10

Liquidation of Companies

We have seen that companies can be incorporated (formed) in accordance with the provisions of the Companies Act, 1956. Likewise, Companies can be wound up or liquidated as per the provisions of the Companies Act. Liquidation is a process by which the life of a company is brought to an end. In the process of winding up, a company’s assets are realized and applied in payment of debts. After all debts are discharged, the balance if any, will have to be paid to the shareholders in proportion to their contributions to the share capital. Modes of winding up, various steps involved in the process of liquidation, order of payment, preparation of Statement of Affairs, preparation of Deficiency or Surplus Account, Liquidator’s final statement of account are discussed in detail and accounting treatment is explained in various illustrations in this chapter.

10.1 MEANING AND SALIENT FEATURES OF LIQUIDATION

Liquidation or winding up is a process by which a company is dissolved. As a student of corporate accounting, you are aware that a company is an artificial person and is created in accordance with the provisions of the Companies Act. Similarly, a company can be wound up, i.e. liquidated, in compliance with the legal provisions. Liquidation is a legal process by which the corporate life of a company is brought to an end.

Liquidation is a lengthy procedure in which the dissolution of a company is carried out by realizing its assets and paying its debts (out of the proceeds of realized assets) and distributing the balance, if any, to the members in proportion to their contribution. By liquidation, the life of a company will be brought to an end.

10.1.1 Salient Features

The following are the salient features of liquidation:

1. Any company can be liquidated legally. It is immaterial whether the company is solvent or insolvent. This means that even solvent companies may be liquidated.
2. Once the liquidation takes place, that company will be closed down forever.
3. During the process of liquidation, assets of the company are realized. Out of realized assets, claims of creditors are discharged. The balance, if any, is distributed to the members of the company in proportion to their contributions.
4. In the liquidation procedure, the role of a person—the liquidator—is important. The person with whom the job of liquidation is entrusted with is known as liquidator. The job of liquidator is to realize the assets and settle the claims of creditors and other liabilities.
5. Modes of liquidation: The process of liquidation may take place in any one of the following ways:
   1. Compulsory winding up—By the Court
   2. Voluntary winding up: (i) Members’ voluntary winding up and (ii) Creditors’ voluntary winding up
   3. Winding up subject to supervision of Court
      1. Compulsory winding up: (Section. 433) (Winding up by a court):

         This mode of liquidation takes place when

         1. The company passes a special resolution (or)
         2. It makes default in delivering the statutory report to the Registrar, or in holding the statutory meeting (or)
         3. It does not commence business within a year from its incorporation or suspends its business for the whole year (or)
         4. It is unable to pay its debt (or)
         5. Its membership reduces below 7 in a public company (below 2 in a private company) (or)
         6. It is just and equitable in the Court’s opinion that it should be wound up
      2. Voluntary winding up (Section 484-521):

         When a company is wound up at the instance of either the members or creditors, such winding up is known as voluntary winding up. These are two kinds:

         1. Members’ voluntary winding up: When the members of the company decide to wind up despite its sound financial condition, the winding is termed as members’ voluntary winding up.’ This mode of liquidation takes place when a declaration of company’s solvency, verified by an affidavit, is delivered to the registrar, by its directors.
         2. Creditors’ voluntary winding up: When the declaration of solvency is not made while the delivery was made to the registrar, then it is called “creditors’ voluntary winding up”. In this case also, a copy of resolution passed by the creditors, presided over by one of its directors, has to be sent to the registrar.
      3. Winding up subject to supervision of the Court: Section 522-527. When a company passes a resolution for “voluntary winding up”, and the Court, upon an application made by a creditor, pass an order to that effect. Such an order is passed by the Court if the situation warrants. The whole procedure of winding up is carried out under the supervision of the Court, by appointing its own official liquidator.
6. When winding up is carried out, the shareholders are called “contributories”: Section 428 defines a contributory as, “every person liable to contribute to the assets of a company in the event of its being wound up and includes any holder of shares which are fully paid-up.”

   This term includes the holder of fully paid shares. It also means any person liable to contribute to the assets of company. It includes all present and all past shareholders who have ceased to be members with in 1 year immediately preceding the commencement of the process of liquidation. The contributories are categorized into two lists:

   • List A—includes the present shareholders
   • List B—includes the past shareholders

   The liability of the contributory is subject to the following:

   1. A contributory is not liable to pay more than the unpaid value of shares held by him.
   2. A past member is not liable to contribute unless the present members have been called upon to contribute to the fullest extent to which they can so be asked.
   3. A past member who has ceased to be a member for at least one year before the commencement of liquidation is not liable to contribute.
   4. A past member is not liable in respect of any liability or debt of the company incurred after he ceased to be a member.
   5. A shareholder (contributory) cannot set off any debt due to him from the Company against calls made on him for paying unpaid capital. He must first pay the calls. His claim is to be considered at par with other members and not with creditors.
7. Adjustment of rights of contributories: In the event of winding up, the liquidator should adjust the rights and interest of contributories in the following manner:
   1. When some of the shares are fully paid-up and others are only partly paid-up, the liquidator may make a call on those shareholders whose shares are already paid-up so that the amount finally contributed by shareholders of any one class become equal as among themselves.
   2. The distribution of surplus, if any, among contributories should be in accordance with the rights provided in the Articles of Association.
   3. After returning payments on capital, if any surplus remains, it has to be distributed only to equity shareholders unless it has been specifically mentioned that preference shares are participating shares.

10.2 ORDER OF PAYMENTS

The company’s debts and liabilities should be discharged out of realized assets in the following order:

1. Secured creditors: The name itself reveals that these type of creditors hold some security for debt due to them from the company such as pledge, mortgage, charge or lien. Their rights are discussed in Section 529 (A).
2. Income tax and sales tax dues.
3. Preferential payments: These are discussed in Sections 529 (4) and 530.
4. Cost of liquidation (Cost of winding up, liquidators remuneration, legal charges, etc.)
5. Debenture holders having a floating charge on the assets of the company.
6. Unsecured creditors: After preferential creditors, unsecured creditors attain priority. In case the amount is insufficient, these will be paid proportionately from the balance.
7. Preference shareholders.
8. Equity shareholders.

In case any surplus remains after making payments as mentioned above, it will be distributed among the equity shareholders unless specifically mentioned that preference shares are participating shares.

If the preference shares are participating, they are entitled to have a right to participate in such surplus.

10.2.1 Overriding Preferential Payments

Companies Amendment Act, 1985 has introduced the factor “overriding preferential payments”.

As per Section 529 (1), the security of every creditor is deemed to be subject to “Pari Paasu” charge in favour of the workmen to the extent of workmen’s portion.

Section 529 (A) reads as follows:

1. Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company-(a) workmen’s dues; and (b) debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to the sub-section (1) of Section 529 PARI PAASU with such dues, shall be paid in priority to all other debts.
2. The debts payable under clause (a) and clause of sub-section (1) shall be paid in full unless the assets are insufficient to meet them, in which case they shall abate in equal proportions.

Illustration 10.1

Model: Overriding preferential payments

The value of the security of a secured creditor of a company is 5,00,000 and the amount owing to him is 15,00,000. Dues to the workers remaining unpaid amount to 5,00,000. State how the security will be shared by the secured creditor and workmen.

Solution

 

Step 1:	Ratio of Dues Between Secured Creditors and Workmen	=	5,00,000:15,00,000
Step 2:	Ratio of the Security and Workmen to Be Shared	=	5:15 (or) 1:3
Step 3:	Workers Claim for Security	=	1/4 × 5,00,000
		=	1,25,000

As per Section 529(1), the security of every creditor is subject to Pari Paasu in favour of the workmen to the extent of workmen’s portion therein.

 

Step 4:	Hence, Workmen Dues that Constitute	=	5,00,000 − 1,25,000
	Overriding Preferential Treatment	=	3,75,000
Step 5:	Overriding Preferential Treatment for Secured Creditor	=	( 15,00,000 − 3,75,000) or
	(As per Pari Paasu Clause)		1,25,000
		=	11,25,000 or 1,25,000
		=	1,25,000
Step 6:	Note: Least of 11,25,000 and 1,25,000 is 1,25,000.

Illustration 10.2

Model: Overriding preferential payments (Pari Paasu clause)

Determine the mode of sharing the security and the extent to which the balance of amounts rank “Pari Paasu” as overriding preferential payments in each of the following alternative cases:

 

(I)	Workmen’s Dues	50,000
	Secured Creditors	1,50,000
	Value of Security	20,000
(II)	Workmen’s Dues	50,000
	Secured Creditors	2,00,000
	Value of Security	2,25,000

Solution

Case I

 

Step 1:	Ratio of Dues Between Secured Creditors and Workmen	=	50,000: 1,50,000
Step 2:	Ratio of Security and Workmen to be Shared	=	50:150 (or) 1:3
Step 3:	Workmen’s Share	=	1/4 × 80,000 = 20,000
Step 4:	Secured Creditors’ Share	=	3/4 × 80,000 = 60,000
Step 5:	Overriding Preferential Payment for Workers	=	Dues − Share
		=
		=	30,000
Step 6:	Overriding Preferential Payment for Creditors	=	20,000 only

Explanation Note:

 

The balance not satisfied for creditors	=	1,50,000 – 60,000
	=	90,000
But the share of workmen is	=	20,000
This is less than 90,000.

Hence, only 20,000 will rank overriding, preferential payment for the creditors. It will rank Pari Paasu along with similar payment due to the creditors.

Case II

 

Step 1:	Ratio of Dues Between Secured Creditors and Workmen	=	50,000: 2,00,000
Step 2:	Ratio to be Shared	=	50:200 (or) 1:4
Step 3:	Workmen’s Share	=	1/5 × 2,25,000
		=	45,000
Step 4:	Secured Creditors Share	=	4/5 × 2,25,000
		=	1,82,000
Step 5:	Overriding Preferential Payment for Workers	=	50,000 − 45,000
Step 6:	Overriding Preferential Payments for Creditors	=	2,00,000 (Given) − 1,80,000 (Step 4) = 20,000

Explanatory note:

For creditors, unsatisfied amount is 20,000. This amount is less than 45,000—share of workers due in security.

Hence 20,000 will rank as overriding preferential, payment for the creditors and will rank Pari Paasu along with similar payment due to creditors, although workers will obtain 45,000 and 5,000 which will rank as overriding preferential payment.

Note: Overriding preferential payments must be paid before the payment of preferential creditors.

10.2.2 Preferential Payments (or) Preferential Creditors

These payments have to be made before the payments of unsecured creditors except the cost of liquidation and the remuneration payable to the liquidator.

Some preferential creditors or payments are as follows:

1. All revenues, taxes, cess and rates due to the central or state government or to a local authority payable within 12 months next before the commencement of winding up.
2. All wages or salaries or commission to an employee due for period not exceeding 4 months, within 12 months, prior to relevant date. This amount is limited to 20,000.
3. All accrued holiday remuneration payable to an employee.
4. All amount payable to an employee under ESIC (Employees Stare Insurance Corporation) during 12 months prior to relevant date, unless the company is wound up voluntarily for reconstruction and amalgamation purposes.
5. All amounts payable to an employee (other than workmen) under the Workmen’s Compensation Act unless the company is wound up for reconstruction and amalgamation.
6. All sums due to an employee from the Provident Fund Pension, Fund, Gratuity or any other fund maintained by the company for the welfare of the employees.
7. The expenses for any investigation held in pursuance of Section 235 or Section 237 in so far as they are payable by the company.

The above-mentioned debts rank equally among themselves.

The relevant date refers to the date of passing of resolution or date of the appointment of a provisional liquidator in case of compulsory winding up.

10.3 STATEMENT OF AFFAIRS

When the Court has passed a winding up order or appointed the official liquidator as provisional liquidator, the officers and directors of the company must submit a statement as to the affairs of the company in the prescribed form verified by an affidavit. This statement is known as statement of affairs.

The statement of affairs must be submitted to the liquidator within 21 days from the date of winding up order (or within such extended time not exceeding 3 months as the liquidator or the Court permits).

10.3.1 Contents of the Statement of Affairs

The statement of affairs contains the following particulars:

1. The assets of the company, stating separately the cash in hand and cash at bank and the negotiable securities
2. The debts and liabilities of the company
3. The names and addresses of its creditors, stating separately the amount of secured and unsecured debts
4. In the case of secured debts, particulars of the securities held by the creditors, their value and the debts on which they are given
5. The debts due to the company and names and addresses of the persons from whom they are due and the amount likely to be realized
6. Such other information as may be required by the official liquidator of the central government

The statement of affairs is open to inspection by any person stating in writing to be a creditor or contributory. This statement must always be verified by an affidavit. This should be prepared in the prescribed form, as set out by the Supreme Court.

The following is the specimen format:

 

In the High Court at………(or) in the District Court at…………Original Jurisdiction…………In the matter of Companies Act, 1956.

 

Statement of affairs of the above named Company as on the…………day of…………20…, the date of winding-up order (or the order appointing Provisional Liquidator or the date directed by the Official Liquidator).

I/We…………of………….do solemnly affirm and say that the statement made overleaf and the several lists here unto annexed marked “A” to “I” are to the best of my/our knowledge and belief a full, true and complete statement as to the affairs of the above-named company, on the…………day of………….20………the date of winding-up order (or the order appointing Provisional Liquidator on the date directed by the Official Liquidator), and that the said Company carries/carried on the following business:

(Here set out nature of company’s business)

Solemnly affirmed at…………before me…………Signature(s) this…………day of…………20…………

The Commissioner is particularly requested, before swearing the affidavit, to ascertain that the full name, address and description of the deponent are stated, and to initial any crossing out or other alterations in the printed form. A deficiency in the affidavit in any one of the above respects will entail its refusal by the Court, and will necessitate its being re-sworn.

Note: The several lists annexed are not exhibits to the affidavit.

10.3.2 Statement of Affairs and Lists to Be Annexed

Statement as to the affairs of…………Ltd., on the…………day of…………20………, being the date of the winding up order (or order appointing Provisional Liquidator of the date directed by the official Liquidator as the case may be) showing assets at estimated realizable values and liabilities expected to rank:

Summary of Gross Assets
Gross Realizable Value of Assets Specifically Pledged		…
Other Assets		…
Gross Assets		…
(e)	Liabilities
Gross	(To Be Deducted from Surplus or Added to Deficiency as the Case May Be)
Liabilities
…	Secured Creditors (As per List B) to the Extent to Which Claims Are Estimated to Be Covered by Assets Specifically Pledged (Item (a) or (b), whichever is less) (Insert in “Gross Liabilities” column only)
…	Preferential Creditors (As per List C)
	Estimated Balance of Assets Available for Debenture Holders by a Floating
	Charge and Unsecured Creditors
…	Debenture Holders Secured by a Floating Charge (As per List D)
…	Estimated Surplus/Deficiency as Regards Debenture Holders
…	Unsecured Creditors (As per List E)	…
…	Estimated Unsecured Balance of Clams of Creditors Partly Secured on Specified Assets, Brought from Preceding Page (c)	…
…	Trade Accounts	…
…	Bills Payable	…
…	Outstanding Expenses	…
…	Contingent Liabilities (State Nature) Estimated Surplus (Deficiency) as Regards Creditors (being the Difference Between Gross Assets Brought from Preceding Page (d) and Gross Liabilities as per Column (e))	…
	Issued and Called-up Capital:	…
	Preference Shares of … Each.…
	Called up (As per List F)
	…… Equity Shares of …… Each ……	…
	Called-up [As per List G]	…
	Estimated Surplus/Deficiency as Regards Members [As per List H]	…

One can grasp the following two vital factors from the statement of affairs:

1. Estimated surplus/deficiency as regards creditors
2. Estimated surplus/deficiency as regards members

Preparation of statement of affairs involves the preparation of following lists:

 

1.	List A :	This list includes all assets which are not specifically pledged. It reflects only the values realizable.
2.	List B :	This includes all assets which are specifically pledged.
		With the help of these two lists—List A and List B—a summary of gross assets is shown.
3.	List C :	This is a list of preferential creditors and the amounts due.
4.	List D :	This is a list of debenture holders having a floating charge on the assets of the company.
5.	List E :	This list contains names of unsecured creditors and the amounts due.
6.	List F :	This gives the amount due to preference shareholders.
7.	List G :	This is a list of equity shareholders including called-up equity capital.
8.	List H :	This is a separate statement showing how surplus or deficiency in the statement of affairs arose (format shown separately).

Important points to be noted in the preparation of statement of affairs:

1. Calls-in-arrears: The amount recoverable on calls-in-arrears is shown in List A. The amount that cannot be recoverable is to be shown as deduction from called-up capital.
2. Debentures: In the absence of any specific information, debentures are treated as having a floating charge.
3. Uncalled capital: This is to be shown as a Note at the end of statement of affairs.
4. Unclaimed dividend: It is included in List E.
5. Contingent liabilities: The portion, which is expected to materialize, has to be added to unsecured creditors.

10.4 STATEMENT OF DEFICIENCY OR SURPLUS (LIST H)

This statement is prepared to explain how the company did incur loss. The net result, i.e., surplus/deficiency, is shown in a nutshell. It is divided into two parts. The first part contains the items that increase deficiency. The second part includes all profits.

When the total of the first part is greater than the second part, it results in deficiency. On the other hand, when the total of the second part exceeds the first part, it results in surplus.

The deficiency shown in this account should agree with the one shown in the statement of affairs.

The period covered by this account should commence on a date not less than 3 years before the date of winding-up order (or the order appointing provisional liquidator, or the date directed by the official liquidator) or, if the company has not been incorporated for the whole of that period, the date of formation of the company, unless the official liquidator otherwise agrees.

10.4.1 Presented Form of Deficiency/Surplus Account

10.4.1.1 List H—Deficiency or Surplus Account

The following are the items contributing to Deficiencyor reducing surplus

 

1.	Excess (if any) capital and liabilities over assets on the………20………as shown by the balance sheet (copy annexed)	…
2.	Net dividends and bonus declared during the period, from………20………to the date of settlement.	…
3.	Net trading losses (after charging items shown in note to below) for the same period.	…
4.	Losses other than trading losses written off or for which provision has been made in the books during the same period (give particulars or annexe schedule).	…
5.	Estimated losses now written off or for which provision has been made for the purpose of preparing the statement (give particulars or annexe schedule).	…
6.	Other items contributing to deficiency or reducing surplus.	…

The following are the items reducing deficiency or contributing to surplus:

 

1.	Excess (if any) of assets over capital and liabilities or the………20……as shown in the balance sheet (Copy annexed).	…
2.	Net trading profits (after charging items shown in note below) for the period from……20……to the date of settlement.	…
3.	Profits and income other than trading profits during the same period (give particulars or annexe schedule)	…
4.	Other items reducing deficiency or contributing to surplus. Deficiency/Surplus (As shown in statement of affairs):

10.4.2 Note as to Net Trading Profit and Losses

Particulars are to be inserted here (so far as applicable) of the items mentioned below, which are to be taken into account in arriving at the amount of net trading profits or losses shown in this account.

Provision for depreciation, renewals, diminution, in value of fixed assets.

Charges for Indian income tax and other Indian taxation on profits.

 

Interest on debentures and other fixed loans, payments to directors made by the company and required by law to be disclosed in the accounts		…
Exceptional or Non-recurring Expenditure:	…
Less : Exceptional or Non-recurring Receipts Balance,
Being Other Trading Profits or Losses)	…
Surplus Account Above.	…	…
Signature:
	Dated………	20………

Illustration 10.3

Model: Statement of affairs preparation

The Sunset Ltd. is to be liquidated. Their summarized balance sheet as at 30 September 2010 appears as follows:

Contingent liabilities are as follows:

 

For Bills Discounted	50,000
For Excise Duty Demands	75,000

On investigation, it is found that the contingent liabilities are certain to devolve and the assets are likely to be realized as follows:

 

Land & Building	5,50,000
Other Fixed Assets	9,00,000
Current Assets	17,50,000

Taking the above into account, prepare the statement of affairs.

Solution

 

Illustration 10.4

Model: Statement of affairs

The following information is extracted from the books of X Ltd. on 30 June 2010 on which date or winding-up order was made:

 

	.
Equity Share Capital 40,000 Shares of 10 Each	4,00,000
10% Preference Share Capital 6,000 Shares of 100 Each	6,00,000
Calls-in-arrears on Equity Shares (Estimated to Produce 4,000)	8,000
9% First Mortgage Debentures, Secured by a Floating Charge on the Whole of the Assets of X Ltd.	4,00,000
Creditors Fully Secured (value of Shares in AB Ltd. 80,000)	70,000
Creditors Partly Secured (Value of Shares in CD Ltd. 40,000)	80,000
Preferential Creditors	15,000
Bank Overdraft, Secured by a Second Charge on the Whole Assets of the Company	40,000
Unsecured Creditors	5,20,000
Estimated Liability on Bills Discounted	20,000
Cash in Hand	4,050
Book Debts    Good	75,000
Doubtful (Estimated to Produce 40%)	15,000
Bad	9,000
Stock in Trade (Estimated to Produce 1,19,350)	1,44,000
Freehold Land & Buildings (Estimated to Produce 3,91,000)	3,30,000
Plant & Machinery (Estimated to Produce 1,06,000)	1,50,000
Fixtures & Fittings (Estimated to Produce 15,000)	25,000

Prepare a statement of affairs

1. As regards creditors
2. As regards contributories

Solution

 

Illustration 10.5

Model: Statement of affairs and deficiency account

Mr. Eswar is appointed liquidator of a company in voluntary liquidation on 1 July 2010 and the following balances are extracted from the books on that date:

The assets are revalued as follows:

 

Investments at	16,000
Stock in trade at	8,000
Machinery at	2,40,000
Leasehold properties at	2,92,000

Bad debts are 8,000; Doubtful debts are 16,000, estimated to realize 8,000.

The bank overdraft is secured by deposit of title deeds of leasehold properties.

Preferential creditors for tax and wages are 4,000.

Telephone rent owing is 320.

You are required to prepare:

1. Statement of affairs as regards creditors and contributories
2. Deficiency/surplus account

Solution

Assumption: Calls-in-arrears will be realized fully.

 

Here in both the cases, surplus = 1,26,680.

10.5 LIQUIDATOR’S FINAL STATEMENT OF ACCOUNT

Liquidator’s prime duty is to realize the assets of the company and to make payment to creditors. For this purpose, he has to prepare a statement how much he realized and how the same was paid to the claimants. This will be in the form of cash A/c. Such a statement of account is known as liquidator’s final statement of account.

After its preparation, the liquidator has to submit it to the court in case of compulsory winding up and to the company in case of voluntary winding up.

As it resembles a cashbook, this statement of account consists of:

1. Amounts realized by the liquidator (all receipts)
2. Payment of various liabilities (all payments)

10.5.1 Amounts Realized by the Liquidator

The following are the sources to realize amount or liquidation:

1. Cash in hand and at bank: Not much effort is needed on the part of a liquidator to realize amount from this source.
2. Sale proceeds of assets: The liquidator has to realize the assets of the company as well as from debtors of the company.
3. Surplus from secured creditors: For secured creditors, payment may be made to them on their claims or up to the amount realized by sale of securities held by them, whichever is less.

   In case the creditor disposes off the securities and if the realization exceeds their claims, then the excess or surplus is handed over to the liquidator. Surplus is to be shown as receipt but payment to creditors is not to be shown in the liquidator’s final statement of account. On the other hand, realization is less than the claim, such deficit is to be added to the unsecured creditors.

4. Contributions by contributories: The liquidator can make a call on partly paid shares to meet inevitable payments.

10.5.2 Payment of Various Liabilities

10.5.2.1 Liquidator’s Remuneration

A liquidator is entitled to get remuneration for his services. Generally his remuneration is in the form of commission based on assets realized and on payments made to unsecured creditors. While determining his commission, the following factors have to be taken into account.

1. Cash in hand and at bank: Not much effort is needed on the part of a liquidator to realize amount from this source.
2. Assets given as security of fully and partly secured creditors: For calculating commission, the surplus realized from such assets should be taken into account.
3. Preferential creditors: Preferential creditors are like unsecured creditors, and the commission is based on the amount paid to them.
4. Deficiency: The amount left to pay unsecured creditors may be less than the required amount. In such cases, the amount left has to be divided between creditors and liquidators. This is explained as follows:

    

   Creditors to be Paid	1,00,000
   Commission to Be Given on the Amount Paid to Creditors	= 10%
   Total Amount Available	= 88,000

   Then commission to the liquidator will be calculated as

   

   i.e., Apply this formuls:

   Commission = Amount avaible to unsecued creditor

5. When the amount is sufficient, it can be calculated as

   Commission = Amount to unsecured creditors

6. Calculation of liquidator’s remuneration or the payment made to shareholders of the company:

   Remuneration of Liquidator = Balance Amount Available to Contributores

   

Balance available to contributories is determined as:
Total of All Amounts on the Debit Side of Liquidator’s Final Statement of A/c	……

 

Less:
(i) Legal Expenses	…….
(ii) Liquidator’s Remuneration:	…….
On Assets Realized …….
On Payments to Preferential Creditors	…….
On Payments to Unsecured Creditors	…….
(iii) Liquidation Expenses	…….
(iv) Payments on Debentures	…….
(v) Payment to Preferential Creditors	…….
(vi) Payment to Unsecured Creditors	…….	xx
Balance Amount Available to Contributories		xxx

Illustration 10.6

Model: Liquidator’s remuneration

The liquidator of a company in voluntary liquidation is entitled to a remuneration of 5% on the amount realized (excluding the cash in hand) and at 2% on the amount distributed to the unsecured creditors. Unsecured creditors including preferential creditors of 10,000 amounted to 50,000.

Debenture holders were paid 60,000 together with interest. Preferential creditors were paid in full. 1,000 was spent as costs of liquidation.

Cash in hand was 2,000 and assets realized 93,000. Find out the liquidator’s total remuneration.

Solution

 

Assets Realized (Given)	93,000	−	−
5% on Assets Realized	−	−	4,650
Total Amount Available for Distribution (Given)	−	95,000	−
( 93,000 + 2,000 Cash)
Less: Liquidation Expenses	1,000	−	−
Part of Liquidator’s Remuneration	4,650
Debenture Holders	60,000	65,650	−
∴ Amount Available for Distribution =		29,350
2% on Amount Distributed to Unsecured Creditors
Apply the formula:
Liquidator’s Total Remuneration:

Illustration 10.7

Model: Liquidator’s remuneration

A liquidator is entitled to receive remuneration @ 2% of the assets realized and 3% on the amount distributed among the unsecured creditors. The assets realized are 50,00,000 against which payments were made as follows:

 

Liquidation Expenses	20,000
Preferential Creditors	70,000
Secured Creditors	30,00,000
Unsecured Creditors	20,00,000

Calculate the total remuneration payable to the liquidator.

Solution

 

Step 1:	Liquidator’s Commission on Assets Realized
		1,00,000
Step 2:	Liquidator’s Commission on Amount Paid to Preferential Creditors	2,100
Step 3:	Liquidator’s commission on amount distributed among unsecured creditors.
		52,657
Step 4:	Total Liquidator’s Commission (Step 1 + Step 2 + Step 3)	1,54,757
Step 5:	Amount Available to Unsecured Creditor is Calculated as Follows: (Find Out and Transfer to Step 3)

 

1. Total Assets Realized (Given)		50,00,000
2. Less:
(i) Liquidation Expenses	20,000
(ii) Preferential Creditors	70,000
(iii) Secured Creditors	30,00,000
(iv) 2% Commission on Assets Realized	1,00,000
(Ref: Step 1)
(v) 3% Commission on Amount Paid to	2,100	31,92,100
Preferential Creditors (Ref: Step 2)
3. Amount Available to Unsecured Creditors
Including Remuneration on Payment to Unsecured Creditors =		18,07,900

 

 

*Here, state whether the winding up is a members’ or creditors’ voluntary winding up or a winding up under the supervision of the Court. If under the supervision of the Court, mention the number of the petition in which the order was made and the date of the order.

** Strike out what does not apply.

Liquidator’s Statement of Account of the Winding up (Members’/Creditors’ Voluntary Winding up)

 

1. Name of the company………Ltd.
2. Nature of proceeding
3. Date of commencement of the winding up
4. Name and address of the liquidator

Statement showing how the winding up has been conducted and the property of the Company has been disposed off from………20…. (Commencement of winding up) to……20……(Close of winding up)

1. The following assets estimated to be of ……have proved to be unrealizable:

   (Give details of the assets which have proved to be unrealizable)

    

2. Amount paid into the company’s liquidation A/c in respect of:

    

   (a)	Unclaimed dividends payable to creditors in the winding up	……
   (b)	Other unclaimed distributions in the winding up	……
   (c)	Moneys held by the company in trust in respect of dividends or other sum due before the commencement of winding up to any person as a member of the company.	……

    

3. Add here any remarks the liquidator thinks desirable.

    

   Dated This……Day of……20……	(sd)……
   	Liquidator

I declare that the above statement is true and contains a full and accurate account of the winding up from the commencement to the close of the winding up.

 

Dated this……day of……20……
	(sd)……
	Liquidator

Illustration 10.8

Model: Liquidator’s final statement of A/c

The following particulars relate to a limited company which went into voluntary liquidation:

 

Preferential Creditors	1,00,000
Unsecured Creditors	2,32,000
6% Debentures	1,20,000

The assets realized 3,20,000. The expenses of liquidation amounted to 6,000. and the liquidator’s remuneration was agreed at 2½% on the amount realized and 2% of the amount paid to unsecured creditors including the preferential creditors.

Show the liquidator’s final statement of account.

Solution

Note: First, liquidator’s remuneration is calculated and only then, the final statement of account may be prepared to avoid, confusion in determining the unsecured creditors value as amount is not sufficient to pay off unsecured creditors in full.

 

	*1 Liquidator’s Remuneration:
(i)	2½% on Assets Realized—3,20,000	= 8,000
(ii)	2% on Preferential Creditors—1,00,000	= 2,000
(iii)	2% on Unsecured Creditors:
	( 3,20,000 − 8,000 − 2,000 − 6,000 – 1,20,000 – 1,00,000)	= 1,647
		= 11,647 -

 

[In this question, unsecured creditors is 2,32,000 but the amount available, i.e., 84,000, is not sufficient to pay off unsecured creditors in full. Hence, the remuneration is also calculated on this amount and not on 2,32,000.]

Illustration 10.9

Model: Liquidator’s final statement of A/c

ED Ltd. went into liquidation with the following liabilities:

 

Secured Creditors	‒	50,000
Preferential Creditors	‒	2,400
Unsecured Creditors	‒	1,22,000
Liquidation Expenses	‒	1,000

Securities realized 1,00,000; the liquidator is entitled to a remuneration of 3% on the amount realized (including securities in the banks of secured creditors) and 1.5% on the amount distributing to the unsecured creditors. The various assets (excluding the securities in the hands of the secured creditors) realized 1,04,000.

Prepare the liquidator’s statement of account showing the payment made to unsecured creditors.

 

[C.S (Inter). Modified]

Solution

Calculations

 

*Calculation of Liquidator’s Remuneration:
(i)	3% on Assets + Securities Realized
	3% of 1,04,000 + 1,00,00	6,120
(ii)	1.5% or Preferential Creditors, i.e. 2,400	36
(iii)	1.5% or Payments to Unsecured Creditors
	1,04,000 + 20,000 (Secured Creditors Surplus)
	(1,00,000 − 80,000) − 1,000 − 2,400 − 6,156)	1,544

 

Illustration 10.10

Model: Liquidator’s final statement of A/c interest on debentures and calculation of cash availability

Sibi Co. Ltd. went into liquidation on 31 December 2010. Its capital is divided into 40,000 shares of 50 each. Its assets and liabilities on this date were as follows:

Cash in hand: 3,000; Realized from stock: 1,18,400; from book debts: 1,96,800; from furniture: 4,200; Investment with bank for overdraft: 19,600; Unsecured creditors: 2,15,100; Preferential creditors: 21,180; Bank overdraft: 16,000; 6% Debentures having a floating charge of 1,76,000.

Bank, after deducting its amount from investments of 19,600, gave the surplus to the liquidator. Debentures were paid on 30 June 2011 with interest.

Remuneration of liquidator; 3% of the net amount realized (excluding the amount given to secured creditors but including cash in hand); 2% on the amount paid to unsecured creditors (excluding preferential creditors). Cost of liquidation is 4,060. Prepare liquidator’s final statement of account.

Solution

 

STAGE I:	Calculation of Total Cash Available:
	Assets Realized: ( 3,000 + 1,96,800 + 1,18,400 + 4,200) + ( 19,600 − 16,000)	3,26,000
STAGE II:	Calculation of Cash Available for Unsecured Creditors:
	, 26,000 −(3% of 3,26,000 − 4,060 − 1,76,000 −( 1,76,000 × ) − 21,180)	1,09,700

 

STAGE III:	Liquidator’s Remuneration:
	3% on 3,26,000	=	9,780
	2% on 1,07,550	=	2,150
STAGE IV:	Preparation of Final Statement of Account:

 

Illustration 10.11

Model: Final statement of account calls-in-arrears

From the data relating to a company (in voluntary liquidation), you are asked to prepare liquidator’s final statement of account:

1. Cash with liquidator (after all assets are realized and secured creditors and debenture holders are paid) is 3,36,900
2. Preferential creditors to be paid are 15,000
3. Other unsecured creditors are 1,07,500
4. 2,000 6% Preference shares of 100 each, fully paid
5. 1,000 Equity shares of 100 each, 75 per share paid-up
6. 3,000 Equity shares of 100 each, 60 per share paid-up
7. Liquidator’s remuneration 2% on preferential and other unsecured creditors
8. Preference dividends were in arrears for 2 years

[B.Com Madurai Kamaraj Modified]

Solution

Note: As different classes of shares are given with varied calls-in-arrear, calculation of amount receivable from equity shareholders and payable to equity shareholders is to be carried out as follows:

 

Step 1:	Assets Realized (Given as Cash with Liquidator)		3,36,900
Step 2:	Less: Payments:
	(i) Liquidator’s Remuneration 2% on (15,000 + 1,07,500)	2,450
	(ii) Preferential Creditors	15,000
	(iii) Unsecured Creditors	1,07,500
	(iv) Preference Shareholders [(2,000 × 100) + 6% of 2,00,000]	2,24,000	3,48,950
Step 3:	Amount Required for Preference Shareholders:		12,050
Add:	Amount Payable to Equity Shareholders:
	(i) 1,000 Equity Shares @ 75 (Paid-up)		75,000
	(ii) 3,000 Equity Shares @ 60 (Paid-up)		1,80,000
Step 5:	Total Loss to Be Borne by Equity Shareholders =		2,67,050
Step 6:	Number of Equity Shares = (1,000 + 3,000) = 4,000
Step 7:	Loss per Equity Share

Step 8:	Amount Receivable per Share	=	(Paid-up Value – Loss per Share)
	Amount Receivable on 3,000 Shares	=	3,000 ( 60 − 66.7625)
		=	3,000 ( 6.76250)
		=	20,287.50
Step 9:	Amount Payable per Share	=	(Paid-up value – Loss)
	Amount Payable on 1,000 Shares	=	1,000 ( 75 − 66.7625)
		=	1,000 ( 8.2375)
		=	8237.50

Assumption: Preference dividend is declared but not paid. It is in arrears for 2 years.

Now, liquidator’s final statement of account is to be prepared as follows:

 

 

Illustration 10.12

Model: Adjustment of rights of contributories

Beta Ltd. went into voluntary liquidation. The details regarding liquidation are as follows: Share Capital:

1. 1,000 8% Preference shares of 100 each (fully paid-up)
2. Class A—1,000 equity Shares of 100 each ( 75 paid-up)
3. Class B—800 Equity shares of 100 each ( 60 paid-up)
4. Class C—700 Equity shares of 100 each ( 50 paid-up)

Assets including machinery realized: 2,10,000; and liquidation expenses amount to 7,500.

Beta Ltd. has borrowed a loan of 25,000 from Alpha Brothers against the mortgage of machinery (which realized 40,250). In the books of the company, salaries of four clerks for four months at the rate of 250 per month and salaries of four peons for 3 months at the rate of 150 per month are outstanding. In addition to this, the company’s books show the creditors worth 41,200. Prepare liquidator’s statement of receipts and payments.

Solution

Surplus available to equity shareholders has to be calculated. Prior to this, total preferential creditors are to be determined.

 

STAGE I:	Calculation of Total of Preferential Creditors:
	(i) Salary of Clerks: 4 × 250 × 4 months	=	4,000
	(ii) Salary of Peons: 4 × 150 × 3 months	=	1,800
	Total		5,800
STAGE II:	Adjustment of Rights of Contributories:
	(a) Determination of Surplus:

 

Step 1:	Assets Realized		2,10,000
Step 2:	Less: (i) Liquidation Expense	7,500
	(ii) Preference Creditors (Ref: Stage I)	5,800
	(iii) Secured Creditors	25,000
	(iv) Unsecured Creditors	41,200	79,500
	Balance:	79,500	1,30,500
Step 3:	Capital to be Returned to Preference Shareholders 1,000 × 100		1,00,000
Step 4:	Surplus (Available to Equity Shareholders)		30,500
	(b) Calculation of Deficiency:
	Equity Share Capital to be Returned:
Step 1:	1,000 Shares of 75 per Share (Paid-up)		75,000
Step 2:	800 Shares of 60 per Share (Paid-up)		48,000
Step 3:	700 Shares of 50 per Share (Paid-up)		35,000

 

Step 4:	Total to be Returned (Step 1 +Step 2 + Step 3)	=	1,58,000
Step 5:	Less: Surplus Available (Ref: Stage II Step 4)	=	30,500
Step 6:	Deficiency (To Be Borne by Equity Shareholders)	=	1,27,500
STAGE III:	Deficiency Distribution for Each Class of Shares:
Step 1:	Percentage of Defi ciency:

Step 2:

STAGE IV:	Return of Amount for Each Class of Share:
Step 1:	Return of A Class Share	24,000
	24 × 1,000 shares
Step 2:	Return of B Class Share	7,200
	9 × 800 shares
Step 3:	Receipt of C Class Shares	700
	1 × 700 shares
Stage V:	Preparation of Liquidator’s Final Statement of Account:

 

Illustration 10.13

Model: Deficiency distribution—amount receivable from/payable to equity shareholders

Given below is the balance sheet of ABC Ltd. as on 1 August 2010 on which date it goes into liquidation:

The assets were realized as follows:

 

(i) Stock of Raw Materials Realized by Bank:	60,000
(ii) Other Stocks:	1,60,000
(iii) Remaining Assets:	40,000

The liquidator is entitled to a fixed remuneration of 4,000 plus 2% of the gross amounts realized by him. Other costs and charges amounted to 22,000. Equity shares carry the same rights, regardless of the amount paid, as far as the capital repayment is concerned.

Show the liquidator’s final statement of account.

Solution

 

STAGE I:	Calculation of Amount Due to Unsecured Creditors:
	(i) Unsecured Dues as Given in the Question	2,03,600
	(ii) Add: Bank Loan Not Covered by Security	16,000	2,19,600
	( 76,000 − 60,000)
	(iii) Less: Balance Amount Available After Paying to Liquidator’s		1,77,600
	Remuneration, Expenses and Preferential Creditors
	(iv) Amount Payable to Unsecured Creditors		42,000

STAGE II:	Calculation of Deficiency:
	(i) Add: Amount Payable to Preference and Equity Shareholders	5,18,000
	(ii) Deficiency (To Be Borne by Equity Shareholders)
	(Total loss)
STAGE III:	Calculation of Loss per Equity Share:
	Loss per Equity Share
STAGE IV:	Distribution of Deficiency Among Different Classes of Shares:

STAGE V:	Calculation of Amount Receivable/Payable to Shareholders:
Step 1:	Amount Receivable on 20,000 Equity Shares: 20,000 × 3	=	60,000
Step 2:	Amount Receivable on 40,000 Equity Shares: 40,000 × 5	=	2,00,00
Step 3:	Amount Payable on 10,000 Equity Shares: 10,000 × 2	=	20,000
	Less: Calls-in-arrears	=	2,000
			18,000

 

Illustration 10.14

Model: Calls-in-arrear and calls-in-advance and calculation of deficiency

The position of Ess Ltd. in liquidation is as follows:

    Issued shares capital:

   3,000, 6% Preference shares of 100 each, fully paid (arrear of dividend of one year)

   3,000, Equity shares of 50 each, fully paid.

   3,000, Equity shares of 40 each, 30 paid;

   Calls-in-arrear: 12,000;

   Calls-in-advance: 18,000;

Cash left after making payments to creditors but before making any call: 3,48,000.

You are required to prepare liquidator’s final statement of account.

What will be the position if cash in hand is 4,02,000? Assume Articles include the provision relating to payment of preference dividend in priority to the equity capital.

Solution

A: When Cash in Hand is 3,48,000:

 

STAGE I:	Calculation of Total Amount to Be Paid (Deficiency):
Step 1:	Amount to Be Paid on Preference Shares: (3,000 × 100)		3,00,000
Step 2:	Add:
	(i) Amount to Be Paid on Pref. Dividend		18,000
	6% on 3,00,000 for 1 year
	(ii) Amount to Be Paid on 50 Equity Capital		1,50,000
	(3,000 × 50) Fully Paid
	(iii) Amount to Be Paid on 40 Equity Capital
	3,000 × 30 Paid	= 90,000
	Less: Calls-in-Arrear	= 12,000
		= 78,000
	Add: Calls-in-Advance	18,000	96,000
Step 3:	Total Amount (Step 2 [i + ii + iii] + Step 1	=	5,64,000
Step 4:	Less: Cash in Hand (As Given)	=	3,48,000
Step 5:	Total Deficiency (Step 3 – Step 4)	=	2,16,000
STAGE II:	Calculation of Percentage of Deficiency:

STAGE III:	Deficiency Distribution, i.e., Actual Loss Suffered:
	(i) 50 Equity Shares Will Suffer
	(ii) 40 Equity Shares Will Suffer
STAGE IV:	Preparation of Final Statement of Account:

 

B. When Cash in Hand is 4,02,000:

 

Step 1:	Deficiency = 5,64,000 − 4,02,000 = 1,62,000
Step 2:	Percentage of Deficiency
Step 3:	Actual Loss to Be Suffered:
	(i) On 50 Equity Shares
	(ii) On 40 Equity Shares
Step 4:	Liquidator’s Statement:

 

Illustration 10.15

Model: Piecemeal distribution

You are asked by a liquidator of a company to prepare a statement of account to be laid before a meeting of the shareholders from the following:

 

The assets realized as follows:

 

On 1 April 2010	Sundry Debtors	1,00,000
	Fixed Assets	1,00,000
	Expenses Paid	4,000
On 1 June 2010	Fixed Assets (Final)	2,00,000
	Sundry Debtors	1,00,000
On 1 August 2010	Sundry Debtors (Final)	50,000

The liquidator is entitled to 4% on collections from debtors and 2% on the amount paid to equity shareholders. Prepare the statement on the assumption that disbursements are made in accordance with law, as and when cash is available.

Solution

Disbursement is to be made as and when cash is available on 1 April. Cash available is distributed proportionately between creditors and secured loan (bank) on 1 June. The bank loan is shown as settled completely.

 

10.6 “B” LIST OF CONTRIBUTORIES

As already said, the present members of the Company are placed on the “List A” and the past members, who have ceased to be members within one year of the commencement of winding up, are placed on the “List B”.

The liability of A List contributory: This consists of the amount unpaid on the shares held.

The liability of B List contributory: These contributories are liable to pay unpaid amount on shares sold by them. That means, if the Company is unable to pay its creditors, and further, the amount of deficiency is not recovered from A List contributories, the liquidators may make a call on “B List” contributories. Their liability is limited to call on B List contributories. Their liability is limited to the debts that exist at the time when they relinquished their membership from the Company. These contributories are not liable to pay more than the amount which remains unpaid on their shares. The reason is that liability of a member is limited to the nominal value of shares held by them.

According to the provisions of the Companies Act, the liability of B List contributory is subject to:

1. “He is liable only to the extent to which the transferee of his shares has failed to pay them up in full;
2. He can be only called upon to pay so much of this amount as is necessary to pay so much of the debts incurred while he was a member as remain unpaid after applying all the contributions of the A List contributories and all the assets of the Company Pari Paasu towards payment of all its debts, irrespective of the date when they were incurred.”

Illustration 10.16

Model: B List contributories

In a winding up which commenced on 15 September 2010, certain creditors of the Company could not receive payments out of the realization of assets and out of contribution from A List contributories. Following are the details of certain share transfers that took place prior to liquidation and the amount of creditors remaining unpaid:

All the shares were of 10 each, on which 5 had been called and paid-up. Ignoring expenses of liquidation, remuneration to liquidator, etc., workout the amount to be realized from the above contributories.

 

[C.A. (Inter). Modified]

Solution

As per law, only persons who transfer his shares within 12 months preceding the date of winding up will be liable for contribution under List B. In this question, shareholder A transfers on 31 August 2009. Winding up is on 15 September 2010. That means he transferred his shares more than 12 months prior to the date of winding up. Hence, he is not liable as contributory.

The remaining transferors’ (i.e., from B to E) liability is restricted to unpaid value of shares.

The liability of each contributory is to be determined proportionately. The ratio is to be found out for this purpose as follows:

1. A is not eligible as B List contributory
2. Ratio is to be determined on the basis of shares transferred

 

Illustration 10.17

Model: B List of contributories

In a winding up of a company, certain creditors remained unpaid. The following persons had transferred their holding sometime before winding up.

The shares were of 100 each, 80 being called up and paid-up on the date of transfers.

A member, F, who held 400 shares died on 28 February 2010, when the amount due to creditors was 30,000. His shares were transmitted.

G was the transferee of shares held by D. G paid 20 per share as calls-in-advance immediately on becoming a member.

The liquidation of the company commenced on 1 February 2011 when the liquidator made a call on the present and past contributories to pay the amount.

You are asked to quantity the maximum liability of the transferors of shares mentioned in the above table, when the transferees:

1. Pay the amount due as “present” member contributories
2. Do not pay the amount due as “present” member contributories

Also quantity the liability of FF’, to whom the shares were transmitted on the demise of his father F.

 

[C.A. (Inter). Modified]

Solution

Note:

1. “A” is not liable to pay any amount because the winding up proceedings commenced after one year from the date of transfer.
2. “D” is also not liable because the transferee “G” has paid the balance 20 per share as calls-in- advance.
3. The remaining members, i.e., B, FF’, C and E, are liable, provided the transferees do not pay the calls.
4. FF’ to whom shares were transmitted on demise of his father “F” is liable as an existing member contributory as per Section 430. His liability is limited to 400 shares @ 20 per share.
5. When the transferees pay the amount due as “present” member contributories, there is no liability on the transferors.
6. When the transferees do not pay as “present” members, then the liability arises in the case of “past” members as contributories.

 

Total of liability of “B” List contributories = 59,790.

10.7 RECEIVER FOR DEBENTURES

A receiver is an independent person appointed by the Court or an individual or a group of individuals to take possession of certain property and receive income. They may be appointed by debenture holders. In such a case, the mortgaged properties of the company given to debenture holders come into the possession of the receiver. The receiver sells these properties, meets his own expenses and remuneration and makes the payment to debenture holders. If the debentures are secured by a floating charge, preferential payments must first be paid before making any payment to debenture holders. Any surplus has to be handed over to the liquidator of the company.

When a receiver is appointed, two statements of accounts will be prepared:

1. To be prepared by the receiver
2. To be prepared by the liquidator

Illustration 10.18

Model: Receiver for debentures

The following is the balance sheet of a public limited company as at 30 September. 2010:

Mortgage loan was secured against land and buildings. Debentures were secured by a floating charge on all the other assets. The Company was unable to meet the payments and therefore the debenture holders appointed a receiver and this was followed by a resolution for members voluntary winding up. The receiver for the debenture holders brought the land and buildings to auction and realized 3,00,000. He also took charge of sundry assets of the value of 4,80,000 and realized 4,00,000. The liquidator realized 2,00,000 on the sale of the balance of sundry assets. The bank overdraft was secured by a personal guarantee of two of the directors of the Company and on the bank raising a demand the directors paid off the dues from their personal resources. Cost incurred by the receiver was 4,000 and that by the liquidator was 5,600. The receiver was not entitled to any remuneration but the liquidator was to receive 3% fee on the value of assets realized by him. Preference shareholders had not been paid dividend for the period after 30 September 2008 and interest for the last half-year was due to the debenture holders.

Prepare the accounts to be submitted by the receiver and the liquidator.

 

[C.A. (Inter). Modified]

Solution

(A): Preparation of Receiver’s Receipts and Payments A/c

 

Calculation of amount receivable from/payable to equity shareholders:        

 

Step 1:	Total Amount Payable to Preference Shareholders + Arrears of Dividend 2,00,000 + 11% on 2,00,000 for 2 years	=	2,44,000
Step 2:	Less: Balance Available After Paying to Liquidator’s Remuneration, Expenses, Unsecured Creditors, etc. ( 3,64,5000 − 1,35,600)	=	2,28,900
Step 3:	Amount Payable to Pref. Shareholders	=	15,100
Step 4:	Add: Equity Share Capital: ( 2,00,000 + 75,000 (Paid-up)	=	2,75,000
Step 5:	Total Deficiency to Be Borne by 30,000 Shares		2,90,000
Step 6:	Deficiency per Equity Share

Step 7:	Calculation of Amount Receivable per Share:
	(Holders of 10,000 Equity Shares)
	Paid-up Value per Share	= 7.50
	Deficiency per Share	= 9.67
		= 2.17
	∴ Amount Receivable on 10,000 Shares = 10,000 × 2.17 = 21,700

Step 8:	Amount Returnable (Payable) per Share: (20,000 Equity Shares)
	Paid-up Value per Share	=	10.00
	Less: Deficiency per Share	=	9.67
		=	0.33
	∴ Amount Returnable on 20,000 Shares = 20,000 × 0.33 = 6,600

 

Liquidation is a process in which a company is dissolved. A person called liquidator is appointed with whom the task of dissolution of a company is entrusted.

A company may be wound up in any one of the ways:

1. Compulsory winding up—by the Court
2. Voluntary winding up
   1. Members’ voluntary winding up
   2. Creditors’ voluntary winding up
3. Winding up subject to supervision of Court

   Each one is explained in detail

Contributory: “Every person liable to contribute to the assets of the company in the event of being wound up and includes any holder of shares which are fully paid-up”.

Adjustment of rights of contributories and accounting treatment of B List contributories— Refer text.

Order of payments:

1. Secured creditors
2. Costs
3. Preferential creditors
4. Debenture holders having floating charge
5. Unsecured creditors
6. Preference shareholders
7. Equity shareholders

Statement of affairs: Statement regarding the affairs of the company in the prescribed form should be submitted to the liquidator. For format and preparation of statement of affairs, refer the text.

Deficit or surplus account: This account explains how the Company incurs loss. For prescribed format and accounting treatment, refer the text.

Liquidator’s final statement of account: A document is to be prepared showing receipts and payments by the liquidator and has to be submitted to the Court. This consists of (i) amounts realized by the liquidator and (ii) payments of various liabilities. For this, calculation of liquidator’s remuneration is illustrated in detail. For format and preparation of liquidator’s statement of account, refer the text.

Receiver for debenture holders: Preparation of account—Refer Illustration 10.18.

Liquidation of Companies: A process by which a company is dissolved.

Contributory: It refers to any person liable to contribute to the assets of the company in the event of liquidation.

Preferential Creditors: A category of creditors who will be paid prior to any others while liabilities are discharged.

Statement of Affairs: A statement as to affairs of the company to be submitted to the liquidator in the prescribed format with an affidavit of verification.

Deficiency/Surplus Account: An account that explains how the company incurred loss.

Liquidator’s Final Statement of Account: A statement of account in the form of cashbook depicting receipts and payments of a company under liquidation, to be prepared by the liquidator.

Receiver for Debenture Holders: An independent person appointed by the Court or debenture holders to take possession of specified property for protective purpose or receive income and profits and apply the same as required.

“B” List of Contributories: List that comprises past members of the company, who have ceased to be members within one year of the commencement of winding up.

QUESTION BANK

I: State whether the following statements are true or false

1. When the company’s financial position is good, then such solvent company cannot be liquidated.
2. When a company is unable to commence its business within a year from its incorporation, it can be wound up.
3. Voluntary winding up can be possible only when both the members and creditors of the company agree to it.
4. Declaration of solvency is essential for creditors’ voluntary winding up of a company.
5. Contributory may also include holders of fully paid shares.
6. A shareholder can set off any debt due to him from the company against calls made on him for payment of unpaid capital.
7. All wages and salaries payable belong to the category of preferential creditors.
8. Secured creditors mean “fully secured” creditors.
9. Statement of affairs is prepared by the liquidator.
10. Uncalled capital is shown along with the capital in the statement of affairs.
11. If the financial position of the company is sound, then surplus alone will be shown as a not result in the statement of affairs.
12. Supplementary schedules, other than Lists A to G, are also annexed to statement of affairs.
13. The deficiency shown by deficiency account will be equal to the deficiency shown by the statement of affairs.
14. Liquidator’s final statement of account is nothing but an account of receipts and payments of the company undergoing liquidation.
15. While calculating the liquidator’s remuneration, the preferential creditors are also treated as unsecured creditors.
16. While making payment to debenture holders, the treatment is similar to both categories of debenture holders carrying a fixed charge or a floating charge.
17. Liability relating to dividend declared but not paid will be included in the category of unsecured creditors.
18. A contributory can only be a present member of the liquidated company.
19. The liquidator has a legal right of forfeiting the shares of the defaulters.
20. Interest on liabilities is to be paid up to the date of actual payment if the company is solvent and up to the date of commencement of insolvency if it is insolvent.

Answers:

1. False
2. True
3. False
4. False
5. True
6. False
7. True
8. False
9. False
10. False
11. True
12. False
13. True
14. True
15. True
16. False
17. True
18. False
19. True
20. True

II: Fill in the blanks with apt word(s)

1. Liquidation or winding up is a process by which a company is_____.
2. A person who is entrusted with the job of realizing assets and discharging liabilities in the process of liquidation is called_____.
3. Liquidation may take place under both the cases, when the company is insolvent and when the company is_____.
4. When winding up takes place in a company, the shareholders are called_____.
5. There are two kinds of voluntary winding up. One is members’ and the other is_____ voluntary winding up.
6. The liability of a contributory is limited to the_____ value of shares held by him.
7. A past member who has ceased to be a member for at least_____ before the commencement of winding up is not liable to contribute.
8. The first item in the order of payment to be made by the liquidator is_____.
9. A creditor for 20,000 holding a charge on the stock of the book value 25,000 (market value 19,000) is termed as_____.
10. According to Section 530, some creditors have to be paid before any payment is made to any creditors. Such creditors who get priority in the order of payment are called_____.
11. The statement relating to the affairs of the company to be prepared in the prescribed form, verified by an affidavit and submitted to the liquidator is known as_____.
12. “List C” annexed to statement of affairs consists a list of _____.
13. “List of_____ ” is also known as deficiency or surplus account. If the company is solvent, the interest on liabilities should be paid up to the date of .
14. The amount recoverable on calls-in-arrears is to be shown in “_____”.
15. Debentures, unless specifically mentioned otherwise, will ever be treated as having a_____ charge on all the assets of the company.
16. The deficiency shown in deficiency or surplus A/c and the amount of shown in statement of affairs must be the______ one.
17. A document prepared by the liquidator depicting receipts and payments of the company under liquidation is called_____ of account.
18. Assets not specifically pledged are shown in the statement of affairs at _____ values.
19. If the company is solvent, the interest on liabilities should be paid up to the date of ____.
20. According to Section 205 A, unclaimed dividend should be included in _____.

Answers:

1. dissolved
2. liquidator
3. solvent
4. contributories
5. creditors
6. unpaid
7. 1 year
8. liquidation expenses
9. partly secured creditors
10. preferential creditors.
11. statement of affairs
12. preferential creditors
13. H
14. List A
15. floating
16. same
17. liquidator’s final statement of account
18. estimated realizable
19. actual payment of liabilities
20. List E

III: Multiple choice questions—Choose the correct answer

1. Which of the following way is not legally permitted for the liquidation of a company:
   1. by the Court
   2. by the order of directors of company
   3. voluntary winding up by members
   4. voluntary winding up by creditors
2. Which of the following activity is not entrusted with a liquidator:
   1. receipts on sale of assets
   2. payments on liabilities
   3. forfeiture of shares
   4. raising resources by mortgage of company’s properties
3. A contributory is a
   1. shareholder
   2. creditor
   3. debenture holder
   4. none of these
4. A past member is included as contributory in the
   1. list of A
   2. list of H
   3. list of B
   4. list of C
5. Which of the following is the correct order of payment:
   1. legal charge, equality shareholders, preferential creditors, secured creditors
   2. secured creditors, legal charge, preferential creditors, equity shareholders
   3. preferential creditors, secured creditors, legal charge, equity shareholders
   4. equity shareholders, legal charge, secured creditors, preferential creditors
6. Which of the following does not belong to the category of preferential creditors:
   1. taxes to government
   2. wages and salaries
   3. commission due 2 years before the commencement of winding up
   4. amount payable under Workmen Compensation Act
7. Liquidator’s final statement of account is in the form of
   1. receipts and payments A/c
   2. profit and loss A/c
   3. balance sheet
   4. income and expenditure A/c
8. “List A” annexed to statement of affairs consists the list of
   1. preferential creditors
   2. unsecured creditors
   3. assets specifically pledged
   4. assets not specifically pledged
9. Preferential creditors are shown in the statement of affairs under
   1. List A
   2. List C
   3. List B
   4. List D
10. Liquidator’s final statement of account is prepared in the case of
    1. creditors’ voluntary winding up
    2. compulsory winding up by Court
    3. members’ voluntary winding up
    4. all of these
11. In the sale proceeds of pledged security is not sufficient to pay off secured creditors fully, the balance is to be added to
    1. preferential creditors
    2. preference share capital
    3. unsecured creditors
    4. secured creditors
12. The salary of three clerks for a period of 4 months before relevant date was in arrears. If the salary of each clerk is 8,000 per month, the amount to be included in preferential creditors will be
    1. 60,000
    2. 3,000
    3. 96,000
    4. 24,000
13. The liquidator of a company is entitled to a remuneration of 2% on assets realized and 3% on the amount distributed to unsecured creditors. The assets realized 2,50,000 including cash balance of 5,000. Amount available for distribution to unsecured creditors before paying liquidator’s remuneration was 32,960. The liquidator’s remuneration will be
    1. 5,860
    2. 5,988.80
    3. 5,900
    4. 5,600
14. “Relevant date” means (in the case of compulsory winding up):
    1. the date of appointment of a provisional liquidator
    2. the date of winding up order
    3. both of these
    4. none of these
15. When a receiver is appointed there will be
    1. one statement of account prepared the receiver
    2. one statement of account prepared by the liquidator
    3. one statement of account prepared by the company’s auditor
    4. two statement of accounts—one prepared by the receiver and the other by the liquidator

Answers:

 

1. (b)	5. (b)	9. (b)	13. (a)
2. (d)	6. (c)	10. (d)	14. (c)
3. (a)	7. (a)	11. (c)	15. (d)
4. (c)	8. (d)	12. (a)

1. What do you mean by “liquidation’ of a company?
2. Name the various ways that a company can be wound up.
3. On what occasions a company can be wound up compulsorily?
4. When can a company be wound up voluntarily?
5. What is the main difference between members’ and creditors’ voluntary winding up?
6. Explain: winding up subject to supervision of the Court.
7. Define: contributory.
8. The liability of the contributory is subject to certain limitations. Name any two limitations.
9. How can a liquidator adjust the rights and interests of contributories?
10. Mention the order of payment in the process liquidation.
11. What do you mean by “second creditors”?
12. What are the rights of a secured creditor?
13. Who are “preferential creditors”, as per Section 530?
14. Mention any six preferential creditors.
15. Mention any four items included in “unsecured creditors”.
16. Explain the term: statement of affairs.
17. Mention the important items that are included in the statement of affairs.
18. Enumerate the lists that are to be annexed to statement of affairs.
19. Explain: deficiency or surplus account.
20. Mention the items that contribute to the deficiency of a company under liquidation.
21. Mention the items contributing to surplus.
22. Who is a “liquidator”? What are his main duties?
23. Explain: liquidator’s final statement of account.
24. What do you mean by preferential payments?
25. How can a liquidator’s remuneration be determined?
26. Explain the accounting treatment for debenture interest at the time of liquidation.
27. How would you deal with “interest on liabilities”?
28. Explain the treatment of calls-in-advance and calls-in-arrears, when a company is under liquidation.
29. Explain the lists of contributories.
30. Explain the role of receive for debenture holders.

1. What is “liquidation”? Explain the various ways of winding up of a company emplacing the legal provisions in each such case.
2. Who is a contributory? How the rights and interest of contributories will be adjusted? Explain the List A and B List contributories.
3. Who are preferential creditors? Enumerate the various items included under this category?
4. Explain “statement of affairs” with a rough sketch and also explain how it is prepared?
5. Explain “deficiency or surplus account” through specimen of it with emphasis on items contributing to deficiency as well as surplus.
6. What is liquidator’s final statement of account? How is it prepared?

 

[Model: Liquidator’s remuneration]

1. The liquidator of a company is entitled to a remuneration of 2% on assets realized and 3% on the amount distributed to unsecured creditors. The assets realized is 3,00,000 including a cash balance of 15,000. Amount available for distribution to unsecured creditors before paying liquidator’s remuneration was 1,29,300. Calculate liquidator’s remuneration.

[Ans: Liquidator’s remuneration on assets realized: 5,700; On payment to unsecured creditors: 3,765]

2. The liquidator of AB & Co Ltd. is entitled to get a remuneration of 3% on the amount realized from assets and 2% on the amount distributed to the unsecured creditors from the following particulars. Calculate the remuneration payable.

 

Cash Realized from Assets	1,50,000
Preferential Creditors	5,000
Amount due to Unsecured Creditor	2,00,000

[Ans: Liquidator’s remuneration—On assets realized: 4,500; On payment to preferential creditors: 100; On payment to unsecured creditors: 2,753]

3. The liquidator of a company is entitled to a remuneration of 3% on the amounts realized (excluding cash in hand) and 2% on the amount distributed to the unsecured creditors, including preferential creditors of 25,000 amounting to 2,00,000.

Debenture holders were paid 2,59,375 together with interest preferential creditors were pain in full. Expenses of liquidation came to 2,550.

Cash on hand was 5,000, and assets realized 3,95,000. Calculate the liquidator’s remuneration.

[Ans: 14,325]

[Model: Interest payable to debenture holders]

4. Calculate the interest payable to debenture holders from the following information assuming the liquidated company has sufficient cash to pay off all side liabilities:

 

8% Debentures	8,00,000
Date of Liquidation	31 December 2010
Date of Repayment of Debentures	30 June 2011
Date Up To Which Interest on Debentures Paid So Far	30 June 2010

[Ans: 64,000]

5. The following information was extracted from the books of a limited company on 31 December 2010:

 

Equity Share Capital:
12,000 Shares of 10 Each	1,20,000
6% Preference Share Capital:
18,000 Shares of 10 Each	1,80,000
Calls-in-Arrear (Estimated to Prudence 1,200)	2,400
5% First Mortgage Debentures Secured by a Floating Charge on the Whole of the Assets of the Company (Interest Paid To Date)	1,20,000
Creditors Fully Secured (Value of Securities 24,000)	21,000
Creditors Partly Secured (Value of Securities 12,000)	24,000
Preferential Creditors for Wages, Rates, Taxes	4,500
Unsecured Creditors	1,62,000
Bank Overdraft, Secured by a Second Charge on the Whole Assets of the Company	12,000
Cash in Hand	720
Book Debts:
Good	22,800
Doubtful Debts (Estimated to Produce 1,800)	4,800
Bad	2,700
Stock in Trade (Estimated to Produce 36,000)	37,200
Freehold Land & Buildings (Estimated to Produce 1,11,000)	1,26,000
Plant & Machinery (Estimated to Produce 37,800)	36,000
Fixtures & Fittings (Estimated to Produce 4,800)	7,200
Prepare a statement of affairs of the company.

[Ans: Estimated deficiency as regards creditors: 91,380; Estimated deficiency as regards customers (members): 3,90,180]

6. R. Co. Ltd. went into voluntary liquidation on 1 March 2011.

The following balances are extracted from its books on that date:

Plant & Machinery and buildings are valued at 75,000 and 60,000, respectively. On realization, losses of 7,500 are expected on stock. Book debts will realize 35,000. Calls-in-arrears are expected to realize 90%. Bank overdraft is secured against buildings. Preferential creditors for taxes and wages are 3,000 and miscellaneous expenses outstanding are 1,000.

Prepare a statement of affairs to be submitted to the meeting of creditors.

[Ans: Estimated surplus as regards creditors: 1,24,000; Miscellaneous expenses outstanding not a part of creditors shown in the b/s]

[Model: Statement of affairs]

7. Mr. Prem is appointed liquidator of X Ltd in voluntary liquidation on 1 December 2010. Following balances are extracted from the books on that date:

Prepare a statement of affairs to be submitted in the meeting of the creditors. The following assets are valued as follows:

Machinery: 3,60,000; Leasehold properties: 4,36,000; Investments: 24,000; Stock in trade: 12,000; Bad debts: – 12,000 and doubtful debts: 24,000 which are estimated to realize 12,000. The bank overdraft is secured by deposit of title deeds of leasehold properties. Preferential creditors are 6,000. Telephone rent outstanding is 480.

[Ans: Estimated surplus as regards creditors: 6,69,520]

Assumptions:

1. Calls-in-arrears realized in full
2. Preferential creditors and telephone rent outstanding are not included in any liability shown in b/s

[Model: Statement of affairs and deficiency account]

8. The following information is extracted from the books of Veer & Co Ltd. on 31 December 2010 on which date a winding up order was passed.

 

Unsecured Creditors	1,90,000
Salary Due for 5 months	20,000
Bills Payable	53,000
Debtors:
Good	2,15,000
Doubtful (Estimated Recovery 31,000)	65,000
Bad	44,000
Bills Receivable (Good 8,000)	8,000
Bank Overdraft	20,000
Land (Estimated to Produce 2,50,000)	1,80,000
Stock (Estimated to Produce 2,90,000)	4,10,000
Furniture & Fixtures	40,000
Cash in Hand	2,000
Estimated Liability for Bills Discounted	30,000
First Mortgage Creditors on Land	2,00,000
Second Mortgage Creditors on Land	1,00,000
Wages Unpaid	3,000
Liabilities Under Workmen’s Compensation Act	1,000
Income Tax Due	4,000
2,500 9% Debentures of 100 Each (Interest Paid on 30 June 2010)	2,50,000
Share Capital:
10,000 10% Preference Shares of 10 Each	1,00,000
25,000 Equity Shares of 10 Each	2,50,000
General Reserve on 31 December 2010	50,000

In 2006, the company earned a profit of 2,25,000 but thereafter it suffered a trading loss totaling 2,92,000. The company also suffered a loss on account of fire 25,000 during the year 2007.

Excise authorities imposed a penalty of 1,75,000 in 2008 for evasion of tax which was paid in 2009.

From the above information, prepare a statement of affairs and a deficiency account.

[Ans: Estimated deficiency as regards creditors: 36,250; As regards contributories 3,86,250; Unsecured creditors: 3,45,000]

[Model: Statement of affairs and deficiency account]

9. In January 2011 a compulsory order for winding up was made against a public limited company, the following particulars being disclosed:

 

	Book Value	Estimated to Produce
Cash in Hand	500	500
Debtors	20,000	18,000
Buildings	3,00,000	2,40,000
Furniture	1,00,000	1,00,000
Unsecured Creditors	1,00,000	—
Debentures:
Secured on Buildings	2,10,000
Secured on Floating Charge	50,000
Preferential Creditors	30,000
Share Capital:	16,00,000
1,60,000 shares of 10 Each

Estimated liability for bills discounted was 30,000 estimated to rank 30,000. Other contingent liabilities were 60,000 estimated to rank 60,000.

The Company was formed on 1 January 2006 and had made losses of 15,69,500.

Prepare statement of affairs and deficiency account.

[Ans: Deficiency as regards creditors: 1,21,500; Deficiency as regards contributories: 17,21,500]

Model: Liquidator’s final statement of account]

10. From the following particulars, prepare liquidator’s final statement of account.

Capital: 5,00,000; loss: 5,57,500, cash: 5,000; cash received from sale of machinery, stock and collection from debtors: 3,95,000; 6% secured debentures 3,00,000; interest due on the above: 7,500; preferential creditors: 25,000; unsecured creditors: 1,75,000; liquidation expenses: 2,500; liquidator’s remuneration to be calculated at 3% on the assets sold and 2% on the amount paid to unsecured creditors.

[Ans: Cash paid to unsecured creditors: 1,00,635; Liquidator’s commission (Total): 14,365]

11. X Ltd. went into liquidation with the following liabilities:

1. Secured creditor: 1,00,000 (Securities realized: 1,25,000)
2. Preferential creditors: 3,000
3. Unsecured creditors: 1,52,500

Liquidation expenses are 1,260. Liquidator is entitled to a remuneration of 3% on the amounts realized (including securities with creditors) and 1½% on the amount distributed to unsecured creditors. The various assets realized 1,30,000 (excluding securities with secured creditors). Prepare the liquidator’s final statement of account.

[Ans: Payment to unsecured creditors: 1,40,930; Liquidator’s remuneration (Total): 9,810]

12. The following particulars relate to a limited company which has gone into voluntary liquidation. Yon are required to prepare the liquidator’s final account, allowing for his remuneration @ 2% on the amount realized and 2% on the amount distributed among unsecured creditors other than preferential creditors:

 

Preferential Creditors	1,20,000
Unsecured Creditors	3,84,000
Debentures	1,20,00
The assets realized the following sums:
Land & Buildings	2,40,000
Plant & Machinery	2,23,800
Fixtures & Fittings	12,000

The liquidation expenses amounted to 12,000.

[Ans: Liquidator’s remuneration: 13,716; Amount paid to unsecured creditors: 2,10,084]

13. X Ltd. went into liquidation. Its assets realized 1,75,000, excluding the amount realized by sale of securities held by the secured creditors. The following was the position:

 

Share Capital 5,000 Shares of 10 Each
Secured Creditors (Securities Realized 20,000)	17, 500
Preferential Creditors	3,000
Unsecured Creditors	70,000
Debentures Having a Floating Charge on the Assets of the Company	1,25,000
Liquidation Expenses	2,500
Liquidator’s Remuneration	3,750

Prepare the liquidator’s final statement of account.

[Ans: Amount Paid to Unsecured Creditors: 43,250]

14. Gama Ltd. went into liquidation on 31 December, 2010. 1,20,000 3,84,000 1,20,00

Following information is available with the liquidator: Sundry creditors amount to 1,51,320 of which 16,000 are preferential. 6% Debentures carrying floating charge on the assets amounted to 1,60,000. Debentures were paid interest up to 30 June 2010. The assets realized as follows:

Stock in trade: 1,68,000;

Plant & Machinery: 1,20,000

Cash in hand stood at 1,000. Debentures were paid off on 30 June of the following year with interest. Liquidator’s expenses amounted to 3,804 and they were entitled to remuneration at 3% on the amount realized and 2% on the amount distributed to unsecured creditors.

Prepare liquidator’s final statement of account.

[Ans: Amount paid to unsecured creditors: 90,000; Liquidator’s remuneration; 10,796]

15. The following particulars are related to a company which has gone into liquidation. You are required to prepare liquidator’s final statement of account allowing for his remuneration at 2% on the amounts realized on assets and 2% on the amounts distributed to unsecured creditors other than preferential creditors.

 

Unsecured Creditors	6,72,000
Preferential Creditors	2,10,000
Debentures	2,25,000

The assets realized the following amounts:

 

Cash in Hand	60,000
Land & Buildings	3,90,000
Plant & Machinery	3,31,500
Furniture & Fittings	22,500

The liquidation expenses amounted to 6,000. A call of 2 per share on the partly paid 30,000 equity shares was made and duly paid except in case of one shareholder owning 1,500 shares.

[Ans: Liquidator’s remuneration: 24,000; Amount paid to unsecured creditors: 3,96,000]

Note: Calls collection is not taken into account for remuneration.

16. Zeen Ltd. went into liquidation on 31 March 2011 where the following balance sheet was prepared:

Assets realized as follows:

Building: 2,10,000; Machinery: 3,06,000; Stock: 2,34,000; Sundry debtors; 3,51,000; Cash: 5,000

The expenses on liquidation amounted to 6,000.

The liquidator’s remuneration was agreed at 2 % on the amount realized (including cash) and 2% on the amount paid to the unsecured creditors. You are required to prepare the liquidator’s final statement of account.

[Ans: Amount paid to unsecured creditors: 7,09,800; Liquidator’s remuneration; 45,000]

17. A company went into liquidation on 30 April 2011. The position of the company on that date was as follows:

Machinery was realized by the secured creditors for 4,80,000; Other fixed assets realized 1,60,000; debtors 80,000; and stock 40,000; Bills receivable was wholly dishonoured. The liquidator is entitled to a fixed remuneration of 4,000 plus 2% of the amount paid to unsecured creditors.

Liquidation expenses amounted to 4,000.

Prepare liquidator’s statement of account.

[Ans: Amount paid to unsecured creditors: 7,16,864; Liquidator’s remuneration: 19,136 (Total)]

18. The balance sheet of Blue Sky Ltd. as on 31 September 2010 was as follows:

The company went into liquidation on that date. Prepare liquidator’s final statement of account after taking into account the following:

1. Liquidation expenses and liquidator’s remuneration amounted to 15,000 and 50,000, respectively.
2. Bank loan was secured by pledge of stock.
3. Debentures and interest thereon are secured by a floating change of all assets.
4. Fixed assets were realized at book value and current assets at 80% of book values.

[Ans: Preference shareholders get 20,000]

19. Base & Co. has been appointed liquidator to Abbas Ltd. The balance sheet at the time of liquidation, i.e., 1 January 2011, is given below:

Fixed assets are sold for 4,80,000 to a debenture holder holding 1,60,000 debentures and cash in received after off. Cash realized from debtors were 3,20,000 and the liquidation expenses amounted to 4,000. The liquidator is paid 4,000 fixed allowance plus 2% commission including cash in hand as remuneration Stock is sold for 40,000.

Prepare the liquidator’s final statement of accounts.

[Ans: Payment to equity shareholders: 38,000; Liquidators remuneration: 18,000]

20. The capital of Sharma Co. Ltd. was as follows:

1. 12,000 equity shares of 100 each, fully paid
2. 12,000 equity shares of 100 each, 80 per share paid-up
3. 3,000 preference shares of 00 each, fully paid

(These shares, under the articles of the company have preference as to capital)

The various creditors amounted in all to 3,00,000 including the liquidator’s remuneration of 7,500. The liquidator made a call of 16 per share on the equity shares which were partly paid-up. This was paid in full. The liquidator realized all the assets amounting to 5,73,000.

Prepare the liquidator’s final statement of account.

[Ans: Deficiency per share; 91.25; 12,000 fully paid equity shareholder get 1,06,500 at 8.875 per share; 12,000 partly paid-up shareholders get 58,500 at 4.875 per share]

21. Akash Ltd. (in voluntary liquidation) has paid of its creditors in full, and the liquidator is in a position to make a return to the shareholders. The position is as follows:

Share capital issued:

2000 Preference shares of 10 each, fully paid 8000 Equity shares of 10 each, fully paid 8000 Equity shares of 10 each, 8 paid

The Articles of the Company provide that the preference shares shall have priority over the equity shares as to repayment of capital.

The cost of liquidation is 2,800, creditors amount to 44,500 and the assets realized are 74,800. A call of 2 per share on partly paid equity shares (to adjust the rights of shareholders interest) was duly paid except in the case of one shareholder owning 2,000 shares.

Prepare liquidator’s final statement of account.

[Ans: Call money received: 2,000; Amount paid to equity shareholders on 14,000 shares @ 1.393 per share: 19,500]

[Model: Piecemeal distribution]

22. You are asked by a liquidator of a company to prepare a statement of account to be placed before the meeting of the shareholders from the following particulars:

 

The assets were realized as follows:

 

1 April 2010:	Fixed assets: 50,000; Book
	debts: 50,000;
	Expenses paid: 2,000
1 June 2010:	Fixed assets (Final):
	1,00,000; Book debts;
	50,000
1 August 2010:	Book debts final payment:
	25,000

The liquidator is entitled to a commission of 5% on collections from book debts and 2% on the amounts paid to equity shareholders. Prepare the statement on the assumption that disbursements are made in accordance with the law as and when cash is available.

[Ans: 1 April 2010— Expenses: 2,000; Liquidator’s remuneration: 2,500; Bank loan: 7,338; Trade creditors: 38,162

1 June 2010—Liquidator’s remuneration: 2,500 + 59; Trade creditors paid: 91,838; Pref. share capital in full and equity shareholders: 2,941.

1 August 2010—Liquidator’s remuneration: 1,250 + 461; Equity shareholders get 23,285]

23. ABC Ltd. went into voluntary liquidation on 1 January 2011. The liquidation gets remuneration at 3% on assets realized and 2% on distribution among shareholders. From the following particulars prepare liquidator’s final statement.

 

Assets Realized	10,00,000
Expenses of Liquidation	18,000
Unsecured Creditors	1,24,000
Salary and Wages Outstanding	12,000
10,000, 6% Preference Share Capital
Dividend Paid Up To 31 December 2009	3,00,000
20,000 Equity Share Capital	1,80,000
General Reserve as on 31 December 2009	2,40,000
P&L A/c as on 31 December 2009	40,000

Under the Articles of Association of the Company, the preference shareholders have the right to receive one-third of the surplus remaining after repaying the equity share capital.

 

[Ans: Preference shareholders:	4,18,666;
Equity shareholders:	3,81,334;
Liquidator’s remuneration:	46,000

24. Dua & Co. Ltd. went into voluntary liquidation on 1 January 2010. The dividend on its preference shares had not been paid for 2 years.

The subscribed capital of the company was 5,000 6% cumulative preference shares of 10 cash, fully paid. (They were preferential for both dividend and capital); 40,000 ordinary shares of 10 each ( 6.25 per share called and paid); 7,500 ordinary shares of 10 each ( 7.50 per share called and paid)

The assets realized 1,31,375, the cost of liquidation was 5,750 and liabilities were 1,10,000.

Prepare the statement of account assuming the liquidator made the necessary calls, received all the money due and that the outstanding dividend was not payable.

[Ans: Deficiency for preference shareholders: 34,375

Equity shareholders holding 40,000 shares will pay at 0.9211 per share 36,844

Equity shareholders holding 7,500 shares will receive at 0.3289 per share 2,466]

[Model: Receive for debenture holders]

25. The following is the balance sheet of X Ltd. as at 30 June 2010:

The mortgage was secured on the buildings and debentures were secured by a floating charge on the “sundry assets”. The debenture holders appointed a receiver who took charge of the sundry assets amounting to 1,57,500. A liquidator was also appointed as the Company went into voluntary liquidation. The receiver realized the assets for 1,47,500 and his costs and remuneration were 750 and 1,000, respectively. 45,000 was realized from buildings and 72,500 from the sale of remaining sundry assets. The bank had the guarantee of the directors amounting to 11,000 which was duly honoured by them. The cost of liquidation was 1,500 and the liquidator’s remuneration amounted to 625. Prepare the receiver’s receipts and payments account and liquidator’s final statement of account.

[Ans: Surplus transferred to liquidator: 23,250; Equity shareholders will get; 21,125, i.e., @ 14.08 per share]

 

 

26. Bad Luck Ltd. went into voluntary liquidation and the proceedings commenced on 2 July 2010. Certain creditors could not receive payment out of the realization of assets and out of the contribution from the contributories of “A” List. The following details of share transfers are made available:

All the shares were of 10 each, on which 5 per share had been paid-up. Ignoring other details like liquidator’s expense, etc., you are required to work out the liability of the individual contributories listed above.

 

[C.A. (Inter). Modified]

[Ans: L does not come under the list; M, N, O and P are liable for 7,500, 4,500, 24,000, and 2,750, respectively]

27. Karat Co. Ltd. went into voluntary liquidation on 1 March 210. The following balances are extracted from its books on that date:

Plant & Machinery and buildings are valued at 75,000 and 60,000, respectively. On realization, losses of 7,500 are expected on stock. Book debts will realize 35,000. Calls-in- arrears are expected to realize 90%. Bank O/D is secured against buildings.

Preferential creditors for taxes and wages are 3,000 and miscellaneous expenses outstanding 1,000. Prepare a statement of affairs to be submitted to the meeting of creditors.

 

[C.A. (Inter). Modified]

[Ans: Deficiency as regards contributories: 1,25,000]

28. X Ltd. went into liquidation on 31 March 2011, when its position was as follows:

Contingent liabilities:

 

(i) Preference dividends	44,000
(ii) Bills discounted	30,000

Estimated realizable value of assets have been indicated in brackets. Three years earlier, the company had a general reserve of 30,000. The company earned a profit of 60,000 for one of the three years. 50,000 had been paid as income tax in this period and a dividend of 10% on equity shares paid in one of the years. For another year, the Company incurred a loss of 1,60,000.

9,000 out of the outstanding expenses is preferential. Bills discounted on likely to be dishonoured 16,000. Prepare statement of affairs and deficiency account on the basis that the Company decides on a voluntary liquidation.

 

[I.C.W.A. (Final). Modified]

[Ans: Deficiency as regards contributories: 4,50,000]

29. The following is the balance sheet of X Ltd. As at 30 September 2010:

Mortgage loan was secured against land and buildings. Debentures were secured by a floating change on all the other assets. The company was unable to meet the payments and therefore the debenture holders appointed a receiver and this was followed by a resolution for members voluntary winding up. The receiver for the debenture holders brought the land and buildings to auction and realized 4,50,000. He also took charge of assets of the value of . 7,20,000 and realized 6,00,000. The liquidator realized 3,00,000 on the sale of the balance of sundry current assets. The Bank overdraft was secured by a personal guarantee of two the directors of the company and on the bank raising a demand, the directors paid off the dues from their personal resources. Costs incurred by the receiver were 6,000 and by the liquidator 8,400. The receiver was not entitled to any remuneration but the liquidator was to receive 3% fee on the value of assets realized by him. Preference shareholders had not been paid dividend for the period after 30 September 2008 and the interest for the last half-year was due to the debenture holders. Prepare the accounts to be submitted by the receiver and the liquidator.

 

[C.A. (Inter). – Modified]

[Ans: Surplus transferred to the liquidator: 2,46,750; Return of money to holders of 30,000 shares @ 0.33; 9,900]

30. The Sundry Vally Mining Co. Ltd. went into voluntary liquidation on 1 April 2011, as its mines reached such a state of depletion that it became too costly to excavate further minerals. The liquidator, whose remuneration is 3% on realization of assets and 2% on distribution among the shareholders, realized all the assets. The following was the position of the company on 31 March 2011:

 

Cash on Realization of Assets	15,00,000
Expenses of Liquidation	27,000
Unsecured Creditors (Including Salaries and Wages for One Month Prior to Liquidation 18,000)	2,04,000
4,500 14% Preference Shares of	4,50,000
100 Each Dividend Paid Up To 31 March 2010
30,000 Equity Shares of 10 Each,	2,70,000
9 per Share Called and Paid-Up
General Reserve as on 31 March 2011	3,60,000
Profit & Loss A/c as on 31 March 2011	60,000

Under the Articles of Association of the Company, the preference shareholders have the right to receive one-third of the surplus remaining after repaying the equity share capital.

[Ans: Preference shareholders receive 6,51,999; Equity shareholders receive 5,48,001]

31. The following particulars were extracted from the books of X Ltd. on 31 April 2011, the day on which a winding up order was made:

 

Equity Share Capital:
1,00,000 Shares of 10 Each, 5 Paid-up	5,00,000
14% Preference Share Capital:
1,00,000 Shares of 10 Each, Fully Paid	10,00,000
14% First Mortgage Debentures,	7,50,000
Secured by a Floating Charge Up on the Whole Assets of the Company, Exclusive of the Uncalled Capital
Fully Secured Creditors (Values of Securities: 1,75,000)	1,50,000
Partly Secured Creditors (Values of Securities: 50,000)	1,00,000
Preferential Creditors, for Taxes, Rates, Wages, Etc.	30,000
Bills Payable	5,00,000
Unsecured Creditors	3,50,000
Bank Overdraft	50,000
Bills Receivable in Hand	75,000
Bills Discounted (One Bill for 50,000 Known to be Bad)	2,00,000
Book Debts: – Good	50,000
– Doubtful (Estimated to Produce 50%)	35,000
– Bad	30,000
Land & Building (Estimated to Produce 5,00,000)	7,50,000
Stock in Trade (Estimated to Produce 2,00,000)	2,50,000
Machinery, Tools, Etc. (Estimated to Produce 10,000)	25,000
Cash in Hand	500

Make out (i) statement of affairs as regards creditors and contributories and (ii) deficiency account.

 

[C.A. (Final). Modified]

[Ans: Deficiency as regards creditors: 9,00,000; Deficiency as regards contributories: 24,02,000; Prepare b/s also → excess of liabilities and capital over assets: 18,99,500]

32. In a winding up which commenced on 15 September 2010, certain creditors could not receive payments out of the realities of assets and out of contribution from “A” List of contributories. Following are the details of certain share transfers that took place prior to liquidation and its amount creditors remain unpaid:

All the shares were of 10 each, on which 5 per share had been caused and paid-up. Ignoring expenses of liquidation, remuneration to liquidator, etc., work out the amount to be realized from the above contributories.

 

[C.A. (Inter). Modified]

[Ans: P does not come under List “B”. Q, R, S and T are liable for 24,000, 28,000, 25,000 and 12,500, respectively]