Liquidation:
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Affairs of company are wound up.
Company ceases to exist.
Administrator called liquidator appointed, takes control, collects assets, pays debts and surplus.
Modes:
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Compulsory Winding Up:
Liquidation is ordered by the court, liquidator appointed by court usually government official.
Petition is filed by a creditor, director, shareholder or company.
Reason: Company is unable to pay debts.
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Voluntary:
Liquidation commenced by shareholders without court order.
1. Members Voluntary (only if company is solvent)
Declaration of solvency states company is solvent and is made by directors. It must be
made five weeks before resolution to wind up. Shareholders appoint liquidator.
2. Creditors Voluntary
If directors can’t make declaration, shareholders pass a special resolution in which is
advised to wind up company due to liabilities.
Company must cease trading.
Meeting of creditors called who appoint liquidator.
Liquidator:
• In compulsory, it’s usually official receives.
• Liquidator must be qualified insolvency practitioner.
• Has power over the directors.
• Collects asset, sells all property and distributes to creditors. Also collects debts.
• Surplus distributed among shareholders.
• Assets are paid in a particular orders:
1. Secured Creditors
Credit has fixed charge over asset, asset is sold and creditor takes money.
If value depreciated, becomes unsecured creditor.
2. Liquidation Cost
Liquidator fees etc.
3. Preferential Creditors
Arrears of salaries and pension.
4. Secured Creditors (Floating Charge)
Floating charge is one whose value changes with time. Upon liquidation, floating charge
freezes at current state becoming fixed charge and creditor is paid.
5. Unsecured Creditor
Creditors are not preferential and don’t have fixed or floating charge.
6. Shareholders
Members / shareholders paid the declared on dividend (profit) or any surplus.
Consequences:
• Liquidator takes power.
• Power of directors ceases.
• All employees are discharged.
• Members are known as contributories. Liquidators makes list of contributories who will be liable
if assets not sufficient.
• Liquidators are may release surplus among members.
• Collect and realize assets.
• Dissolution of company.
Contributory:
• Every person liable to contribute to assets, either past or present.
• Fraudulent preference is when one creditor takes preference over other creditor.
Employees:
• All employees are discharges as winding up serves as notice of discharge unless business
continued.
Interest on liabilities:
• If company is solvent, interest is upto actual date of payment
• If company is insolvent, interest is upto date of commencement of insolvency.
Shareholders:
1. Preference Shareholders
Get priority over equity shareholders in regards to payment of capital.
If after giving surplus to equity shareholders, capital is left, arrears on divided may be
paid.
2. Equity Shareholders
Any surplus left after paying preferential shareholders is distributed among.
Preferential Creditors:
• Government (revenue, taxes, rates to government due within 12 months of winding up).
• Salary of employees (due within 12 months).
• Accumulated holiday remuneration.
• Any sum under insurances.
• Any sort of compensation.
• Any sum by company to its employees from a fund.
Liquidator’s Final Statement:
• Liquidator must submit cash book with all receipts and payments to either court or company.
• Prepare an account known as final statement of accounts.