MODULE IV

LIQUIDATION OF COMPANIES

Introduction:

A debt-laden company is liquidated when it is ascertained that the business is not in any state to
continue. This may be due to various reasons such as insolvency i.e. inability to pay off its financial
obligations (usually the main reason), unwillingness its business operations, etc. The liquidation
process is a possible outcome of bankruptcy, which a company enters when it does not have
sufficient funds to pay its creditors. A bankruptcy filing can be voluntary or involuntary. A petition
to liquidate a company can be made to the applicable court by creditors who have not been paid
by the company; if granted, the business will involuntarily enter bankruptcy.

Meaning of Liquidation of Company:

Liquidation is the process of terminating the legal existence of a company and selling off all the
assets of a company, settling its liabilities, distributing any remaining funds to shareholders, and
closing it down as a legal entity. OR

The Liquidation or winding up a company is a process through which life of company and it’s all
affairs are wound up and its property administered for benefits of its creditors and members.

Process of winding up:

1. Selling of the assets of the company

2. Paying off the liabilities of the company

3. If there is any deficiency to pay to the creditors and the shareholders are called upon to pay

unpaid amount on their articles.

4. In case of surplus, after paying off the liabilities, it may be distributed to the contributories

according to their rights under the articles.

5. At the end, the Registrar of Companies removes the name of the company from the Register of
 Companies which is maintained by his office.

Methods of winding up of companies.

1. Compulsory winding up by the court
2. Voluntary winding up:
i. Member’s Voluntary winding up : At the time of winding up, if the company is a
solvent company that is able to pay its debts and Directors make a declaration to that
effect, it is called a Member’s Voluntary Winding up.
ii. Creditor’s voluntary winding up
3. Voluntary winding up under the supervision of the court.

Modes/Types of Winding Up/ Liquidation of Companies

Circumstances Provisions Applicable

On Inability to Pay Debts Insolvency and Bankruptcy code 2016
Reasons Other than Inability to pay Debts Companies Act 2013
Voluntary Winding Up Companies Act 2013
a. Up to 31/3/2017
b. After 1/4/2017 Section 59 of the Insolvency and Bankruptcy code
2016

As per section 270 of the Companies Act 2013, the procedure for winding up of a company
can be initiated either:

a. By the tribunal or,

b. Voluntary. (However section 304 of company’s act has been omitted, therefore section 59
of the Insolvency and Bankruptcy code 2016 is applicable from 1/4/2017)

I. Winding up of a Company by a Tribunal

As per section 271 of the Companies Act 2013, a company can be wound up by a tribunal in the
following circumstances:

1. If the company has by special resolution resolved that the company be wound up by
the tribunal.
2. If the company has acted against the interest of the integrity or morality of India,
security of the state, or has spoiled any kind of friendly relations with foreign or
 neighboring countries.
3. If the company has not filed its financial statements or annual returns for preceding five
consecutive financial years.
4. If the tribunal by any means finds that it is just and equitable that the company should
be wound up.

5. If the company in any way is indulged in fraudulent activities or any other unlawful
business, or any person or management connected with the formation of company is
found guilty of fraud, or any kind of misconduct.

II. Filing of Winding Up Petition

Section 272 provides that a winding up petition is to be filed in the prescribed form in 3 sets. The
petition for compulsory winding up can be presented by the following persons:

i. The company
ii. The creditors; or Any contributory or contributories
iii. By the central or state govt.
iv. By the registrar of any person authorized by central govt., for that purpose The winding
up petition has to be accompanied with a Statement of Affairs.

The tribunal after hearing the petition has the power to dismiss it or to make an interim order as it
think appropriate or it can appoint the provisional liquidator of the company till the passing of
winding up order.

III. Voluntary Winding Up of a Company

The company can be wound up voluntarily by the mutual agreement of members of the company,

if:

i. The company passes a Special Resolution stating about the winding up of the company.
ii. The company in its general meeting passes a resolution for winding up as a result of
expiry of the period of its duration as fixed by its Articles of Association or at the
occurrence of any such event where the articles provide for dissolution of company.

Member’s Voluntary Winding Up under the Insolvency and Bankruptcy Code, 2016

The Procedure of Voluntary Winding up of solvent company section 304 is now omitted from the
Companies Act, 2013. Therefore, making section 59 of Insolvency and Bankruptcy Code, 2016
applicable from 1st April, 2017.

Some of Key features of section 59 of Insolvency and Bankruptcy Code, 2016 are as follows:

a. Shifting of Powers from Official Liquidator to Insolvency Professional.

 b. Jurisdictional Authority has been shifted from High Court to National Company Law
Tribunal (NCLT).
c. Timeline for carrying out the Voluntary Winding up process under the Insolvency and
Bankruptcy Code is of 12 months.
d. The shifting of Jurisdictional Authority from High Court to NCLT will result into faster
execution as Insolvency Professionals have been entrusted with powers of completing the
winding up process and reporting to NCLT.
e. With the passing of special resolution at the Members meeting and declaration of solvency,
the company can commence with the winding up proceedings.

Contributory

According to the Companies Act a contributory is “every person liable to contribute to the assets
of a company in event of its being wound up, and includes a holder of fully paid-up shares and
also any person alleged to be contributory.
OR
Contributories are all the present and past members of the company who are liable to jointly
contribute to the assets of the company an amount sufficient for payment of its debts and
liabilities, to meet the cost of liquidation and adjust the rights of contributories among
themselves, in the event of liquidation of a company.

Liquidator:

The person appointed for conducting the liquidation proceedings of the company is called
‘Liquidator’. (In case of Voluntary winding up an Insolvency Professional). The company must
submit a statement of affairs to the liquidator. The general duties of the liquidator are to take into
his custody all the property of the company and actionable claims and make the payments as per
the order laid down in the Companies Act.

Functions of a Liquidator

1. To Verify claims of all the creditors and consolidate them

2. To take into his custody or control all the assets, property, effects and actionable claims of
the corporate debtor
3. To Evaluate the assets and property of the corporate debtor in the manner and prepare a
report
4. To Protect and preserve the assets and properties of the corporate debtor
5. To realise the assets of the company.
 6. To collect money due from the contributories.

Secured Creditors
A secured creditor is generally a bank or other asset-based lender that holds a fixed or floating
charge over a business asset or assets. When a business becomes insolvent, sale of the specific
asset over which security is held provides repayment for this category of creditor.
 7. To distribute the amount realised from the sale of assets and amount received from
contributories in the order of preference as per Rule 329 of Companies Act.
8. To maintain and submit the record of receipts and payments of cash to the members in the
case of voluntary winding up and to the court in the case of compulsory winding up.

Liquidators Final Statement Account

It is a statement of receipts and payments which is prepared by the liquidator to submit the same
to registrar of companies, IBBI (Insolvency and Bankruptcy Board of India) and NCLT after the
company is completely wound- up and it shows the details of assets realization amount, other
receipts and its use for the payment of liabilities of the company.

The main duty of the liquidator is to collect the assets of the company and realize them and
distribute the amounts realized among the right claimants.

Format of Liquidator Final Statement

Particulars RS
I Receipts
Cash in Hand
Cash at Bank
Assets Realised
Marketable Securities
Bills Receivable
Trade debtors
Stock in Trade
Freehold Property
Plant & Machinery
Furniture & Fittings
Investments
Calls in arrears
Surplus from Securities
Amount receivable from Calls on Contributories etc.
Total Receipts xxxxxxx
 Less: II Payments
Secured Creditors
Legal Charges
Liquidation expenses
Liquidators Remuneration
Debenture Holders (having the floating charge on the asset of the co.)
Outstanding Debenture Interest
Debenture
Preferential Creditors
Unsecured Creditors
Preference Shareholders
Preference Dividend
Preference Share capital
Equity Shareholders
Total xxxxxx
Calculation of Liquidator’s Remuneration:

I. On Receipts

i. on Total Receipts

Liquidators Remuneration = Total Receipts x Rate of Commission/100

ii. on Assets Realised

Liquidators Remuneration = Total Assets Realised x Rate of Commission/100

II. On Payments

i. On unsecured creditors
a. When sufficient balance available to unsecured creditors

Liquidators Remuneration = Amount available to unsecured creditors x Rate of Commission/100

b. When Insufficient balance available to unsecured creditors

Liquidators Remuneration =
 Amount available to unsecured creditors x Rate of Commission/100+ Rate of commission

Note: For calculating remuneration on payment made to unsecured creditors, preferential creditors
must be considered as part of unsecured creditors.

ii. On amount available to shareholders

Liquidators Remuneration =

Amount available to shareholder’s x Rate of Commission/100+ Rate of commission

Deficiency/Surplus Account

Statement of Affairs shows the Deficiency/Surplus as regards creditors and members. This account
explains how the deficiency or surplus has arose. This statement must cover at least a 3-year period
preceding the date of winding up order.

PREFERENTIAL CREDITORS

In a winding up there should be paid in priority to all other debts subject to the provisions of section
326.

i. Government Taxes: All revenues, taxes, cess and rates due from the company to the
Central Government or a State Government or to a local authority at the relevant date,
and having become due and payable within the twelve months immediately before that
date.
ii. Salary and Wages: All wages or salary including wages payable for time or piece
work and salary earned wholly or in part by way of commission of any employee in
respect of services rendered to the company and due for a period not exceeding four
months within the 12 months immediately before the relevant date, subject to the
condition that the amount payable under this clause to any workman should not exceed
such amount as may be notified
iii. Holiday Remuneration: All accrued holiday remuneration becoming payable to any
employee, or in the case of his death, to any other person claiming under him, on the
termination of his employment before, or by the winding up order, or, as the case may
be, the dissolution of the company
iv. Contribution under ESI Act: Unless the company is being wound up voluntarily
merely for the purposes of reconstruction or amalgamation with another company, all
amount due in respect of contributions payable during the period of twelve months
immediately before the relevant date by the company as the employer of persons under
the Employees’ State Insurance Act, 1948 or any other law for the time being in force;
v. Compensation in respect of death of disablement: Unless the company has, at the
commencement of winding up, under such a contract with any insurer as is mentioned
in section 14 of the Workmen’s Compensation Act, 1923, rights capable of being
transferred to and vested in the workmen, all amount due in respect of any
compensation or liability for compensation under the said Act in respect of the death
or disablement of any employee of the company: Where any compensation under the
said Act is a weekly payment, the amount payable under this clause should be taken to
be the amount of the lump sum for which such weekly payment could, if redeemable,
be redeemed, if the employer has made an application under that Act;
vi. PF, Pension Fund or Gratuity Fund: All sums due to any employee from the
provident fund, the pension fund, the gratuity fund or any other fund for the welfare of
the employees, maintained by the company; and
vii. Expenses of Investigation: The expenses of any investigation held in pursuance of
sections 213 and 216, in so far as they are payable by the company.