Meaning of Liquidation
A company is an artificial person
which comes into existence through a process of law. Therefore its life can
also be brought to an end only through the process of law. Since a company has
a separate existence from its members, its life span is not affected by the
life span of any of its members. One of the ways to dissolve a company is to
resort to the process of winding up or liquidation. Therefore, when the process
of winding up commences, the company is said to be in liquidation. When the
directors or members want to liquidate the company, they will have to follow
the procedure stated in the company law.
Liquidation of a company is the
process whereby its life is ended and its property administered for the benefit
of its creditors and members. An administrator, called a liquidator, is
appointed and he takes control of the company, realizes its assets, pays its
debts and finally distributes any surplus among the members in accordance with
their rights as per the company law. The term ‘Liquidation’ and ‘Winding up’
has been used synonymously.
The procedure for liquidation
The
Process of Winding up of a company is that a Liquidator is appointed who is
entrusted with the following duties:
a)
Selling off assets of the Company
b)
Paying off its Liabilities
c)
If there is any deficiency to pay to the
creditors, the shareholders (Contributories) are called upon to pay unpaid
amount on their shares
d)
If there is any surplus after clearing off the
liabilities, the liquidator then distributes surplus funds to the shareholders.
e)
After going through the above process, the
registrar of Companies removes the name of the company from the register of company.
The company is then formally dissolved.
Difference between Insolvency
and Liquidation
a)
Insolvency is applicable to sole-trading firms, partnership firms
&HUF whereas liquidation is applicable to Joint Stock companies.
b)
Insolvency leads to liquidation, but liquidationdoes not lead toinsolvency.
c)
Insolvency is governed by Insolvency Act, but
liquidation is governed by companies Act.
MODES OR METHODS OF LIQUIDATION
Liquidation
can be done in three ways.
(A)Compulsory
winding up by the court
(B)Voluntary
winding up by the members or creditors
(C)Winding
up under the super vision of the court
(A)Compulsory winding up by the
court: The court may wind up a Company:
a)
if the company has, by special resolution,
resolved that the company should be wound up by the court;
b)
if default is made in delivering the statutory
report to the Registrar or in holding the statutory meeting;
c)
if the company does not commence its business
within a year from its incorporation, or suspends its business for a whole
year;
d)
if the number of members is reduced, in the
case of a public company, below seven, and in the case of a private company,
below two;
e)
if the company is unable to pay its debts;
f)
If the court is of the opinion that it is just
and equitable that the company should be wound up.
(B)Voluntary winding up by the
members or creditors: A voluntary winding-up may be made on any one of the
following grounds:
(a) When the period, if any,
fixed for the duration of company by its articles, has expired;
(b) An event has taken
place, on the occurrence of which the articles provide that the company is to
be dissolved;
(c) If the company passes a
special resolution that the company should be wound up voluntarily (section
484(1) of the Act).
In circumstances (a) and (b), an ordinary resolution passed in a
general meeting for winding-up is sufficient.
A
voluntary winding-up may be
(a)
A members’ voluntary winding-up, or
(b)
A creditors’ voluntary winding-up.
(C)Winding up under the super vision
of the court
After
the company has passed a resolution for voluntary winding-up, the court may
make an order that the voluntary winding-up shall continue, but subject to the
supervision of the court and with such liberty for creditors, contributories or
others to apply to the court, and generally on such terms and conditions as the
court thinks just (section 533 of the Act).
Thus, a voluntary winding-up can e converted into a winding-up subject
to the supervision of the court, on terms and conditions imposed by the court.
CONSEQUENCES OF WINDING UP
1.
A liquidator is appointed by the court in case of compulsory winding
up. But in case of voluntary Winding up the members appoint the liquidator. In
case members and creditors differ about the liquidator to be
appointed then the creditor’s decision will be final.
2.
The liquidator collects the sale proceeds of the assets and
distribute among the right claimants as per law.
3.
Liquidation leads to closure of the organization.
4.
With the start of liquidation process the power of the director becomes
nullified.
5.
The liquidator prepares a list of contributories who will contribute to the
assets of the organization in case of liquidation.
Contributories
Contributories
refer to those members (share holders) who are supposed to contribute to the
organization in case of liquidation. They may be present members or
past members.
Present
members come under ‘A’ list of contributories.
And
past members are coming under ‘B’ list of contributories.
Present
members are those who are share holders of the company at the time of liquidation. They
are supposed to pay the unpaid amount of the value of the shares or
guaranteed amount, as the case may be. Past members are those who are ceased to
be the share holders within one year of the winding of the company. They
are also required to contribute towards liquidation in the sense that their activities
have also affected the process of liquidation. However, the following
points are to be remembered.
(a)A past
member will not contribute for any liability arising
out of any contract made after he ceased to be a member of the company.
(b)A past
member will not contribute if his ceased up period is
more than 1 year.
Order of payment
The amount
realized from assets (not specifically pleased) will be distributed as follows
a)
Liquidation expenses (including liquidators’ Remuneration)
b)
Creditors or Debenture holders having a floating
charge over the asset
c)
Preferential creditors
d)
Unsecured creditors
e)
Any surplus is to be distributed among
the preference share holders and equity share holders.
Preferential Creditors
These are
those creditors who are not secured, but they are having prior rights
over unsecured creditors regarding payment. They are paid out of Assets
not specifically pledged and surplus from assets specifically pledged,
after payment of legal expenses. These includes the followings
a)
All revenues, taxes, cess and rates payable to govt.
or local authorities within 12 months before the date of commencement of
winding up.
b)
All wages or salaries or commission to the
employees for services rendered to the company for a period not exceeding4
months within 12 months before the date of commencement. However, salary
to (director, Branch Manager, Manager, Secy., and Asst. Secy.) is not preferential
creditors.
c)
All remuneration to employees due to termination
of employment is preferential.
d)
Persons who have advanced money to pay the
preferential creditors are also called preferential creditors.
e)
All money payable under ESI Act and
workmen compensation Act is also preferential creditors.
f)
All sums payable to employee such as provident fund, pension,
and gratuity fund is also called preferential creditors.
Liquidator’s Final Statement of
Account
The
statement prepared by the liquidator showing receipts and payments of cash in
case of voluntary winding up is called “Liquidators’ statement of account”
(Form No. 156 Rule 329 of the Companies Act, 1956). There is no double entry
involved in the preparation of liquidator’s statement of account. It is only a
statement though presented in the form of an account.
While preparing
the liquidator’s statement of account, receipts are shown in the following order:
(a)
Amount realised from assets are included in the prescribed order.
(b)
In case of assets specifically pledged in favour of creditors, only the surplus
from it, if any, is entered as ‘surplus from securities’.
(c)
In case of partly paid up shares, the equity shareholders should be called up
to pay necessary amount (not exceeding the amount of uncalled capital) if
creditors’ claims/claims of preference shareholders can’t be satisfied with the
available amount. Preference shareholders would be called upon to contribute
(not exceeding the amount as yet uncalled on the shares) for paying of
creditors.
(d)
Amounts received from calls to contributories made at the time of winding up
are shown on the Receipts side.
(e)
Receipts 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. Payments are made and shown in the following order:
(a)
Legal charges;
(b)
Liquidator’s expenses;
(d)
Debentureholders (including interest up to the date of winding up if the
company is insolvent and to the date of payment if it is solvent);
(e)
Creditors:
(i)
Preferential (in actual practice, preferential creditors are paid before
debenture holders having a floating charge);
(ii)
Unsecured creditors;
(f)
Preferential shareholders (Arrears of dividends on cumulative preference shares
should be paid up to the date of commencement of winding up); and
(g)
Equity shareholders.
Liquidator’s
statement of account of the winding up is prepared for the period starting from
the commencement of winding up to the close of winding up. If winding up of
company is not concluded within one year after its commencement, Liquidator’s
statement of account pursuant to section 551 of the Companies Act, 1956 (Form
No. 153) is to be filed by a Liquidator within a period of two months of the
conclusion of one year and thereafter until the winding up is concluded at
intervals of not more than one year or at such shorter intervals, if any, as
may be prescribed.