1.Liquidation of company

2. LIQUIDATION Liquidation or winding upis a Legal term and refersto the procedure throughwhich the affairs of thecompany are wound up bylaw. 3. Winding up of a company has beendefined in the Companies Act 1956as the process whereby its life isended and its property isadministered for the benefit of itscreditors & members. AnAdministrator called the Liquidator isappointed and he takes control of thecompany, collects its assets , pays itsdebts & finally distributes any surplusamong the members in accordancewith their rights. 4. MODES OF LIQUIDATION MODES OFLIQUIDATION COMPULSO VOLUNTAR RY SUPERVISIY WINDING WINDINGON BYUP UP COURT 5. Section 425 (1) of the companies actprovides that a company can beliquidated in any of the following threeways : COMPULSORY WINDING UP BY THE COURT VOLUNTARY WINDING UP BY THE MEMBERS WINDING UP UNDER THE SUPREVISION OFCOURT Generally the provisions of the Act with respect tothe winding up apply to winding up of a companywhether it be by the court or voluntary or subjectto the supervision of the court [Section 425 (2)] 6. CONSEQUENCES OF WINDING UPThe 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. 7. 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 8. CONTRIBUTORYAccording 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. FRAUDULENTPREFERENCE Fraudulent preference takes place when one creditor ispreferred to another creditor in the matter of payment of hisdues. It has been made in the provisions of section 531 thatevery transfer of property or money made with in 6 months 9. 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. 10. ORDER OF PAYMENTThe amount received from the assets not specificallypledged & the amounts contributed by thecontributories must be distributed by the liquidator inthe following order: Expenses of winding up including the liquidatorsremuneration Creditors secured by the floating charge on the assetsof the company Preferential creditors Unsecured creditors The surplus, if any, amongst the contributories (i.e. 11. PREFERENCESHAREHOLDERS Preference shareholders get the priority over the equityshareholders as regards the payment of their capital & thedividend payable upto the ate of winding up. The holders ofcumulative preference shares are entitled to arrears of dividendif there is a surplus after the return of the amount of the equityshareholders or if the Articles state that arrears of preferencedividend are to be paid before anything is paid to equityshareholders.EQUITY SHAREHOLDERS Any surplus left after making payment to preferenceshareholders is distributed among the equity shareholders if allthe shares are equally paid up. But if the shares are called inunequal proportions, the liquidator should see that the capitalcontribution by the shareholders should be the same. 12. PREFERENTIALCREDITORSUnder 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 13. 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, 14. FORMAT OF STATEMENT OFAFFAIRSASSETS NOT SPECIFICALLYESTIMATEDPLEDGED (list A)REALISABLE VALUE(Rs.)Balance at BankCash in handDebtorsLeasehold PropertyPlant & MachineryInvestmentsOther Assets 15. ASSETSESTIMATEDDUE TO DEFICIENCY SURPLUSSPECIFICALL REALISABLE SECUREDRANKING AS CARRIED TOY PLDGEDVALUECREDITORSUNSECUREDLAST(list B)Rs.Rs.Rs.COLUMN Rs.FreeholdpropertyESTIMATED SURPLUS FROM ASSETS SPECIFICALLYPLEDGEDESTIMATED TOTAL ASSESTS AVAILABLE FOR PREFRENTIALCREDITORS, DEBENTUREHOLDERS & UNSECURED CREDITORS SUMMARY OF GROSS ASSETSAMOUNT Estimated value of assets specifically pledged Other assets 16. GROSSLIABILITIELIABILITIES AMOUNTS Rs.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 purchasestelephone rent o/sbills payable Estimated surplus/deficiency as regards 17. EXAMPLE REALAED TO STATEMENT OF AFFAIRSQ. The following information is extracted from books of luckylimited on 31st July ,2010 on which date a winding up orderwas made. Unsecured creditors3,50,000 Salaries due for five months20,000 Managing directors remuneration30,000 Bills payable1,06,000 Debtors --- good 4,30,000 --- doubtful(estimated to produce rs. 62,000)1,30,000 --- bad88,000 Bills receivable (good rs. 10,000) 16,000 Bank overdraft 40,000 Land (estimated to produce rs.5,00,000)3,60,000 Stock (estimated to produce rs.5,80,000) 8,20,000 Furniture and fixtures80,000 Cash in hand 4,000 Estimated liability for bills discounted60,000 Secured creditors holding first mortgage on land 4,00,000 Partly secured creditors holding second mortgage on land 2,00,000 Weekly wages unpaid6,000 18. Liabilities under workmens compensationAct,1925 2,000Income tax due 8,0005000 9% Mortgage debentures of 100 eachinterest payable to 30th June and 31st December,5,00,000paid 30th June, 2008Share capital :20,000 10% preference share s of rs. 10 each50,000 Equity shares of rs. 10 each 2,00,000General reserve since 31st December, 2004 5,00,0001,00,000In 2004 , the company earned profit of rs. 4,50,000 butthereafter it suffered trading losses totaling Rs. 5,84,000 . Thecompany also suffered a speculation loss of Rs. 50,000 duringthe 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 Statementof Affairs and the Deficiency Account. 19. SOLUTIONUnsecured Creditors as per List E :Rs.Unsecured creditors3,50,000One months Salaries ( 4 month salaries are preferential)4,000Managing Directors Remuneration30,000Bills Payable1,06,000Bank Overdraft40,000Liability on Bills Discounted60,000Amount uncovered in respect of partly secured creditors ( Rs. 2,00,000 Rs. 1,00,000 value of security ofsecond mortgage on land)1,00,000________6,90,000 20. LUCKY LTD (IN LIQUIDATION)STATEMENT OF AFFAIRSAs on July, 2008 AssetsEstimated Realisable valueAssets not specifically pledged ( as per list A)Cash in hand 4,000Bills Receivable 10,000Trade Debtors 4,92,000Stock 5,80,000Furniture and Fixtures 80,000Assets specifically pledged (as per List B)estimateddue todeficiencysurplusrealisable securedranking ascarried tovaluecreditorsunsecured last -------column ----------------------Rs. Rs.Rs.--11,66,000Rs.Land 5,00,0006,00,0001,00,000----Estimated total assets available for preferential creditors ,debenture holders secured by a floating charge and unsecured 21. -------------- 16,66,000 --------------GrossLiabilitiesLiabilities Rs. ( to be deducted from surplus or added to deficiency as the case may be )5,20,000 Secured creditors (as per list B ) to the extent to which claims 32,000are estimated to be covered by assets specifically pledged32,000 Preferential Creditors (as per list C) Estimated balance of assets available for debenture holders secured by a floating charge and unsecured creditors 11,34,00 Debenture holders secured by a floating charge (as per list D) 05,03,750 5,00,000 Interest due for 1 month (july,2008)@ 9% p.a. 5,03,750 3,7506,90,000 6,30,000------------ Estimated surplus as regards debenture holders 6,90,00017,25,75 Unsecured creditors (as per list E) 0 Estimated deficiency as regards creditors ,being the difference 59,750 between gross liabilities and gross assets Issued and called up capital: 2,00,00020,000 10% Preference shares of Rs. 10 each fully paid (as 5,00,000 22. DEFICIENCY ACCOUNT (LIST H)PARTICULARSPARTICULARSAMOUTAMOUNTTO EXCESS OF ASSET1,00,000BY NET TRADING LOSSES 5,87,750OVER CAPITALAFTER DEPRICIATION ,TO NET TRADING ASSSET 4,50,.000 TAXATION ETCTO PROFITS AND INCOME BY LOSSES OTHER THANOTHER THAN TRADINGTRADING LOSSESPROFITS 1,40,000SEPECULATION LOSSTO DEFICENCY7,59,75050,0004,00,000PENALTY IMPOSED BYEXISCE AUTORITIES3,50,000BY ASTIMATED LOSSESNOW WRITTEN OFFB/R6,000DEBTORS1,56,000 4,62,000STOCK2,40,000CONTIGENTLIABILTY60,000 23. LIQUIDQTORS FINALSTATEMENT 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 Liquidators Final Statement of accounts after the affairs of the company are fully wound up. 24. LIQIDATORS FINAL STATEMENT OF ACCOUNTAmoun Receipts Amount Payments t (Rs.)(Rs.)To Assets Realised :-By Legal Charges-- Cash at BankBy Liquidation Expenses-- Cash in HandBy Liquidator Remuneration-- Marketable Securities By Preferential Creditors-- Bills ReceivableBy Debenture -holders-- Trade Debtors (having-- Stock in trade a floating charge on the-- Freehold propertyassets of the co.)-- Plant and Machinery By Unsecured Creditors-- Furniture and FittingsBy Preference ShareholdersTo Surplus from Securities By Equity Shareholdersheld by Secured (42500 shares @ Rs. 1.50)CreditorsTo Proceeds of calls madeoncontributories (on 7500 25. Example of Liquidators final statement ofAccounts 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 companys books show the creditors worth Rs.87,400. Prepare liquidators statement of receipts & payments. 26. SOLUTION: Liquidators Statement Of Receipts & Payments Rs.Rs.Assets Realised 3,39,50 Liq. Expenses 15,000Surplus from0 Liq. Remuneration - - - - -secured Preferential5,800creditors(80,500- creditors 88,20050,000) 30,500Unsecured 2,00,000Call on equitycreditorsshare(C=I,400sh.1,400 Preference Sh.48,000@1) Holder14,400Equity Sh. HolderA=2000sh.@243,71,40 3,71,400B=16,000sh.@90 27. Working notes:1. Calculation of preferential & unsecured creditors PREFERENTI UNSECUR AL EDSalaries of 4 clerks @ Rs.10004,000 800(salary of Rs.200/clerk in excess of preferentialamount of Rs.800 treated as unsecured)1,800Salaries of 4 peons @ Rs.450 87,400Other unsecured creditors 5,80088,200 2 . Calculation of amount returnable to equity shareholders or Receivable from Equity Shareholders: Rs. Assets Realised 4,20,000 Less: Payments:Rs. Secured creditors50,000 Liquidation Expenses 15,000 Preferential Creditors 5,800 Unsecured Creditors 88,200 28. Amount available for Shareholder2,61,000Less: Capital to be returned to preference shareholder2,00,000Balance available for equity shareholder61,000Less: Equity share paid up:Class A- 2,000 equity shares @ Rs. 75 = 1,50,000Class B- 1,600 equity shares @ Rs. 60 = 96,000 Class C- 1,400 equity shares @ Rs. 50 = 70,0003,16,000 Total No. of EquityLoss to be borne by equity shareholders shares2,55,000Therefore loss per equity share= Total Loss = 2,55,000/5,000 = Rs. 51