Liquidation of
Companies
Introduction
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A company is a creation of law and it can come
to an end only through a process of law.
A company ceases to exist when it is dissolved.
One of the ways to dissolve a company is to
resort to the process of winding up or
liquidation.
When winding up commences the company is
said to be in liquidation.
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It is not necessary that only an insolvent
company should be liquidated.
Sometimes it is necessary to liquidate or wind
up even a prosperous and solvent company.
The Company Act 2013 lays down the
procedure by which the company can be
wound up.
Modes of winding up
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Compulsory winding up
Voluntary winding up
Winding up under the supervision of the court
Compulsory winding up
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the company has a special resolution
resolved that the company may be wound up
by the court
Statutory report not delivered to the Registrar
Not commence business within one year from
its incorporation or suspends t for whole year
If the number of members are reduced
Unable to pay debts
Voluntary winding up
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Member voluntary winding up
Creditors voluntary winding up
Member voluntary winding up
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This type of winding up occurs only when the
company is solvent
A declaration of the company solvency at the
BOD meeting, stating that the company has no
debts or it will be able to pay its debts in full
within three years of the commencement of the
winding up
At the general meeting a liquidator is appointed
and his remuneration is fixed.
Creditors voluntary winding up
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It occurs in the absence of declaration of
solvency that is when the company is insolvent.
Both at member meeting and creditors meeting
liquidator is nominated, in case of disagreement
the creditors nominee is appointed
The liquidator must annually call not only the
members but also creditors meeting.
Winding up subject to supervision
of court
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The court may intervene only incase of
following circumstances:
◦ If the resolution for winding up was obtained by
fraud by the company
◦ If the rules pertaining to winding up are not
properly followed
◦ If the liquidator is found to be negligent in
releasing the assets of the company
Consequences of liquidation
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Liquidator will take over the administration of
the company
The powers of the BODs will terminate and
will now vest in the liquidator
No suit or legal proceedings can be proceed
with against the company except with the
permission of the court.
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The order for winding up has the effect of a
notice of discharge to the employees of the
company except where the business of the
company is continued by the order of the
court.
A shareholder is liable to pay the full amount
up to the face value of the shares held by
him.
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Incase of solvent company all claims of its
creditors when proved are fully met and
incase of insolvent company the rules under
the law of insolvency hall apply.
Order of payment
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The following amounts are realized by the
liquidator;
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From the debtors of the company
From sale proceeds of the assets of the company
The surplus amount from fully secured creditors
By making calls for the amount remaining unpaid
on the shares.
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Payments are done in the following order
Secured creditors
Legal expenses
Remuneration of the liquidator
Expenses and cost of winding up
Payment to preferential creditors
Payment to debenture holders and creditors who have
floating charge on the assets of the company
◦ Payment to unsecured or ordinary creditors
◦ Payment to members or contributories (if balance
remains)
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Remuneration of liquidator
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form of commission
based on the assets realized,
cash and bank balance is not included unless
specified
Surplus of secured creditors is mostly
included in the amount realized
If remuneration is paid on amount distributed
to unsecured creditors, If (un)sufficient
amount is available to pay all creditors then
the remuneration
◦ Amount of Unsecured creditors * percentage
◦ Amount of Unsecured creditors * percentage/100+
percentage of commission
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The liquidator’s job is to realize the assets of
the company and pay the creditors (including
Revenue) from the proceeds. Where there are
insufficient assets to pay all the creditors, the
funds available are distributed in a preset order
The end result is that the company is removed
from the Companies Register and ceases to
have legal existence.
Statement of Affairs
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List A- list of assets which are not in hand or Pledged in favor of secured
creditors
List B-List of assets which are specifically pledged with creditors both fully
and partly secured
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List C list of Preferential Creditors and mount due
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List D- List of Debenture holders having floating charges
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List E – List of Unsecured creditors and amount due
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List F- List of names and holding of Preferential shareholders
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List G- List of Equity shareholders and the amount of Shares held
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List H- Statement showing the surplus or Defficiency in the statement of
Affairs arose due to profit or loss of the compant
Accounting Procedure
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Appointment of Liquidators
Statement of profit and Loss account and
Balance sheet
Statement of Affairs / Surplus and
Deficiency
Liquidators Final statement of Account