Liquidation of Companies

Advanced Corporate Accounting

II B.Com 4th Semester

SESHADRIPURAM COLLEGE
SESHADRIPURAM, BENGALURU-20 Department of Commerce and Management

Unit - 1

LIQUIDATION OF COMPANIES

Meaning–Types of Liquidation – Order of Payment - Calculation of Liquidators’ Remuneration –

Preparation of Liquidators Final Statement of Account.

Section - A
(2 Marks)

Introduction

A joint stock company is created by law, as such it can be brought to end only through the process of
law. Some legal formalities are required to close the affairs of a company. Such legal procedures can
be called as liquidation of companies.

Meaning of Liquidation

It is the process of putting an end to the life of the company. It is a procedure by means of which
company is dissolved.
In this process of dissolution, assets of the company are disposed off, debts are paid from the amount
realized or collected from contributories and surplus if any to be distributed to the member in
proportion of their holding.

State the Types of Winding Up of Companies

• Compulsory winding up
• Voluntary winding up
Members voluntary winding up
Creditors voluntary winding up
• Winding up under the supervision of the court
Smt. BHAGYASHRI N
Assistant professor
Seshadripuram College
Liquidation of Companies

Meaning of Liquidator

Liquidator is a person either an individual or a group of persons who may be appointed by the
Company or by the Court to perform the process of liquidation and is entitled to a fixed rate of
commission.

Functions of Liquidator

1. To realize the assets of the company

2. To collect the amount due from contributories.
3. To settle the liabilities as per the rule 329 of company Act.
4. To maintain and to submit record of receipts and payments to the court / to the company / to the
members.

Liquidator’s Final Statement of Account

At the time of liquidation, the Liquidator realises all the assets and discharge the liabilities and
capital. The statement prepared to record such receipts and payments is called Liquidator’s Final
Statements of Account.

Who is a preferential creditor?

Is a creditor who has a higher priority for repayment over other creditors in the event of liquidation.
These creditors are typically paid before other unsecured creditors or shareholders. Examples of
preferential creditors include employees owed wages, certain tax authorities, and holders of certain
types of security interest.

Who is a Secured Creditor?

These are creditors whose debt is secured against certain assets. They can claim the assets, sell the
asset and discharge their debts.

Who is a Contributory ?
As per Section 428 of the companies Act
Contributory is Every person liable to contribute towards the assets of the company in the event of
its being wound up they are the present and past shareholders of the company.

There are two types of contributories

List A contributories
List B contributories

List A contributories are the present members of the company I.e. members whose names appear
on the companies register of the members at the time of winding up.

List B contributories are the past members of the company those who have ceased to be members
within one year preceding the commencement of the winding up.

Smt. BHAGYASHRI N
Assistant professor
Seshadripuram College
Liquidation of Companies
Section - B
(5 Marks)
1. Explain in detail on which ground types of liquidation will take place?

A. Compulsory winding up by the court (section 433)

The following are the grounds for Compulsory winding up:

I. If a default is made in delivering the statutory reports /statutory meetings.

II. If the company does not commence or start its business within a year from its incorporation.
III. If the number of the members falls below in public and in private companies.
IV. If the company is unable to pay its debts.

V. If the court is of the opinion that it is just and equitable that the company should be wound up.

B. Voluntary winding up

A Company can be wind up voluntarily under the ordinary circumstances,

I. By an ordinary
resolution. II. By a special
resolution.

C. Voluntary winding up, under the supervision of the court.

Any time after a company has passed a resolution for voluntary winding up, the court makes an order
with such liberty for creditors, contributors or other to apply to the court.

Problems

1. Following particulars related to limited company which has gone into voluntary
liquidation. You are required to prepare the liquidators final statement allowing for his
remuneration at 2% on the amount realized, 2% on the amount distributed to the unsecured
creditors (other than preferential creditors)

Preferential creditors – 10,000

Unsecured creditors – 32,000
Debentures – 10,000

Assets realized as follows:

Land and building – 20,000

Plant and machinery – 18,650
Furniture – 1,000

Liquidation expenses amounted to Rs 1,000

Smt. BHAGYASHRI N
Assistant professor
Seshadripuram College
Liquidation of Companies
2. Prakash ltd went into liquidation on 31-03-2023. Following information is available with the
liquidator. Creditors amounted to Rs 75,660 of which 8,000 are preferential, 6% debentures having
a floating charge on the assets of the company amounted Rs 80,000 debentures to be paid interest
upto 30 Sep 2023.

The assets realized as follows:

Stock – 84,000
Plant and machinery – 60,600
Cash in hand – 500
Debentures were paid off on 30 sept 2023 with interest.
Liquidator’s expenses amounted to Rs 1,902 and are to be given remuneration @ 3% on the amount
realized and 2% on the amount distributed to unsecured creditors excluding preferential creditors.
Prepare liquidators final statement of Account.

(2016 - QP)
3. ABC ltd went into voluntary liquidation on 31-3-23 when the state of affairs as below:

Unsecured creditors was Rs 4,00,000 including 50,000 preferential claim Secured creditors secured
on plant and machinery stood at Rs 2,00,000. Cash in hand was Rs 10,000. The liquidator realized
plant and machinery for Rs 1,50,000 and other assets realised Rs 1,00,000. Liquidation expenses Rs
10,000 and the liquidators remuneration was fixed at 4% of the amount realised including cash
balance and 2% on the amount distributed to the unsecured creditors including preferential creditors.
Prepare liquidators final statement of Account.

4. Bad luck Co. Ltd. went into liquidation, its assets realized Rs. 1,75,000 excluding the amount
realized by the sale of securities held by secured creditors.

The following was the position:

• Share capital 500 shares of Rs100 each.

• Secured creditors (securities realized Rs 20000) 17,500.
• Preferential creditors 3,000.
• Unsecured creditors 70,000.
• Debentures having floating charge on the assets of the Co. Rs 1,25,000.
• Liquidation expenses – 6,250.
• Liquidator is to be paid a commission of 2% on the amount actually paid to unsecured creditors
including preferential creditors.
• Prepare liquidators final statement of accounts.
5. The following particulars related to Prasad Ltd. which went into Voluntary Liquidation.

(A) Preferential Creditors = Rs 40,000.

(B) Unsecured Creditors other than Preferential Creditors = Rs 3,20,000.
(C) Debenture holders = Rs 1,00,000.
(D) Assets realized = Rs 3,96,500.
(E) Liquidation expenses = Rs 10,000.
Smt. BHAGYASHRI N
Assistant professor
Seshadripuram College
Liquidation of Companies
You are required to prepare liquidators final statement of account, allowing for his remuneration at
2% on assets realized and 2% on the amount distributed to unsecured creditors including
preferential creditors.

(2017 - QP)

6 Anee Co. Ltd. went into liquidation on 31-03-2023.

Unsecured creditors was Rs. 8,00,000 including Rs. 1,00,000 Preferential claims. Secured creditors
secured by plant and machinery stood at Rs. 4,00,000. Cash in hand was Rs. 20,000.
The liquidators realized plant and machinery for Rs. 3,00,000 and other assets realized Rs. 2,00,000.
Liquidation expenses came to Rs. 2,00,000 and the liquidators remuneration was fixed at 4% on the
amount realized including cash balance and 2% of the amount distributed to unsecured creditors
including preferential creditors.
Prepare liquidators final statement of account. (2015 - QP)

7 A Ltd. Company went into voluntary liquidation with the following liabilities :-

- Secured creditors Rs. 40,000 (Securities realized by the liquidators Rs. 50,000).
- Preferential creditors Rs. 12,000.
- Unsecured creditors Rs. 61,000.
- Liquidation expenses Rs. 500.
The liquidators is entitled to a remuneration of 3% on amount realized and 1 1/2 (1.5)% on the amount
paid to unsecured creditors other than preferential creditors. The remaining assets released is Rs.
52,000.
Prepare liquidators final statement of account. (2014 - QP)

8. Ali Ltd. Company went into liquidation on 31st March 2023 with the following liabilities:

- Secured creditors = Rs. 2,00,000 (Securities realized Rs. 2,50,000).

- Preferential creditors = Rs. 6,000.
- Unsecured creditors = Rs. 3,05,000.
The liquidators met liquidation expenses amounted to Rs. 2,520. The liquidators entitled for a
remuneration at 3% on amount realized including secured assets held by secured creditors and 1
1/2 (1.5)% of the amount distributed to unsecured creditors.
The assets (other than secured assets) realised is Rs. 2,60,000.
Prepare liquidators final statement of account.

9. Unlucky Ltd. went into voluntary liquidation. Its assets realized by Rs. 2,10,000 excluding the
amount realized by the sale of securities held by secured creditors.
From the following prepare liquidators final statement of Account.
Secured creditors Rs. 17,500 (Security realized Rs. 20,000), preferential creditors
Rs. 3,000, unsecured creditors Rs. 1,00,000, debentures (having floating charges on
assets) Rs. 1,25,000 liquidation expenses Rs. 2,500
liquidator remuneration is 3% on amount paid to unsecured creditors. (2018, 2023 - QP)

Smt. BHAGYASHRI N
Assistant professor
Seshadripuram College
Liquidation of Companies
10. The following particulars relates to vadigar ltd., which went into Voluntary liquidation.
Unsecured creditors (including Rs 60,000 preferential creditors) Rs 3,00,000

Debentures Rs 1,00,000

Assets Realized Rs 4,00,000

Secured creditors Rs 50,000

Prepare liquidator’s Final statement of account. (Sept. 2022- Qp)

11. Calculate Liquidator’s remuneration and amount available to pay unsecured Creditors
Balance of cash after paying preferential creditors Rs 2,10,000
Other unsecured creditors Rs 2,50,000
Liquidator’s remuneration is 5% on the amount paid to other unsecured creditors.

12. Calculate the amount of preferential creditors from the following information
• Income tax payable Rs 25,000
• Salaries and wages payable to 10 workers at Rs 10,000 per month for the last 3 months
• Remuneration to office clerk Rs 2,00,000
• compensation under the workmen's compensation act 1923 in respect of death of an employee
Rs 40,000 due.
• amount due to an employee from a provident fund for the welfare of the employee maintained
by the company Rs 20,000.

13. The capital of Omega Co limited was as follows

1000 preference shares of Rs 100 each fully paid
4000 equity shares of Rs 100 each fully paid
3000 equity shares of rupees 100 each Rs 85 paid.
The creditors were Rs 2,54,900 of which rupees 10,900 were preferential and Rs 54,000 fully
secured. The assets realised Rs 3,74,000 including those sold on behalf of fully secured creditors.
The cost of liquidation amounted to Rs 12,000 and the liquidato’s remuneration was 5% of the
amount realised (excluding security of creditors) and 3% on the amount distributed to unsecured
creditors. The liquidator made a call of Rs15 per share on the partly paid equity shares which was
duly paid except by one member holding 200 shares. prepare liquidators final statement

14. XYZ company went into liquidation with the following liabilities.
Secured creditors Rs 20,000 (securities realised Rs 25,000)
Unsecured creditors Rs 30,000 liquidator’s out of pocket expenses amounted to Rs 252.
Preferential creditors Rs 600.
The liquidator is entitled to a remuneration of 3% and the amounts realised (including securities in
the hands of creditors and one and half percent on the amount distributed to unsecured creditors. the
various assets (excluding securities in the hands of secured creditors) realised Rs 26,000. Prepare the
liquidators final account showing the compensation given to unsecured creditors.

15. A company went into voluntary liquidation on 31-3-2023. Their position was as follows.
2000 preference shares of Rs 100 each fully paid.
Smt. BHAGYASHRI N
Assistant professor
Seshadripuram College
Liquidation of Companies
4000 equity shares of Rs 100 each fully paid.
4000 equity shares of Rs 100 each Rs 75 paid
Unsecured creditors Rs 3,80,000.
Assets realised 6, 40,000.
liquidation expenses Rs 24,000. liquidation remuneration 5 % on the amount realised and 3% on the
amount distributed to unsecured creditors.
The liquidators made a call on the partly paid equity share which was duly paid. Prepare liquidator’s
final statement of account.

Smt. BHAGYASHRI N
Assistant professor
Seshadripuram College