ACCOUNTING SOLUTIONS

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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 directors 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 companys 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.

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SCO: 209, First Floor, Sector-36/D. Chandigarh (M): 0172-4670390-5017149, 9876149390
(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

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Format of Statement of Affairs
Assets Amount
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

Balance of Deficiency

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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.
Liquidators 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) Liquidators 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

Liquidators 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 liquidators 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

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While preparing receivers 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 workmens 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. It is prepared by the liquidators after It is prepared by the concerned person

realisation of assets and payment of all of the accounting department
liabilities

3. It is prepared in the form of account i.e. It is prepared in the statement form in

debit side for receipt side and credit side which left side for liabilities and right
for payment side side for the assets

4. It shows how much amount realised on It shows the financial position of an

sale of assets and how the different existing company on a particular date.
types of liabilities are paid in an order.

5. Reserves and surplus and fictitious assets Reserves and surplus and fictitious

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 ACCOUNTING SOLUTIONS
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are not to be show in final statement of assets are to be shown in Balance
account. Sheet.

6. Liquidator submits Final Statement of A copy of Balance Sheet is submitted

Account to the company or court as the by the company to Registrar of
case may be. company and also to its shareholders

7. All assets and liabilities are recorded at All Assets and liabilities are recorded at
their realised and paid value historical cost.
respectively.

8. Final Statement of Account is not the Balance Sheet is the part of final
part of Final Accounts of the company. statements of the company.

SCO: 209, F.F. Sector-36/D Chandigarh. 0172-4670390-5017149, 9876149390