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Module 5

LIQUIDATION
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Liquidation
• The process of dissolution of a company that
brings to an end of its existence is called
liquidation. On liquidation a company ceases
to exist.
• A Co is a creation of Law and there fore, it can
come to an end only through a process of law. It
is not necessary that only an insolvent co
should be liquidated. Often, it become
necessary to wind up even a prosperous and
solvent company.
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Types of Liquidation
• 1) Compulsory Winding up.2) Voluntary winding up
3)Voluntary winding up subject to supervision of court
• Grounds for compulsory winding up:-Sec 433 provides that a
Co may be wound up by the National Co Law Tribunal.
• 1) If the Co by Spl. resolution resolved to be wound up
• 2) If default is made to delivering the statutory report
• 3) If the Co does not commence its business with in a year
• 4) If the no. of members is reduced (7 or 2)
• 5) If the Co is unable to pay its debts.
• 6 ) If the Tribunal is of the opinion it is just and equitable that
the Co should be wound up
• 7) If the Co made default in filing its final A/cs.
• 8) If the Co has acted against interest of state
• 9)If the Co is a sick unit
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Voluntary Winding up-Sec. 484-521.
It takes place when the members of the Co alone or jointly
with the creditors take steps to wind up the Co.

• There are two kinds of voluntary winding up

• 1)Members voluntary winding up
• 2)Creditors voluntary winding up
• Grounds for voluntary winding up
• A) by passing an ordinary resolution in the General
meeting
• (i)When the duration of the Co has expired
(ii) when the event on the happening of which the
company is to be wound up has happened.
B) By passing Spl. Resolution to windup voluntarily.
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Voluntary winding up subject to supervision of

the court. Sec 522-527

• The court may on the application of any

creditors ,liquidator, of the Co itself, order for
the winding up under its supervision on any of
the following circumstances.
• 1)The liquidator under the voluntary winding
up is negligent in collecting the assets of the
Company.
• 2)The resolution for the winding up was
obtained by fraud
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Liquidator
A liquidator is a person who is appointed in connection
with liquidation of a Co to complete the process of
liquidation.
• Powers of liquidator
1)To take into custody all the property of the Co.
2)To institute legal proceedings.
3)To carryon business for its beneficial winding up
4)To raise money on the security of assets of the Co
5)To sell Cos property
6)To take all other things required for the purpose of
winding up.
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Statement of affairs

• According to Sec 454 of the Cos Act, the officers

and directors of a Co under liquidation must
prepare and submit with in 21 days of the date
of the order liquidation, a statement of assets
and liabilities to the liquidator of the Co. Such a
statement submitted to the liquidator by the
officers and directors of the Co is known as
‘statement of affairs’. The statement should
show the estimated realisable value of assets,
the liabilities ranked for payment and deficiency
or surplus as the case may be.
8 Deficiency Account
• A deficiency A/c is a statement submitted by
the officers and directors along with the
statement of affairs. It shows how deficiency
or surplus arose or the reasons for arising
deficiency or surplus
• Fradulent Preference:-It takes place when one
creditor is preferred to another creditor in the
matter of payment of his dues . The Cos Act,
therefore , provides that every transfer of
property or money made within six months
before the commencement of winding up is
fraudulent preference and is invalid
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Preferential creditors
• Preferential creditors are those unsecured creditors who
are paid in priority to creditors having floating charge and
other(non- preferential) unsecured creditors. Preferential
creditors include the following (Sec. 530 of Cos Act)
• 1) All revenues , taxes , cesses and rates due to the Central
or state Govt. or to the local authority which have become
due and payable within 12 months before the date of
winding up order.
• 2)All wages and salaries of any employee not exceeding Rs.
20000w.e.f 17.2.97 in respect of services rendered to the
Co and due for a period not exceeding 4 months within the
said 12 months before the date of winding up order.
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3) All accrued holiday remuneration becoming payable to the
employee or in case of his death , to any other person in his
right, on termination of his employment before , or by the
effect of the winding up
• 4) All amounts due in respect of contribution payable during the
12 months under the Employees state insurance Act,1948 or any
other law
• 5) All compensation due under workmen’s Compensation Act
1923, in respect of death or disablement of any employee of the
Co .
• 6) All sums due to any employee from provident fund , a pension
fund , a gratuity fund or any other fund for the welfare of the
employees maintained by the co.
• 7) The expenses of any investigation held in pursuance of section
235 to237 in so far as they are payable by the Company
 Contributory
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• A contributory is person liable to contribute to the assets

of the Co.in the event of its being wound up. A
contributory can be either a present member or past
member. A present member is one whose name appears
in the register of members when the Co is wound up.He is
liable to contribute the amount remaining unpaid on the
shares held by him if the amount is needed to make the
payment to the legal claimants. The holders of fully paid
up shares are also treated as contributories even though
they are not to contribute to the assets of the Co ,
because the court has to get the list of not only who will
contribute but also who will share the surplus if any.
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Points to be noticed while preparing
Liquidator’s final statement of account
• 1) Liquidator’s remuneration:-The liquidator normally gets
remuneration in the form of commission which is usually
based on the value of assets realised and the amount paid
to unsecured creditors. For this the following points may
be noted
• (a)Commission on assets given as securities to secured Crs.
The liquidator gets commission on the surplus from such
assets left after making payment o f secured creditors .
• (b) cash and bank balance. He gets commission on cash
and bank balance unless otherwise stated
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(c) Unsecured Creditors:- If the liquidator is to get a
commission on amount paid to unsecured creditors,
unsecured creditors include preferential creditors for the
purpose of calculation of remuneration unless otherwise
stated.
If the Amt. available is sufficient to make the full payment of unsecured
Crs., the commission is calculated as follows
L.remuneration=Amt. due to unsecured Crs.* % of com/100
If the Amt. available is not sufficient to make the full payment of
unsecured Crs., the commission is calculated as
=Amt. available for unsecured Crs.*%of com./100+%of com
(2) Dividend payment:- Both equity and preference dividends declared
but not paid are to be paid as unsecured debt.
(3) Debenture Int: (a) If the Co. is solvent, Int. on Deb. is to be paid up to
the date of payment.(b) if the Co. is not solvent , Int. on Deb. is to be
paid up to the date of winding up.
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Qn:-Prepare liquidator’s final statement of A/c.
• His remuneration is @3%on the Amt. realised from assets and 2% of
the amt. distributed to unsecured Crs. other than pref: Crs.
• The assets realised as follows.
• Cash in hand Rs.7000 ,Plant Rs.38000 ,Furniture Rs.35000,
• Land Rs 220000.
• The liabilities ranked were:
• Unsecured Crs: Rs 260000 ,Preferential creditors Rs.60000,
Debentures Rs 90000
• Share capital:
• 20000 shares of Rs.10 each fully paid Rs.200000,
• 10000 Shares of Rs. 10each Rs. 8 paid up Rs. 80000
• The liquidation expenses amounted to Rs 3000.
• The partly paid shares were made fully paid up by making final call.
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Liquidator’s final Statement account
Receipts amount payments amount
Assets realised: Liquidation expenses 3000
Cash 7000 Liq. remuneration:-
Plant 38000 3% on 300000 = 9000
2% on 154902 =3098 12098
Furniture 35000 300000 Debenture holders 90000
Land 220000 Preferential Crs. 60000
Call on 10000 shares 20000 Unsecured Crs. 154902
@Rs 2 ---------- ----------
320000 320000

Commission=on payment to unsecured creditors

=158000 x2/102=3098
158000 =320000-(3000+9000+90000+60000)
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Qn:- X Ltd. went into liquidation on
31/03/2005,when their balance sheet was as follows
Liabilities amount Assets amount

2500 Equity shares of Rs.100 each 250000 Land 200000

5% Debentures.( having floating Plant 200000
charge on all assets) 200000 stock 200000
Interest outstanding on Debentures 25000 cash 10000
Loan from HDFC bank 200000 Bank 90000
(secured on mortgage on land) Other current assets 300000
Loan from IDBI bank 200000
(secured by stock)
Owing to Govt. for taxes 75000
Telephone bill, electricity bills etc. 50000 ------------
1000000 1000000
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Other Information:-
• 1) Expenses of Liquidation Rs. 30000.
• (2) legal charges Rs.2000
• 3)Liquidator is entitled to a commission of 3% on assets realised
except cash and bank and 2% on the amount distributed to
unsecured creditors (other than preferential creditors.)
• (4)All payments were made on30th sept,2005.
• (5)Land realised at 150%, plant at 50%, stock at 50%,
• (6) Other current assets realised at Rs 100000.
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Liquidator’s final statement of account
Receipts Amount Payments Amount

Assets realised:- Liquidation expenses 30000

Cash 10000 Legal charges 2000
Bank 90000 Liquidator’s remuneration 13098
Other current assets 100000 Debenture holders:
Plant 100000 Principal
Surplus from Land 100000 Interest 225000
(300000-200000) Unsecured Creditors:-
Preferential Crs :-taxes 75000
Unsecured creditors 54902
(IDBI loan + Tele. charges)
ie,100000+50000=150000
------------- ---------------
400000 400000
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working note
(1) Calculation of liquidator’s remuneration
Assets realised =Surplus of land + stock+ plant + other assets
= 100000+100000+100000+100000=400000
(a) Commission @3%on Rs.400000=12000
(b) Commission @2% on payment to unsecured Creditors.(other
than preferential creditors)
= 56000*2/102 =1098
Total commission =12000+1098=13098
(2) Since the Co is insolvent Interest on Debentures has been paid
up to the date of winding up ie , 31st March 2005.

Commission= amount available to unsecured Crs * rate/100 or

Commission= amount available to unsecured Crs * rate/100 +
rate
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Liquidator’ final statement of
account
• Liquidator’ final statement of account is an
account of winding up prepared by the
liquidator showing the amount realised from
assets and disbursement of money realied
among right claimants. This a/c takes the form
of cash book and is submitted to the court in
the case of compulsory winding up and to the
creditors and members in the case of
voluntary winding up
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Order of payment of liabilities
• 1)Payment to secured creditors up to their
claim or up to the securities held by them
• 2)cost of winding up ,legal charges
• 3)Payment to liq. Remuneration
• 4)payment to preferential crs.
• 5)Payment to Crs.(debentures) having floating
charges
• 6)Payment to unsecured Crs.(div. declared)
• 7)Payment to pre. share holders
• 8)payment to eq. share holders