5.1 Meaning of liquidation modes of winding up consequences of winding up statement of affairs liquidator’s final statement of account list ‘B’ contributories

Unit 5

Liquidation of Companies

5.1 Meaning of liquidation, modes of winding up, consequences of winding up, statement of affairs, liquidator’s final statement of account, list ‘B’ contributories

Winding up is a means to dissolve a company and realize and use its assets in the payments of debt. After satisfaction of the debts, the remaining balance, if any, is paid back to the members in proportion to the contribution made by them to capital of the company. The winding up of a company is the process whereby its life is ended, and its property is administered for the benefit of its creditors and members. An administrator, called a liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.

As per SECTION 2(94A) of the Companies Act,2013, “winding up” means winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016.

Thus, winding up ultimately leads to the dissolution of the company. In between winding up and dissolution, the legal entity of the company remains, and it can be sued in Tribunal of Law.

Winding up V. Liquidation:

Commonly, the expression “winding up” and “liquidation” are used interchangeably; however, there exist a line of difference between the two expressions. Winding up is a process of ending all the business affairs of the company and liquidation refers to selling off the assets of the company.

Modes [S.270]

Statement of Affairs [S.274]

Petition by Company:

In case of winding up by Tribunal, Section 272(5) of the Companies Act, 2013 provides that a petition presented by the company for winding up before the Tribunal shall be admitted only if accompanied by a statement of affairs in such form and in such manner as may be prescribed.

Petition by Others:

In accordance with Section 274(1), where a petition for winding up is filed before the Tribunal by any person other than the company, the Tribunal shall, if satisfied that a prima facie case for winding up of the company is made out, by an order direct the company to file its objections along with the statement of its affairs within thirty days of the order in such form and in such manner as may be prescribed. The Tribunal may allow a further period of thirty days in a situation of contingency or special circumstances.

Procedure/Contents:

The broad lines on which the Statement of Affairs is prepared are the following:

Include assets on which there is no fixed charge at the value they are expected to realize.

Include assets on which there is fixed charge. The amount expected to be realized would be compared with the amount due to creditor concerned. Any Surplus is to be extended to the other column. A Deficit is to be added to unsecured creditors.

The total of assets in point (a) and any surplus from assets mentioned in point (b) is available for all the creditors (except secured creditors already covered by specifically mortgaged assets).

From the total assets available, the following should be deducted one by one:

Preferential creditors,

Debentures having a floating charge, and

Unsecured Creditors.

If a minus balance emerges, there would be deficiency as regards creditors, otherwise there would be surplus.

e. The amount of total paid-up capital should be added, and the figure emerging will be deficiency as regards members.

Lists:

Statement of Affairs should accompany eight lists:

Assets:

List A: Full particulars of every description of property not specifically pledged and included in any other list are to be set forth in this list.

List B: Assets specifically pledged, and creditors fully or partly secured.

b. Liabilities:

List C: Preferential creditors for rated, taxes, salaries, wages and otherwise.

List D: List of debenture holders secured by a floating charge.

List E: Unsecured creditors.

c. Share Capital:

List F: List of Preference shareholders.

List G: List of Equity shareholders.

d. Deficiency/ Surplus:

List H: Deficiency or surplus account.

Deficiency Account

The official liquidator will specify a date for period beginning with the date on which information is supplied for preparation of an account to explain the deficiency or surplus. On that date either assets would exceed capital plus liabilities, that is, there would be a reserve or there would be a deficit or debit balance in the Profit and Loss Account. The deficiency account is divided into two parts:

The first part starts with the deficit and contains every item that increases deficiency.

The second part starts with the surplus on the given date and include all profits.

If the total of the first exceeds that of the second, there would be a deficiency to the extent of the difference, and if the total of the second part exceeds that of the first, there would be a surplus.

Liquidators Final Statement of Account

Receipts:

While preparing the liquidators statement of account, receipts are shown in the following order:

Amount realized from assets.

In case of assets specifically pledged in favor of creditors, only the surplus from it, if any, is entered as ‘surplus from securities.

In case of partly paid up shares, the equity shareholders should be called up to pay necessary amount if creditors’ claims/claims of preference shareholders can’t be satisfied with the available amount. Preference shareholders would be called upon to contribute for paying off creditors.

Amounts received from calls to contributories made at the time of winding up are shown on receipts side.

Net results as per Trading Account are also included on the receipts side.

Payments made to redeem securities and cost of execution and payments per trading account are deducted from total receipts.

2. Payments:

Payments are made and shown in the following order:

Legal charges

Liquidator’s remuneration

Liquidator’s expenses

Debenture holders

Creditors:

Preferential;

Unsecured Creditors;

f. Preferential shareholders; and

g. Equity shareholders.

3. Partly paid shares:

In case of partly paid shares, it should be seen whether any amount is to be called up on shares. Firstly, the equity shareholders should be called up to pay necessary amount if creditors claim/claims of preference shareholders cannot be satisfied with the amount. Preference shareholders would be called upon to contribute for paying off creditors.

4. Loss of Shareholders:

The loss is suffered by each class of shareholders, i.e. the amount that cannot be repaid, should be proportionate to the nominal value of the share. The shares have nominal value of Rs. 80 per share and other set has paid Rs. 60 per share. Suitable adjustment will have to be made in cash in such a case; the latter set must contribute Rs. 20 first; or the first set must be paid Rs. 20 first.

Liquidators Final Statement of Account (Format)

Liquidators Final Statement of Accounts

Receipts	Amount (in Rs.)	Payment	Amount (in Rs.)
To Assets Realized:	xx	By Legal Charges	xx
- Land & Building	xx	By Liquidation expenses	xx
- Plant & Machinery	xx	By Liquidator’s Remuneration	xx
- Furniture	xx	By Preferential creditors (unsecured)	xx
- Debtors	xx	By Debenture holders (having a floating charge on assets of the Co.):
- Stock	xx	- Principle	xx
- Investment	xx	- Outstanding Interest	xx
- Cash in Hand	xx	By unsecured Creditors	xx
- Cash at Bank	xx	By Preference Shareholder’s
To Surplus from assets held by secured creditors	xx	- Principle	xx
To Proceeds on call made on:		- Dividend in arrears	xx
- Equity Shares	xx	By Equity Shareholder’s	xx
- Preference shares	xx

	xxx		xxx

Key takeaways:

The winding up of a company is the process whereby its life is ended, and its property is administered for the benefit of its creditors and members.

Winding up is a process of ending all the business affairs of the company and liquidation refers to selling off the assets of the company.

The official liquidator will specify a date for period beginning with the date on which information is supplied for preparation of an account to explain the deficiency or surplus.

References:

Sehgal, Ashok and Deepak Sehgal. Corporate Accounting. Taxman Publication, New Delhi.

Gupta, Nirmal. Corporate Accounting. Sahitya Bhawan, Agra.

Jain, S.P. and K.L. Narang. Corporate Accounting. Kalyani Publishers, New Delhi.

Compendium of Statements and Standards of Accounting. The Institute of Chartered Accountants of India, New Delhi.

Bhushan Kumar Goyal, Fundamentals of Corporate Accounting, International Book House.

Solved Examples

Q.1

From the following particulars, prepare a Statement of Affairs and the Deficiency of the Equipment Ltd., which went into liquidation on December 31, 2016:

			Rs		Rs
3,000 equity shares of 100 each, Rs 80 paid-up					2,40,000
6% 1,000 preference shares of Rs 100 each fully paid-up			1,00,000
Less : Calls in arrear			(5,000)		95,000
5% Debentures having a floating charge on the
assets (interest paid upto June 30, 2016)					1,00,000
Mortgage on Land & Buildings					80,000
Trade Creditors					2,65,500
Owing for wages					20,000
Secretary’s salary (@ Rs 500 p.m.) owing					3,000
	Assets	Estimated to produce		Book value
		Rs		Rs
	Land & Building	1,30,000		1,20,000
	Plant	1,30,000		2,00,000
	Tools	4,000		20,000
	Patents	30,000		50,000
	Stock	74,000		87,000
	Investments in the hands of a
	Bank for an overdraft of Rs 1,90,000	1,70,000		1,80,000
	Book Debts	60,000		90,000

On 31st December, 2011 the balance sheet of the company showed a general reserve of Rs 40,000 accompanied by a debit balance of Rs 25,000 in the Profit & Loss Account.

In 2012 the company made a profit of Rs 40,000 and declared a dividend of 10% on equity shares. The company suffered a total loss of Rs 1,09,000 besides loss of stock due to fire of Rs 40,000 during 2013, 2014 and 2015. For 2016 accounts were not made.

The cost of winding up is expected to be Rs 15,000.

Solution:

Statement of Affairs on 31 December, 2016, the date of winding up

Estimated realisable value

Assets	Rs
Assets not specifically pledged (as per list A)
Trade debtors	60,000
Stock in trade	74,000
Plant	1,30,000
Tools	4,000
Patents	30,000
Unpaid calls	5,000
	3,03,000

Assets specifically pledged (as per list B)
	Estimated Realisation	Due to Secured Creditors	Deficiency Ranking as Unsecured Creditors	Surplus carried to the last column
	Rs	Rs	Rs	Rs
Investments	1,70,000	1,90,000	20,000	50,000
Land & Building	1,30,000	80,000	20,000	50,000
	3,00,000	2,70,000
	Estimated surplus from assets specifically pledged					50,000
	Estimated total assets available for preferential creditors, debenture holders and unsecured creditors					3,53,000
	Summary of Gross Assets:
	Gross realisable value of - assets specifically charged				3,00,000
	others assets				3,03,000
					6,03,000
	Estimated total assets available for preferential creditors, debenture holders, bank overdraft and unsecured creditors brought forward					3,53,000
Gross Liabilities	Liabilities
Rs					Rs	Rs
2,50,000	Secured creditors (as per List B) to the extent to which claims are estimated to be covered by assets specifically pledge
22,000	Preferential creditors as per list C (20,000 +2,000)					22,000
	Estimated balance of assets available for
	Debenture holders, Bank & unsecured
	creditors					3,31,000

1,02,500	Debenture holders secured by a floating		(1,02,500)
	charge as per list D		(1,02,500)
	Surplus as regards debenture holders		2,28,500
	Unsecured creditors as per list E
	Estimated unsecured balance of claim of creditors partly secured on
	specific assets	20,000
	Trade creditors	2,65,500
2,92,500	Outstanding expenses	7,000	2,92,500
	Estimated deficiency as regards creditors
	being the difference between gross
	liabilities and gross assets		64,000
6,67,000
	Issued & Called up Capital:
	3,000 Equity shares or Rs 100 each, Rs 80 paid	2,40,000
	6% 1,000 preference shares of Rs 100 each fully called	1,00,000	3,40,000
	Estimated Deficiency as regards members as per list H		4,04,000

Note:

(i) The above is subject to cost to winding up estimated at Rs 15,000 and to any surplus in deficiency on trading realisation of assets.

(ii) There are 3,000 shares unpaid @ Rs 20 per share liable to be called up.

List H - Deficiency Account

Item contributing to Deficiency: Rs

Excess of capital & liabilities over assets on 1-1-2014 Nil
Net dividend & bonuses during the period Jan.-Dec. 2014 29,700
Net trading losses after charging depreciation, taxation,

interest on debentures, etc. during the same period

(Rs 1,09,000 + Rs 1,31,300) 2,40,300

4. Losses other than trading losses written off or for which

provision has been made in the books during the same

period - stock loss. 40,000

5. Estimated losses now written off or for which

provision has been made for the purpose of preparing

the statement :

Plant 70,000

Tools 16,000

Patents 20,000

Stock 13,000

Investments 10,000

Debtors 30,000 1,59,000

6. Other reducing items contributing to deficiency NIL

4,69,000

B. Items reducing Deficiency

7. Excess of assets over capital and liabilities on 1st Jan. 2012 15,000

8. Net trading profit during the period 1st Jan. 2010 to

31st Dec. 2012 40,000

9. Profit & Incomes other than trading profit during the

same period

10. Other items Deficiency - Profit expected on

Land & Building 10,000

65,000

Deficiency as shown by the statement of Affairs (A) - (B) 4,69,000

4,04,000

Working Notes :

(1) Trial Balance to ascertain the amount of loss for 2016

	Dr.	Cr.
	Rs	Rs
Land & Building	1,20,000
Plant	2,00,000
Tools	20,000
Patents	50,000
Stock	87,000
Investments	1,80,000
Debtors	90,000
Equity Capital		2,40,000
6% Preference share capital		95,000
5% Debentures		1,00,000
Interest Outstanding		2,500
Mortgage on Land & Building		80,000
Trade Creditors		2,65,500
Owing for Wages		20,000
Secretary’s Salary		3,000
Managing Director’s Salary		6,000
Bank Overdraft		1,90,000
Profit & Loss Account on 1-1-2014	1,23,700
	8,70,700	10,02,000
Loss for the year (balancing figure)	1,31,300	-
	10,02,000	10,02,000

Q.2

X Co. Ltd. went into voluntary liquidation on 1st April, 2017. The following balances are extracted from its books on that date :


Capital		Machinery	90,000
24,000 Equity Shares of Rs 10 each	2,40,000	Leasehold properties	1,20,000
Debentures (Secured by floating charge)	1,50,000	Stock	3,000
Bank overdraft	54,000	Debtors	1,50,000
Creditors	60,000	Investments	18,000
		Cash in hand	3,000
		Profit and loss account	1,20,000

	5,04,000		5,04,000

The following assets are valued as under:

	Rs
Machinery	1,80,000
Leasehold properties	2,18,000
Investments	12,000
Stock	6,000
Debtors	1,40,000

The bank overdraft is secured by deposit of title deeds of leasehold properties. There were preferential creditors amounting Rs 3,000 which were not included in creditors

Rs 60,000.

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

Solution:

Statement of Affairs of X Co. Ltd. on the 1st day of April, 2017

Assets not Specifically Pledged:					Estimated realisable values
Cash in Hand					3,000
Investments					12,000
Debtors					1,40,000
Stock					6,000
Machinery					1,80,000
					3,41,000
Assets specifically pledged :
	(a)	(b)	(c)	(d)
	Estimated Realisable Value	Due to Secured Creditors	Deficiency ranking as unsecured	Surplus carried to last column
	Rs	Rs	Rs	Rs
Leasehold Property	2,18,000	54,000	-	1,64,000
	Estimated Surplus from Assets Specifically pledged				1,64,000
	Estimated total assets available for Preferential creditors, debentures holders secured by floating charge, and unsecured creditors				5,05,000
	Summary of Gross assets
	Gross realisable value of assets
	Specifically Pledged 2,18,000
	Other Assets 3,41,000
	Gross Assets 5,59,000
Rs	Gross Liabilities(to be deducted from surplus or added to deficiency as the case may be)
	Secured creditors to the extent to which claims are estimated to be covered by assets
54,000	Specifically pledged
3,000	Preferential creditors				(3,000)
	Balance available for Debenture Holders				5,02,000
1,50,000	Debentures (Payment)				(1,50,000)
	Balance available for Creditors				3,52,000
60,000	Creditors				(60,000)
2,67,000	Estimated surplus as regards creditors [being difference between gross assets (d) and gross liabilities (e)]				2,92,000
	Issued and called up capital 24,000 equity shares of Rs 10 each				2,40,000
	Estimated surplus as regard members				52,000

Q.3

M. Ltd. resolved on 31st December 2016 that the company be wound up voluntarily. The following was the trial balance extracted from its books as on that date:

	Rs	Rs
Equity shares of Rs 10 each		2,00,000
9% Preference shares of Rs 10 each		1,00,000
Plant (less depreciation w/o Rs 85,000)	2,15,000
Stock in trade	2,50,000
Trade receivables	55,000
Trade payables		75,000
Bank balance	74,000
Preliminary Expenses	6,000
Profit & Loss A/c (balance on 1st January, 2016)		30,000
Trading loss for the year 2016	24,000
Preference dividend for the year 2016	6,000
Outstanding Expenses (including mortgage interest)		25,000
4% Mortgage loan		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 a premium of 2%.

The remaining steps in the liquidation were as follows:

The liquidator realised Rs 52,000 out of the book debts and the cost of collection amounted to Rs 2,000.

The loan mortgage 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;

On 30th June 2017 six month’s interest on debentures was received from M. Ltd.

Liquidation expenses amounting to Rs 3,000 and liquidator’s remuneration of 3% on disbursements to members were paid on 30th June, 2017 when:

The preference shareholders were paid out in cash; and

The debentures on M. Ltd. and the balance of cash were distributed ratably among the equity shareholders.

Prepare the Liquidator’s Statement of Account showing the distribution.

Solution:

M. Ltd. (in liquidation)

Liquidator’s Statement of Account from 1st January, 2017 to 30th June, 2017

Reciepts	Rs	Rs	Payments	Rs	Rs
Balance at Bank Realisation from:		74,000	Liquidator’s remuneration (3% on Rs 2,43, 398) Liquidation		7302*
Trade receivables M. Ltd. -		52,000
Rs 1,40,000 6%			Expenses		3,000
Debentures	1,42,800		Loan on mortgage with Accrued interest**		2,04,000
Cash	2,62,200	4,05,000
6 month’s interest on debentures		4,200	Creditors including Outstanding		75,500
			Expenses
Equity shareholders		5,35,200	Return contributors :
Less: Cost of			6% Preference share-
Collection of Debts		(2,000)	Holders Rs 10 per share		1,00,000
			6% Debentures	1,42,800
			Cash (03 P. approx.) per share	598	1,43,398

Total		5,33,200	Total		5,33,200

*3/103 × 2,50,700 (i.e. Rs 5,32,000 less payments made to all creditors)

**It is assumed that loan is secured by a floating charge.

Q.4

Prakash Processors Ltd. went into voluntary liquidation on 31st December, 2016 when their Balance Sheet read as follows:—

Liabilities	Rs
Issued and subscribed capital :
5,000 10% cumulative preference shares
of Rs 100 each, fully paid	5,00,000
2,500 equity shares of Rs 100 each, Rs 75 paid	1,87,500
7,500 equity shares of Rs 100 each, Rs 60 paid	4,50,000
15% Debentures secured by a floating charge	2,50,000
Interest outstanding on Debentures	37,500
Creditors	3,18,750
	17,43,750
Assets
Land and Building	2,50,000
Machinery and Plant	6,25,000
Patents	1,00,000
Stock	1,37,500
Trade receivables	2,75,000
Cash at Bank	75,000
Profit and Loss A/c	2,81,250
	17,43,750

Preference dividends were in arrears for 2 years and the creditors included Preferential creditors of Rs 38,000.

The assets realised as follows :

Land and Building Rs 3,00,000; Machinery and Plant Rs 5,00,000; Patents Rs 75,000; Stock Rs 1,50,000; Trade receivables Rs 2,00,000.

The expenses of liquidation amounted to Rs 27,250. The liquidator is entitled to a commission of 3% on assets realised except cash. Assuming the final payments including those on debentures is made on 30th June, 2017 show the liquidator’s Statement of Account.

Solution:

Prakash Processors Limited

Liquidator’s Statement of Account

Receipts	Rs	Rs	Payments	Rs	Rs
To Assets realised -			By Liquidation expenses		27,250
Bank		75,000	By Preferential creditors		38,000
To Other assets:			By Liquidator’s		36,750
Land etc.	3,00,000		Remuneration (W.N.1)
Machinery etc.	5,00,000		By Debenture holders:
Patents	75,000		Debentures	2,50,000
Stock	1,50,000		Interest accrued	37,500
Trade receivables	2,00,000	12,25,000	Interest 1/1/17-30/6/17	18,750	3,06,250
To Call on equity shareholders (7,500 × Rs 2.65) (1)		19,875	By Unsecured creditors		2,80,750
			To Preferential Shareholders :
			Preference capital	5,00,000
			Arrear of Dividend	1,00,000	6,00,000
			By Equity Shareholders
			(Rs 12.35 per share on 2500 shares)		30,875
Total		13,19,875	Total		13,19,875

Working Notes:

Liquidator’s remuneration 12,25,000 × 3/100 =Rs 36,750

As the company is solvent, interest on the debentures will have to be paid

for the period 1-1-2017 to 30-6-2017 (250000 x 15% x 6/12) = Rs 18,750

3. Total equity capital - paid up Rs 6,37,500

Less : Balance available after payment to unsecured and

preference shares (13,00,000 — 12,89,000) Rs(11,000)

Loss to be borne by 10,000 equity shares Rs6,26,500

Loss per share (626500/10000) Rs 62.65

Hence, amount of call on Rs 60 paid up share (60-62.65) Rs 2.65

Refund to share on Rs 75 paid up share (75-62.65) Rs 12.35

Q.5

The following is the Balance Sheet of Confidence Builders Ltd., as at 30th Sept. 2016:

Liabilities		Rs	Asset	Rs
Share Capital			Land and Buildings	1,20,000
Issued : 11% Pref. Shares			Sundry Current Assets	3,95,000
of Rs 10 each		1,00,000	Profit and Loss Account	38,500
10,000 equity shares of			Debenture Issue
Rs 10 each, fully paid up		1,00,000	expenses not written off	2,000
5,000 equity shares of
Rs 10 each, Rs 7.50 per
share paid up		37,500
13% Debentures		1,50,000
Mortgage Loan		80,000
Bank Overdraft		30,000
Creditors for Trade		32,000
Income-tax arrears :
(assessment concluded
in July 2012)
Assessment year 2014- 2015	21,000
Assessment year 2015- 2016	5,000	26,000
		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 but the liquidator was to receive 3% fee on the value of assets realised 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 debenture holders. Rest of the assets were realised at Rs 1,00,000.

Prepare the accounts to be submitted by the Receiver and Liquidator.

Solution:

Receiver’s Receipts and Payments Account

		Rs			Rs
Sundry Assets realised	1,50,000	2,00,000	Costs of the Receiver	-	2,000
Surplus received from			Preferential payments
mortgage			Creditors paid Taxes
Sale Proceeds of land and building			raised within 12 months		26,000
Less: Applied to discharge of mortgage loan	(80,000)	70,000	Debentures holders Principal Interest for half year	1,50,000 9,750	1,59,750
			Surplus transferred to the Liquidator		82,250
Total		2,70,000	Total		2,70,000

Liquidator’s Final Statement of Account

	Rs			Rs
Surplus received from		Cost of Liquidation		2,800
Receiver	82,250	Remuneration to Liquidator (1,00,000 x 3%)		3,000
Assets Realised	1,00,000	Unsecured Creditors :
Calls on Contributories :		for Trade	32,000
On holder of 5,000		Directors for payment
at the rate of		of Bank O/D
Rs 2.17 per share	10,850		30,000	62,000
		Preferential Shareholders:
		Principal	1,00,000
		Arrears of
		Dividends	22,000	1,22,000
		Equity shareholder :
		Return of money to
		contributors to holders
		of 10,000 shares at 33
		paise each		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 @ 2.50 each	12,500
Net balance after notional call	4,950
No. of shares deemed fully paid	15000
Refund on fully paid shares (4950/15000)	0.33 paise
Calls on party paid share (2.50 - 0.33)	2.17

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