Liquidation

Notes 3 Pages

Bengaluru City University

Bachelor of Business Administration

Contributed by

Tabeed Malpani

Study Material on Liquidation BY MS HARINI (MESIOM)

Study material on the chapter Liquidation
Liquidation is a legal procedure by which the corporate life of a company is brought to an end; a company which is wound up
need not necessarily be a bankrupt company sometimes even solvent companies are liquidated.
Some salient features of liquidation include the realization of assets, the collection of uncalled capital, if required, and the
settlement of the debts and obligations of the company out of the proceeds. If any surplus is left, it is returned to the
shareholders of the company according to their rights. The job of realizing various assets and settling the debts and obligations
of the company is performed by a person called liquidator.
The liquidation can take place in any of the following three ways:
1) Compulsory winding up by the court.
2) Voluntary winding up:
a) Members voluntary winding up
b) b) Creditors voluntary winding up
3) Winding up subject to the supervision of the court.
Compulsory winding up
A court may order the winding up of a company on any of the following grounds:
a) if the company has passed special resolution to the effect the company be wound up by the court,
b) if default is made in filing statutory reports or in holding statutory meetings,
c) if the number of members is reduced to below two in the case of a private company and below 7 in the case of any
other company,
d) if the company does not commence business within one year from its incorporation or suspends business for a whole
year,
e) if the company is unable to pay its debt and,
f) if the court is of the opinion that it is just, and equitable that the company be wound up.
voluntary winding up
Voluntary winding up maybe either member’s voluntary winding up or creditors voluntary winding up.
When a company’s solvency is declared by the directors in voluntary winding up it is called Members voluntary winding up,
when a company's solvency is not declared by the directors it is called Creditors voluntary winding up.
Winding up subject to the supervision of the court:
This is voluntary winding up with the supervision of the court. The object supervision order is to ensure the protection of
interest of all persons concerned---the company, the contributories and the creditors.
Contributory:
According to section 428 of the company’s act, contributory is “every person liable to contribute to the assets of the company
in the event of its being wound up, and includes the holder of any shares which are fully paid up and also any person alleged
to be a contributory".
in the event of the company being wound up all present and past members are liable to jointly contribute to the assets of the
company an amount sufficient for payment of its debts and liabilities, to meet the cost of liquidation and adjust the rights of
contributories among themselves. While asking the contributories to contribute, the following points must be borne in mind.

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Study Material on Liquidation BY MS HARINI (MESIOM)

1. Contributory cannot be asked to contribute more than the amount unpaid on the shares held by him.
2. A past member is not liable to contribute unless the present members are unable to make the contribution required
by them.
3. A past member who has ceased to be a member for at least one year before the commencement of winding up, is
not liable to contribute.
4. A past member is not liable in respect of any debt or liability of the company contracted after he has ceased to be a
member.
The liquidator realizes various assets not specifically pledged with any creditor and receives the surplus of assets specifically
pledged, if any, and disburses the proceeds in the following manner:
1. Legal charges
2. Remuneration to the liquidator
3. Cost of winding up
4. Preferential creditors
5. Debenture holders
6. Unsecured creditors
7. Preference shareholders
8. Equity shareholders
Note: Any surplus that remains after making the above payments will go to the the equity shareholders unless it has been
specifically mentioned that preference shareholders are participating preference shares. If the preference shares are
participating, then they have the right to share the surplus left after paying the equity capital.
Preferential creditors
The preferential creditors are paid from the proceeds off the assets not specifically pledged which remain after retaining the
amount required for cost of expenses but before making any payment any other unsecured creditors. Section 530 of the
company’s act list down the following debts as preferential creditors:
A. All revenues, taxes, cess and rates due from the company to the central government or a state government or to a
local authority at a relevant date and having become due and payable within 12 months next before the due date;
B. All wages and salaries of any employee, in respect of service rendered to the company and due for a period not
exceeding 4 months within the twelve months next before the relevant date and any compensation payable to any
workman under any provisions of Industrial Dispute Act 1947 provided the amount does not exceed rupees 20000.
C. All accrued holiday remuneration becoming payable to any employee or in case of his death to any other person in
his right, on the termination of his employment before, or by the effect of winding up.
D. All sums payable by the employer to the employees under Employees State Insurance Act 1948 or or any other law.
E. All sums due as compensation under Workmen Compensation Act 1923 in respect of death or disablement of any
employee of the company.
F. All sums due to an employee from a Provident fund, Pension fund or any other fund for the welfare of the employees,
maintained by the company.
G. The expenses of any investigation held in pursuance of section 235 or 237 insofar as they are payable by the
company.
Note: Persons advance money e for making preferential payments under 2.and 3. Alone will be treated as preferential
creditors.
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Study Material on Liquidation BY MS HARINI (MESIOM)

Liquidators remuneration:
Liquidator normally gets his remuneration in the form of commission which is usually based on the value of assets realized
and the payments made to creditors. The percentage of commission differ for the assets realized and the payments made to
creditors. While calculating liquidator’s remuneration the following points are to be borne in mind:
A. He gets the commission at the agreed percentage on all assets realized by him. If the payment to the secured creditors
is made by him by the way of selling the assets specifically pledged, then he is entitled to the commission for the
proceeds so realized by him. However, he is not entitled to the commission if the assets given as securities are
realized by the secured creditors themselves.
B. Unless otherwise stated, he is not entitled for the commission on cash and Bank balances.
C. When the liquidators commission is based on the amount paid to unsecured creditors, preferential creditors also
taken into consideration because they are also unsecured creditors.
D. If the amount available is sufficient to make full payment of unsecured creditors the commission is calculated as
follows:
 Amount due to unsecured creditors × %of com /100
If the amount available is not adequate to make the full payment to unsecured creditors, the commission is calculated as
under
 Amount due to unsecured creditors × % of com/100 + % of commission.
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