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LIQUIDATION LIQUIDATION

LIQUIDATION - PowerPoint Presentation

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LIQUIDATION - PPT Presentation

Liquidation or winding up is a Legal term and refers to the procedure through which the affairs of the company are wound up by law Winding up of a company has been defined in the Companies Act 1956 as the process whereby its life is ended and its property is administered for the benefit ID: 332661

creditors 000 amp company 000 creditors company amp assets equity winding preferential list estimated shares shareholders preference secured surplus

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Slide1

LIQUIDATION

Liquidation or winding up is a Legal term and refers to the procedure through which the affairs of the company are wound up by law. Slide2

Winding up of a company has been defined in the Companies Act 1956 as “ the process whereby its life is ended and its property is administered for the benefit of its creditors & members. An Administrator called the Liquidator is appointed and he takes control of the company, collects its assets , pays its debts & finally distributes any surplus among the members in accordance with their rights.Slide3

MODES OF LIQUIDATIONSlide4

Section 425 (1) of the companies act provides that a company can be liquidated in any of the following three ways :

COMPULSORY WINDING UP BY THE COURT

VOLUNTARY WINDING UP BY THE MEMBERS

WINDING UP UNDER THE SUPREVISION OF COURT

Generally the provisions of the Act with respect to the winding up apply to winding up of a company whether it be by the court or voluntary or subject to the supervision of the court [Section 425 (2)] Slide5

CONSEQUENCES OF WINDING UP

The following are the consequences of winding up:

An officer called a liquidator is appointed & he takes over the administration of the company. He may be appointed by High Court, members or by the creditors as the case may be.

The powers of the board of directors will cease & will now vest the liquidator.

Winding up order or resolution of voluntary winding up shall operate as a notice of discharge to all the members of the company. Members of company are called CONTRIBUTORIES.Slide6

Liquidator of the company will prepare a list of contributories who be made liable to contribute to the assets of the company in case assets are not sufficient to meet the claims of various claimants . In case there is a surplus in the assets, the liquidator of the company will prepare a list of those members, who are entitled to share this surplus.

Liquidator of the company will collect & realise its assets & distribute the proceeds among right claimants as per the procedure of the law.

Winding up ultimately leads to dissolution of the company. The companies life will come to an end & it will be no more an artificial person in the eyes of law.Slide7

CONTRIBUTORY

According to section 428

of the Companies Act, 1956, a contributory is “every person liable to contribute to the assets of a company in the event of it being wound up & includes a holder of fully paid up shares, & also any person alleged to be contributory “

A Contributory can be either a present member or a past member.

FRAUDULENT PREFERENCE

Fraudulent preference takes place when one creditor is preferred to another creditor in the matter of payment of his dues. It has been made in the provisions of section 531 that every transfer of property or money made with in 6 months before the commencement of winding up which amounts to fraudulent preference is invalid.

Slide8

VOLUNTARY TRANSFER

All voluntary transfers made by the company within a period of one year or before the presentation or petition for winding up or the passing of a resolution for voluntary winding up, are void as against the liquidator.

EMPLOYEES & OFFICERS

According to section 444, a winding up order operates as a notice of discharge to the employees & officers of the company, except when the business of the company is being continue.

INTEREST ON LIABILITIES

Interest on liabilities is payable upto the date of actual payment if the company is solvent. But if the company is insolvent, interest on liabilities is payable upto the date of commencement of insolvency proceedings.Slide9

ORDER OF PAYMENT

The amount received from the assets not specifically pledged & the amounts contributed by the contributories must be distributed by the liquidator in the following order:

Expenses of winding up including the liquidators remuneration

Creditors secured by the floating charge on the assets of the company

Preferential creditors

Unsecured creditors

The surplus, if any, amongst the contributories (i.e. preference shareholders & equity shareholders) according to their respective rights & interests

.Slide10

Preference shareholders get the priority over the equity shareholders as regards the payment of their capital & the dividend payable upto the ate of winding up. The holders of cumulative preference shares are entitled to arrears of dividend if there is a surplus after the return of the amount of the equity shareholders or if the Articles state that arrears of preference dividend are to be paid before anything is paid to equity shareholders.

EQUITY SHAREHOLDERS

Any surplus left after making payment to preference shareholders is distributed among the equity shareholders if all the shares are equally paid up. But if the shares are called in unequal proportions, the liquidator should see that the capital contribution by the shareholders should be the same.

It may be remembered that

calls in advance will have priority in repayment over the paid up share capital of that class.

PREFERENCE SHAREHOLDERSSlide11

Under Section 530 of the Companies Act , the following creditors are treated as preferential creditors:

all revenues, taxes, cesses & rates payable to the government or local authority will be treated as preferential creditors provided that it must become due within 12 months before the date of winding up.

4 months salary & wages due to the employees of the company will be treated as preferential provided that it must become due within 12 months before the date of winding up. Maximum of Rs. 20000 will be treated as preferential creditors.

All accrued holiday remuneration payable to an employee due to termination of his employment is treated as preferential.

PREFERENTIAL CREDITORSSlide12

The person who advances money for making the payment under (ii) & (iii) mentioned above will be treated as preferential.

Any sum payable by the company under the Employees State Insurance Act, 1948 will be treated as preferential provided that it must become due within 12 months before the date of winding up.

Compensation payable by the company under Workmen Compensation Act, 1923 is treated as preferential.

Any sum payable by the company to its employees from a Providend Fund, Pension Fund, Gratuity Fund or any other fund maintained foe the welfare of the employees.

the expenses of investigation held

Under Section 235 or 237

will be treated as preferential. Slide13

FORMAT OF STATEMENT OF AFFAIRS

ASSETS NOT SPECIFICALLY PLEDGED (list

‘A’)

ESTIMATED REALISABLE VALUE (Rs.)

Balance at Bank

Cash

in hand

Debtors

Leasehold Property

Plant & Machinery

Investments

Other AssetsSlide14

ASSETS SPECIFICALLY PLDGED (list ‘B’)

ESTIMATED REALISABLE VALUE

Rs.

DUE TO SECURED CREDITORS

Rs.

DEFICIENCY RANKING AS UNSECURED

Rs.

SURPLUS

CARRIED TO LAST COLUMN

Rs.

Freehold

property

SUMMARY

OF GROSS ASSETS

AMOUNT

Estimated

value of assets specifically pledged

Other

assets

ESTIMATED SURPLUS FROM ASSETS SPECIFICALLY PLEDGED

ESTIMATED

TOTAL ASSESTS AVAILABLE FOR PREFRENTIAL CREDITORS, DEBENTUREHOLDERS & UNSECURED CREDITORSSlide15

GROSS LIABILITIESRs.

LIABILITIES

AMOUNT

Rs.

Secured creditors (list ‘B’) to the extent it is secured

Preferential

creditors (list ‘C’)

Estimated balance of assets available

for debenture holders

Debenture holders secured by floating charge

(list ‘D’)

Estimated surplus/deficiency as regards debenture holders

Unsecured creditors (list ‘E’)

liability for purchases

telephone rent o/s

bills payable

Estimated

surplus/deficiency as regards creditors (being diff. of gross assets & gross liabilities) Slide16

EXAMPLE REALAED TO STATEMENT OF AFFAIRS

Q

. The following information is extracted from books of lucky limited on 31

st

July ,2010 on which date a winding up order was made.

Unsecured

creditors

Salaries due for five months

Managing director’s remuneration

Bills payable

Debtors --- good

--- doubtful(estimated to produce rs. 62,000)

--- bad

Bills receivable (good rs. 10,000)

Bank overdraft

Land (estimated to produce rs.5,00,000)Stock (estimated to produce rs.5,80,000)Furniture and fixtures

Cash in hand

Estimated liability for bills discounted

Secured creditors holding first mortgage on land

Partly secured creditors holding second mortgage on land

Weekly wages unpaid

3,50,000

20,000

30,000

1,06,000

4,30,0001,30,000 88,000 16,000 40,0003,60,0008,20,000 80,000 4,000

60,0004,00,0002,00,000 6,000Slide17

Liabilities under workmen’s compensation Act,1925Income tax due

5000 9% Mortgage debentures of 100 each interest payable to 30

th

June and 31

st

December, paid 30

th

June, 2008

Share capital :

20,000 10% preference share s of rs. 10 each

50,000 Equity shares of rs. 10 each

General reserve since 31

st

December, 2004

2,000

8,000

5,00,000 2,00,000 5,00,000 1,00,00

0

In 2004 , the company earned profit of rs. 4,50,000 but thereafter it suffered trading losses totaling Rs. 5,84,000 . The company also suffered a speculation loss of Rs. 50,000 during the year 2005 . Excise authorities imposed a penalty of Rs. 3,50,000 in 2006 for evasion of tax which was paid in 2007.

From the foregoing information, prepare the Statement of Affairs and the

D

eficiency Account

.Slide18

SOLUTION Unsecured Creditors as per List E : Rs.

Unsecured creditors 3,50,000

One month’s Salaries ( 4 month’ salaries are preferential) 4,000

Managing Director's Remuneration 30,000

B

ills Payable 1,06,000

Bank Overdraft 40,000

Liability on Bills Discounted 60,000

Amount uncovered in respect of partly secured creditors

( Rs. 2,00,000 – Rs. 1,00,000 value of security of second mortgage on land) 1,00,000 ________ 6,90,000 ======

Preferential creditors as per List C : Rs.

Salaries for 4 months 16,000

Weekly wages 6,000

Liabilities under Workmen’s C

ompensation

Act, 1925 2,000 Income Tax due ,000 ------------

32,000 ======Slide19

LUCKY LTD (IN LIQUIDATION)

STATEMENT OF AFFAIRS

As on July, 2008

Assets

Assets not specifically pledged ( as per list A)

Cash in hand

Bills Receivable

Trade Debtors

Stock

Furniture and FixturesAssets specifically pledged (as per List B) estimated due to deficiency surplus realisable secured ranking as carried to

value creditors unsecured last column

Rs. Rs. Rs. Rs.

Land 5,00,000 6,00,000 1,00,000 ----

Estimated total assets available for preferential creditors , debenture holders secured by a floating charge and unsecured creditors

Summary of Gross Assets: Rs.

Specifically pledged 5,00,000

Others 11,66,000 ----------------- 16,66,000

Estimated Realisable value4,00010,000

4,92,000

5,80,000

80,000

-------

------------------------11,66,000Slide20

--------------16,66,000

--------------

Liabilities

( to be deducted from surplus or added to deficiency as the case

may be )

Secured creditors (as per list B ) to the extent to which claims

are estimated to be covered by assets specifically pledged

Preferential Creditors (as per list C

)

Estimated balance of assets available for debenture holders

secured by a floating charge and unsecured creditors

Debenture holders secured by a floating charge (as per list D)

5,00,000

Interest due for 1 month (july,2008)@ 9% p.a. 3,750

Estimated surplus as regards debenture holders

Unsecured creditors (as per list E)

Estimated deficiency as regards creditors ,being the difference

between gross liabilities and gross assets

Issued and called up capital:

20,000 10% Preference shares of Rs. 10 each fully paid (as per list F) 50,000 equity shares of Rs. 10 each fully paid (as per list G)

Estimated Deficiency as regards contributories (as per list H)

Gross LiabilitiesRs.

5,20,000

32,000

5,03,750

6,90,000

------------

17,25,750

32,000

11,34,000

5,03,750

6,30,000

6,90,000

59,750

2,00,000

5,00,000

7,59,750Slide21

DEFICIENCY ACCOUNT (LIST H)

PARTICULARS

AMOUNT

PARTICULARS

AMOUT

TO

EXCESS OF ASSET OVER CAPITAL

TO NET TRADING ASSSET

TO PROFITS AND INCOME OTHER THAN TRADING PROFITS

TO DEFICENCY

1,00,000

4,50,.000

1,40,000

7,59,750

BY NET

TRADING LOSSES AFTER DEPRICIATION , TAXATION ETC

BY LOSSES OTHER THAN TRADING LOSSES

SEPECULATION LOSS 50,000

PENALTY IMPOSED BY EXISCE AUTORITIES 3,50,000

BY ASTIMATED LOSSES NOW WRITTEN OFF

B/R 6,000

DEBTORS 1,56,000

STOCK 2,40,000

CONTIGENT

LIABILTY 60,000

5,87,750

4,00,000

4,62,000Slide22

LIQUIDQTORS FINAL STATEMENT OF ACCOUNTS

The main job of the liquidator is to collect the assets of the company & realise them & distribute the money realised among right claimants.

For this purpose he maintains a cash book for recording the receipts & payments & is required to submit an abstract of the cash book to the court in case of compulsory winding up & to the company in case of voluntary winding up.

The liquidator is also required to prepare an account known as the Liquidator’s Final Statement of accounts after the affairs of the company are fully wound up.Slide23

LIQIDATOR’S FINAL STATEMENT OF ACCOUNT

Receipts

Amount

(Rs.)

Payments

Amount

(Rs.)

To Assets Realised :-

-- Cash at Bank

-- Cash in Hand

-- Marketable Securities

-- Bills Receivable

-- Trade Debtors

-- Stock in trade

-- Freehold property -- Plant and Machinery -- Furniture and Fittings

To Surplus from Securities

held by Secured Creditors

To Proceeds of calls made on

contributories (

on 7500

Equity shares @3.50

)

By Legal ChargesBy Liquidation Expenses

By Liquidator Remuneration

By Preferential Creditors By Debenture -holders (having a floating charge on the assets of the co.)

By Unsecured Creditors By Preference Shareholders By Equity Shareholders (42500 shares @ Rs. 1.50

)Slide24

Example of Liquidators final statement of Accounts

Ex: Bekar Ltd. Went into voluntary liquidation. The details regarding liquidation are as follows:

Share Capital:

2,000 8% preference shares of Rs.100 each(fully paid up)

ClassA-2,000 equity shares of Rs.100 each (Rs.75 paid up)

ClassB-1,600 equity shares of Rs.100 each (Rs.60 paid up)

ClassC-1,400 equity shares of Rs. 100 each (RS.50 paid up)

Assets including machinery realized Rs.4,20,000.

Liquidation expenses amount to Rs.15,000.

Bekar Ltd. Has borrowed a loan of Rs.50,000 from Patel Brothers against the mortgage of machinery (which realized Rs.80,500). In the books of the company salaries of four clerks for four months at a rate of Rs.300 per month & salaries of four peons four three months at a rate of Rs.150 per month, are outstanding. In addition to this, the company’s books show the creditors worth Rs.87,400. Prepare liquidator’s statement of receipts & payments. Slide25

SOLUTION: Liquidator’s Statement Of Receipts & Payments

Assets

Realised

Surplus from

secured creditors(80,500-50,000)

Call on equity share(C=I,400sh. @1)

Rs.

3,39,500

30,500

1,400

Liq.

Expenses

Liq. Remuneration

Preferential creditors

Unsecured creditors

Preference Sh. Holder

Equity Sh. Holder

A=2000sh.@24

B=16,000sh.@9

Rs.

15,000

-

- - - -

5,800

88,200

2,00,000

48,000

14,400

3,71,400

3,71,400Slide26

Working notes:1. Calculation of preferential & unsecured creditors

PREFERENTIAL

UNSECURED

Salaries of 4 clerks @ Rs.1000

(salary of Rs.200/clerk

in excess of preferential amount of Rs.800 treated as unsecured)

Salaries of 4 peons @ Rs.450

Other unsecured creditors

4,000

1,800

800

87,400

5,800

88,200

2 . Calculation of amount returnable to equity shareholders or Receivable from Equity Shareholders:

Rs.

Assets Realised 4,20,000

Less:

Payments: Rs.

Secured creditors 50,000

Liquidation Expenses 15,000

Preferential Creditors 5,800

Unsecured Creditors 88,200

1,59,000

Balance available for shareholders 2,61,000 Slide27

Amount available for Shareholder 2,61,000Less: Capital to be returned to preference shareholder 2,00,000

Balance available for equity shareholder 61,000

Less

: Equity share paid up:

Class A- 2,000 equity shares @ Rs. 75 = 1,50,000

Class B- 1,600 equity shares @ Rs. 60 = 96,000

Class C- 1,400 equity shares @ Rs. 50 =

70,000

3,16,000

Loss to be borne by equity shareholders

2,55,000Therefore loss per equity share= Total Loss = 2,55,000/5,000 = Rs. 51 CLASS A B CPaid up Rs. 75 60 50

Loss per share 51 51 51

-------------------------------------------------------------------------------------

Called / returned Rs. 24 9 (1)

Total No. of Equity shares