). Preferential Creditors - 2% 200 3,830
(35,000 x 60%) (10,000 x 2%)
3. Liquidation Exp. 970
Excess of Secured Assets: 5,000 4. Preferential Creditors 10,000
(Land & Building) 5. Debenture 61,200
(55,000 – 50,000) (76,000 – (3,830 + 970 + 10,000) =61,200)
76,000 76,000

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 Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Plant & Machinery 25,000 2. Liquidator’s Remuneration
Stock 31,000 (a). Assets Realized – 3% 3,525
Debtors 43,500 (25,000 + 31,000 + 43,500 +
Cash 500 18,000 = 1,17,500 x 3%)
(b). Unsecured Creditors – 2% 1,772 5,297
Excess of Secured Assets: Nil (Sufficient Amount not Available)
Building
(18,000 – 29,180)
(90,375 x 2/102)
3. Liquidation Exp. 1,100
4. Debenture with interest Nil
5. Preferential Creditors
(Salary and Wages only 4 Months allowed) 4,200
(6,300 x 4/6)
Add: Taxes of Govt. 5,000
800
6. Unsecured Creditors 88,603
(90,375 – 1,772)
1,00,000 1,00,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 1,00,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration 3,525
3. Liquidation Exp 1,100
4. Debenture with Interest Nil
5. Preferential Creditors 5,000 9,625
Amount Available to Unsecured Creditors 90,375

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 Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Land & Building 60,000 2. Liquidator’s Remuneration
Stock 90,000 (a). Assets Realized – 3% 7,800
Debtors – (40 % Book value) 44,000 (60,000 + 90,000 + 44,000 + 2,500
(1,10,000 x 40 %) + 63,500 = 2,60,000 x 3%)
(b). Unsecured Creditors – 2% 1,850 9,650
Cash in Hand 2,500 (Sufficient Amount not Available)

Excess of Secured Assets: 13,500 (94,350 x 2/102)

Plant and Machinery
3. Liquidation Exp. 1,850
(63,500 – 50,000)
4. Debenture 1,00,000
Add: 2 Months interest outstanding 1,000 1,01,000
(1,00,000 x 6% x 2/12 months)
5. Preferential Creditors
(Salary and Wages only 4 Months allowed) 4,000
(Rs, 1000 x 4 Months)
Add: Taxes of Govt. 1,000 5,000
6. Unsecured Creditors (94,350 – 1,850) 92,500
2,10,000 2,10,000
Workings:
Find Amount Available to Unsecured Creditors
Particulars Rs Rs
Total Receipts 2,10,000
Less Payments:
1. Legal Charges Nil
2. Liquidator’s Remuneration 7,800
3. Liquidation Exp 1,850
4. Debenture with Interest 1,01,000
5. Preferential Creditors 5,000 1,15,650
Amount Available to Unsecured Creditors 94,350

16
 Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Plant – 10,00,000 2. Liquidator’s
Less: 5% over B. V - 50,000 9,50,000 Remuneration
(a). Assets Realized – 1% 22,750
Debtors – ( Book value) 3,00,000 (9,50,000 + 3,00,000 + 1,00,000 +
6,00,000 + 3,25,000 = 22,75,000 x 1%)
Cash 1,00,000
3. Liquidation Exp. Nil
Excess of Secured Assets: 6,00,000 4. Debenture with Interest Nil
Land & Building – 10,00,000 50,000
Add: 10% over B. V – 1,00,000
5. Preferential Creditors
11,00,000 6. Unsecured Creditors 2,50,000
(3,00,000 – 50,000 = 2,50,000)
(11,00,000 – 5,00,000) 7. Preference Share Capital 10,00,000
Add: Preference Dividend Nil 10,00,000
Excess of Secured Assets: (Hints)
Stock – 5,00,000 3,25,000
Add: 10% over B. V – 25,000 8. Equity Share Capital 9,52,250
5,25,000 (22,75,000 – (22,750 + 50,000 +
2,50,000 + 10,00,000) = 9,52,250)
(5,50,000 – 2,00,000)
22,75,000 22,75,000

17
 Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Liquidator’s Final Statement of Accounts

Receipts Rs. Payments Rs. Rs.
Assets Realized 1. Legal Charges Nil
Plant & Machinery 5,00,000 2. Liquidator’s Remuneration
Patents 75,000 (a). Assets Realized – 3%
(5,00,000 + 75,000 + 1,50,000 + 2,00,000
Stock 1,50,000 + 3,00,000 = 12,75,000 x 3%)
36,750
Debtors 2,00,000 (b). Unsecured Creditors -2%
Cash at Bank 75,000 (Sufficient Amount Available)
(3,62,500 – 37,500 – 1,25,000 = 2,00,000) 4,000 40,750
Excess of Secured Assets: (2,00,000 x 2%)
Land & Building 1,75,000 3. Liquidation Exp.
27,250
(3,00,000 – 1,25,000) 4. Debenture 2,50,000
Add: Interest Outstanding 12,500 2,62,500
5. Preferential Creditors 37,500
6. Unsecured Creditors 2,00,000
7. Preference Share Capital
Add: Preference Dividend 5,00,000 5,60,000
(5,00,000 x 6% x 2 years) 60,000

8. Equity Share Capital

(11,75,000 - (40,750 + 27,250 + 2,62,500 +
37,500 + 2,00,000 + 5,60,000) = 47,000)
A. 2,500 Share Holders 39,375
B. 7,500 Share Holders 7,125 47,000
11,75,000 11,75,000

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Dr.B.Palani,
Assistant Professor, Department of Commerce,
SRM Arts and Science College, Kattankulathur.

Workings:
Equity share holders amount distribution
Particulars 2,500 7,500
Share Holder Share Holder
Excess amount paid for Rs. 15 each:
(2,500 shares X Rs. 15) 37,500 Nil
Total Amount Available to Equity = 47,000
Excess amount paid = 37,500
Remaining Amount 9,500

Remaining Amount Distribute to All Share Holders:

Remaining Amount Rs, 9,500

Total No. of Share 10,000 shares
= Re. 0.95
 2,500 Share Holders X Re. 0.95 = 2,375 2,375 7,125
 7,500 Share Holders X Re. 0.95 = 7,125
39,875 7,125

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