Unit – 3
Liquidation of a Company
Introduction:
A company comes into existence through a legal process and also it comes to end by law. The legal procedure through which the existence of a company comes to an end is known as ‘Liquidation’.
Definition:
As per Sec 2(94A) of the Companies Act, 2013, winding up means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.
A Company may be liquidated
- Voluntarily
- Compulsorily
A company can be voluntarily wounded
- If the company passes a resolution in general meeting
- As the period has expired of its duration, if any, fixed by its Articles or
- On occurrence of some event and on happening of which, the Articles provide for its dissolution
- If the company passes a special resolution for voluntarily winding up of the company.
A company can be compulsorily wounded by
- Tribunal
- Filing a petition
- By Contributory
- By Registrar
- By the Company
To the tribunal.
IMPORTANT NOTE for Students:
In case of voluntary winding up, the statement prepared by the liquidator to show Receipts and Payment of Cash is called as ‘Liquidator’s Statement of Account’ and in case of Compulsory winding up, it is called ‘Official Liquidator’s Final Account’.
Q1) M. Ltd. Resolved on 31st December that the company be wound up voluntarily. The following was the trail balance extracted from its books as on that date.
Particulars | Amount | Amount |
Equity shares of Rs.10 each 9% Preference shares of Rs.10 each Plant (less depreciation w/o Rs.85,000) Stock in Trade Trade Receivables Trade Payables Bank balance Preliminary expense Profit & Loss A/c (balance on 1st January 2016) Trading loss for the year 2016 Preference dividend for the year 2016 Outstanding Expenses (including mortgage interest) 4% Mortgage loan |
2,15,000 2,50,000 55,000
74,000 6,000
24,000 6,000
| 2,00,000 1,00,000
75,000
30,000
25,000 2,00,000 |
Total | 6,30,000 | 6,30,000 |
On 1st January, 2017 the liquidator sold M. Ltd.’s Plant for Rs.2,05,000 and Stock in trade for Rs.2,00,000. The sale was completed in January, 2017 and the consideration satisfied as to Rs.2,62,200 in cash and as to the balance in 6% Debentures of the purchasing company issued to the liquidator at the premium of 2%.
The remaining steps in the liquidation were as follows
1) The liquidator realized Rs.52,000 out of the book debts and the cost of collection amounted to Rs.2,000.
2) The loan mortgaged was discharged on 31st January, 2017 along with interest from 31st July, 2016. Creditors were discharged subject to 2% and outstanding expenses excluding mortgage interest were settled for Rs.2,000
3) On 30th June 2017 six months interest on debentures was received from M. Ltd.
4) Liquidation expenses amounting to Rs.3,000 and liquidators remuneration of 3% on disbursements to members were paid on 30th June, 2017 when;
a) The preference shareholders were paid out in cash; and
b) The debentures on M. Ltd. And the balance of cash were distributed rate by among the Equity shareholders.
Prepare the Liquidators Statement of Account showing the distribution.
SOLUTION: M. Ltd. (In Liquidation)
Liquidators Statement of Account from 1st January, 2017 to 30th June, 2017
Particulars | Amount | Amount | Particulars | Amount | Amount |
Balance at Bank Realisation from: Trade Receivables Rs.1,40,000 6% Debentures Cash 6 months interest on debentures Equity Shareholders Less: Cost of Collection of Debts
|
1,42,800 2,62,200 | 74,000
52,000
4,05,000
4,200
5,35,200
(2,000) | Liquidators remuneration (3% on Rs.2,43,398) Liquidation Expenses Loan on mortgage with Accrued interest Creditors including Outstanding expenses Return contributors: 6% Preference share Holders Rs.10 per share 6% Debentures Cash (3 paise approx.) |
1,42,800
5,98 |
7,302
3,000
2,04,000
75,500
1,00,000
143398 |
Total |
| 5,33,200 | Total |
| 5,33,200 |
Q2) The following is the Balance Sheet of Confidence Builders Ltd. As at 30th Sept.2016
Particulars | Amount | Particulars | Amount |
Share Capital Issued: 11% Pref. Shares of Rs.10 each 10,000 Equity Shares of Rs.10 each fully paid up 5,000 Equity Shares of Rs.10 each, Rs.7.50 per share paid up 13% Debentures Mortgage Loan Bank Overdraft Creditors for Trade Income tax arrears: (Assessment concluded in July 2012) Assessment year 2014 – 2015 Assessment year 2015 - 2016 |
1,00,000
1,00,000
37,500 1,50,000 80,000 30,000 32,000
21,000
5,000 | Land and Buildings Sundry Current Assets Profit and Loss Account Debenture issue expenses not written off
| 1,20,000 3,95,000 38,500
2,000 |
| 5,55,500 |
| 5,55,500 |
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 for the Debenture holders brought the Land and Buildings to auction and realized Rs.1,50,000. He also took charge of Sundry assets of value of Rs.2,40,000 and realized Rs.2,00,000. 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 due from their personal resources. Costs incurred by the Receiver were Rs.2,000 and by the Liquidator Rs.2,800. The Receiver was not entitled to any remuneration by the Liquidator was to receive 3% fee on the value of assets realized by him. Preference shareholders had not been paid dividend for period after 30th September 2014 and interest for the last half year was due to the debentures holders. Rest of the assets were realized at Rs.1,00,000.
Prepare the accounts to be submitted by the Liquidator and Receiver.
SOLUTION: Receivers Receipts and Payments Account
Particulars | Amount | Amount | Particulars | Amount | Amount |
Sundry Assets realized Surplus received from mortgage Sale Proceeds of Land & Building Less: Applied to discharge of mortgage loan |
1,50,000
(80,000) |
2,00,000
70,000 | Costs of the Receiver Preferential payments Creditors paid taxes raised within 12 months Debenture holders Principal Interest for half year Surplus transferred to the liquidator |
1,50,000
9,750 |
2,000
26,000
1,59,750
82,250 |
|
| 2,70,000 |
|
| 2,70,000 |
Liquidator’s Final Statement of Account
Particulars | Amount | Particulars | Amount |
Surplus received from Receiver Assets Realized Calls on Contributories: On holder of 5,000at the rate of Rs.2.17 per share |
82,250 1,00,000
10,850 | Cost of Liquidation Remuneration to Liquidator (1,00,000 x 3%) Unsecured Creditors For trade 32,000 Directors for payment Of Bank O/D 30,000 Preferential Shareholders: Principal 1,00,000 Arrears of Dividends 22,000
Equity Shareholder: Return of money to contributors to holders of 10,000 shares at 33 paise each | 2,800 3,000
62,000
1,22,000
3,300 |
| 1,93,100 |
| 1,93,100 |
Working Note:
Call from partly paid shares
Deficit before call from Equity Shares (1,82,250 – 1,89,800) = 7,550
Notional call on 5,000 shares @ Rs.2.50 each 12,500
Net balance after notional call a) 4,950
No. Of shares deemed fully paid b) 15,000
Refund on fully paid shares 4,950 = 33p
15,000
Calls on partly paid share (2.50 – 0.33) = Rs.2.17
INTRODUCTION:
In the current phase of economic and business growth, many organisations are growing into large corporations by way of acquisition or mergers. To achieve this objective, formation of holding company is an important tool.
DEFINITIONS:
As per section 2(46) of the Companies Act, 2013, ‘Holding Company’, in relation to one or more other companies, means a company of which such companies are subsidiary companies.
Section 2 (87) of the Companies Act, 2013, defines ‘Subsidiary Company’ as a company in which the holding company –
- controls the composition of the board of directors or
- exercises or controls more than one half of the total share capital either at its own or together with one or more of its other subsidiary companies.
PURPOSE OF PREPARING CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Financial Statements (CFS)are the financial statements of a group presented as those of a single enterprise, where a group refers to parent and all its subsidiaries.
The Parent Company need to inform the users of its financial statements, about the financial position and results of operations not only of their enterprise itself but also of the group as a whole. For this purpose, Consolidated Financial Statements are prepared by a parent that is holding enterprise; to provide financial information about a parent and its subsidiary or subsidiaries as a single economic entity.
CFS normally includes Consolidated Balance Sheet, Consolidated Statement of Profit and Loss and Notes and Schedules. Consolidated Cash Flow Statement also needs to be prepared, in case the Holding Company prepares its own Cash Flow Statement.
IN THE SYLLABUS, preparation of Consolidated Balance Sheet and Consolidated Profit and Loss only are included.
Q 1) Given below are the Profit and Loss Accounts of H Ltd and its Subsidiary S Ltd for the year ended on 31st March, 2017.
Particulars | H Ltd | S Ltd |
Incomes: Sales and Other Income Increase in Inventory |
5000 1000 |
1000 200 |
| 6000 | 1200 |
Expenses: Raw Material Consumed Wages and Salaries Production Expenses Administrative Expenses Selling and Distribution Expenses Interest Depreciation |
800 800 200 200
200 100 100 |
200 150 100 100
50 50 50 |
| 2400 | 700 |
Profit before Tax Less: Provision before Tax | 3600 1200 | 500 200 |
Provision after Tax Less: Dividend Paid | 2400 1200 | 300 150 |
Balance of Profit | 1200 | 150 |
Other Information:
H Ltd. Sold goods to S Ltd. Of Rs. 120 at cost plus 20%. Inventory of S Ltd. Includes such goods valuing Rs. 24. Administrative expenses of S Ltd. Include Rs. 5 paid to H Ltd. As consultancy fees. Selling and Distribution expenses of H Ltd. Include Rs. 10 paid to S Ltd. As commission.
H Ltd. Holds 80% of equity share capital of Rs. 1000 in S Ltd. Prior to 2015-16. H Ltd. Took credit to its Profit and Loss Account, the proportionate amount of dividend declared and paid by S Ltd. For the year 2015-16. Prepare a consolidated Profit and Loss Account.
Solution: Consolidated Profit and Loss A/c
Particulars | Note No. | Amount (Rs.) |
I. Revenue from Operations | 1 | 5865 |
II. Total Revenue |
| 5865 |
III. Expenses Cost of Material Purchased/Consumed Changes of Inventories of Finished Goods Employee Benefit Expenses Finance Cost Depreciation and Amortization Expense Other Expenses |
3 2 4 6 7 5 |
1180 (1196) 950 150 150 535 |
Total Expense |
| 1769 |
IV. Profit Before Tax (II-III) V. Tax Expenses |
8 | 4096 1400 |
VI. Profit After Tax |
| 2696 |
Notes to Accounts:
Note No. | Particulars | Amount | Amount |
1
2
3
4
5
6
7
8 | Revenue from Operations Sales and Other Income H Ltd S Ltd
Less: Inter Company Sales Consultancy fees received by H from S Consultancy received by S from H
Increase in Inventory H Ltd S Ltd
Less: Unrealised Profits [(24 x 20) / 120]
Cost of Material purchased/consumed H Ltd S Ltd
Less: Purchase by S Ltd from H Ltd
Direct Expenses (Production) H Ltd S Ltd
Employee Benefit Expense Wages and Salaries H Ltd S Ltd
Other Expenses Administrative Expenses H Ltd S Ltd
Less: Consultancy received byH Ltd fromS Ltd
Selling and Distribution Expenses H Ltd S Ltd
Less: Consultancy received by S Ltd from H Ltd
Finance Costs Interest H Ltd S Ltd
Depreciation and Amortization Expenses H Ltd S Ltd
Provision for Tax H Ltd S Ltd |
5000 1000 6000 (120) (5) (10)
1000 200 1200 (4)
800 200 1000 (120)
200 100
800 150
200 100 300 (5)
200 50 250 (10)
100 50
100 50
1200 200 |
5865
1196 7061
880
300 1180
950
295
240 535
150
150
1400 |
Q 2) From the following summarized balance sheets of H Ltd and S Ltd, prepare a consolidated Balance Sheet as on 31st March, 2017.
1. Reserves and Profit and Loss A/c of S Ltd stood at Rs. 25,000 and 15,000 respectively on the date of acquisition of its 80% shares by H Ltd on 1st April, 2016.
2. Machinery (Book Value Rs. 1,00,000) and Furniture (Book Value Rs. 20,000) of S Ltd were revalue at Rs. 1,50,000 and 15,000 respectively on 1st April, 2016 for the purpose of fixing the price of its shares. Rate of Depreciation – Machinery 10%, Furniture 15%.
Summarized Balance Sheet as on 31st March, 2017
Liabilities | Amount | Amount | Assets | Amount | Amount |
Equity and Liabilities Shareholder’s Funds Share Capital Shares of Rs. 100 each
Reserves
Profit and Loss A/c
Trade Payables |
6,00,000
2,00,000
1,00,000
1,50,000 |
1,00,000
75,000
25,000
57,000 | Non-Current Assets Fixed Assets Machinery Furniture
Other Non-Current Assets Non-Current Investments in Shares of S Ltd 800 Shares at Rs. 200 each |
3,00,000 1,50,000
4,40,000
1,60,000 |
90,000 17,000
1,50,000
- |
| 10,50,000 | 2,57,000 |
| 10,50,000 | 2,57,000 |
Solution: Consolidated Balance Sheet as on 31st March, 2017
Particulars | Note No. | Amount |
I. Equity and Liabilities 1. Shareholder’s Funds a. Share Capital b. Reserves and Surplus 2. Minority Interest (WN 5) 3. Current Liabilities a. Trade Payables |
1
2 |
6,00,000 3,44,600 48,150
2,07,000 |
TOTAL |
| 11,99,750 |
II. Assets 1. Non-Current Assets a. Property, Plant and Equipment i. Tangible Assets Ii. Intangible Assets b. Other Non-Current Assets |
3 4 5 |
5,97,750 12,000 5,90,000 |
TOTAL |
| 11,99,750 |
Notes to Accounts:
Note No. | Particulars | Amount | Amount | Amount |
1 | Reserves and Surplus Reserves Add: 4/5th share of S Ltd.’s post acquisition reserves (WN 3)
Profit and Loss Account Add:4/5th share of S Ltd.’s post acquisition profits (WN 4) |
|
2,00,000
40,000
1,00,000 4,600 |
2,40,000
1,04,600 |
|
|
|
| 3,44,600 |
2
| Trade Payables H Ltd S Ltd |
|
1,50,000 57,000 |
2,07,000 |
3 | Tangible Assets Machinery H Ltd S Ltd Add: Appreciation
Less: Depreciation (1,50,000 x 10%) Furniture H Ltd S Ltd Less: Decrease in Value
Less: Depreciation (15,000 x 15%) |
1,00,000 50,000 1,50,000 (15,000)
20,000 (5,000) 15,000 (2,250) |
3,00,000
1,35,000
1,50,000
12,750 |
5,97,750 |
4 | Intangible Assets Goodwill (WN 6) |
|
|
12,000 |
5 | Other Non-Current Assets H Ltd S Ltd |
|
4,40,000 1,50,000 |
5,90,000 |
Working Notes:
Sr. No. | Particulars | Amount |
1 | Pre-acquisition profits and reserves of S Ltd Reserves Profit and Loss Account
H Ltd : 4/5 x 40,000 Minority’s Interest : 1/5 x 40,000 |
25,000 15,000 40,000 32,000 8,000 |
2 | Profit on revaluation of assets of S Ltd. Profit on Machinery (1,50,000 – 1,00,000) Less: Loss on Furniture (20,000 – 15,000) Net Profit on revaluation H Ltd : 4/5 x 45,000 Minority’s Interest : 1/5 x 45,000 |
50,000 5,000 45,000 36,000 9,000 |
3 | Post-acquisition reserves of S Ltd Post-acquisition reserves (Total Reserves less pre-acquisition reserves) H Ltd : 4/5 x 50,000 Minority’s Interest : 1/5 x 50,000 | 50,000
40,000 10,000 |
4 | Post-acquisition profits of S Ltd Post-acquisition profits (Profit and Loss Account less pre-acquisition profits 25,000-15,000) Add: Excess Depreciation charged on Furniture @ 15%on 5,000 (20,000-15,000)
Less: Under Depreciation on Machinery @ 10% on 50,000 (1,50,000-1,00,000) Adjusted Post-acquisition profits H Ltd : 4/5 x 5,700 Minority’s Interest : 1/5 x 5,750 |
10,000
750
10,750 5,000
5,750 4,600 1,150 |
5 | Minority Interest Paid up value of 200 shares (1000-800) held by outsiders 200 shares x 100/- Add: 1/5th share of pre-acquisition profits and reserves 1/5th share of profit on revaluation 1/5th share of post-acquisition reserves 1/5th share of post-acquisition profit |
20,000
8,000 9,000 10,000 1,150 48,150 |
6 | Cost of Control or Goodwill Price held by H Ltd for 800 shares (A) Less: Intrinsic Value of the Shares Paid up value of 800 shares held by H Ltd 800 shares x Rs. 100 Add:4/5thshareof pre-acquisition profits and reserves 4/5thshare of profit on revaluation Intrinsic Value of Shares on the Date of Acquisition (B) Cost of Control or Goodwill (A)-(B) |
1,60,000
(80,000) 32,000 36,000 1,48,000 12,000 |
Books recommended:
1. M. C. Shukla and T. S. Grewal —Advanced Account
2. S. M. Shukla —Advanced Accounts.
3. R. L. Gupta —Advanced Accounts.
4. Man Mohan Prasad — Advanced Accounts.
5. S. K. Singh & R. U. Singh —Specialised Accounts