Liquidation of a Company | UGC NET Commerce Preparation Course PDF Download

Introduction

A company comes into existence through a legal process and also a company can comes to an end by law. Some legal formalities are required to close the affairs of a company. Such legal procedures can be called as liquidation of companies.

Meaning of Liquidation

Simply, liquidation or winding up is the legal procedure by which a company comes to its end. Liquidation or winding up of a company can be defined as “the process whereby its life is ended and its property is administered for the benefit of its creditors and members”. An administrator, namely 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. 

Unlike an insolvent individual or partnership firm, insolvency proceedings are not applicable to a company.A solvent as well as insolvent company may be liquidated.

Modes of Winding up or Liquidation

According to section 271 of the Companies Act, 2013 a company can be liquidated or wound up in the following ways: 

a) By the Tribunal
b) Voluntary 

Notwithstanding anything contained in any other Act, the provisions of this Act with respect to winding up shall apply to the winding up of a company in any of the modes specified under this section.

Winding up by the Tribunal

As per section 271 of the Companies Act 2013, in the following circumstances a company may be wound up by the Tribunal: 
(1) A company may, on a petition under section 272, be wound up by the Tribunal
(a) if the company is unable to pay its debts;
(b) if the company has, by special resolution, resolved that the company be wound up by the Tribunal;
(c) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; 
(d) if the Tribunal has ordered the winding up of the company under Chapter XIX (of the Companies Act, 2013 dealing with revival and rehabilitation of sick companies); 
(e) if on an application made by the Registrar or any other person authorised by the Central Government by notification under this Act, the Tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purpose or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company we wound up; 
(f) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or 
(g) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Contributory

Contributoryis a person liable to contribute to the assets of the company in the event of winding up. A contributory’s liability is legal, not contractual. A contributory can be either a present member or a past member.

1. Present Members (‘A’ List of Contributories)
A present member is that member whose name is included in the register of members when the company is wound up. He is liable to contribute the amount remaining unpaid on the shares held by him if the amount is needed to make the payment to the legal claimant. In the case of company limited by guarantee, he is liable for the payment of guaranteed amount at the time of winding up.

2. Past Members (‘B’ List of Contributories) 
Past members are those members who ceased to be shareholders (except by death) within one year of winding up of the company and can be called upon to pay, if the present contributories are not able to pay the liabilities of the company. Section 285 of the Companies Act, 2013 provides that: 
(a) A past member is not liable to contribute in respect of any liability of the company contracted after he ceased to be a member of the company.
(b) A past member is not liable to contribute if he ceased to be a member of the company for one year or upward before the commencement of the winding up.
(c) A past member is liable to contribute only if it appears to the Tribunal that present members are unable to make the contributions required to be made by them in pursuance of the Companies Act.
(d) In the case of a company limited by shares, no contribution is required from any member excluding the amount (if any) unpaid on the shares in respect of which he is liable as such member.
(e) In the case of a company limited by guarantee, no contribution is required from any member excluding the amount undertaken to be contributed by him in the event of the company being wound up.

Liquidator

A liquidator is the person who is appointed for the purpose of liquidating the company. The main job of a liquidator is to realise all assets of the liquidating company, collects the amount due from the contributories and distribute the sale proceeds of assets of the company among the right claimants. The company must submit a Statement of Affairs to the liquidator within 21 days of the passing of the winding up order. 

In case of winding up of a company by the Tribunal, the Tribunal at the time of passing of the order of winding up, shall appoint an Official Liquidator or a liquidator from the panel maintained by the Central Government consisting of the names of the Chartered Accountants, advocates, Company Secretaries, Cost Accountants and such other professional as may be notified by the Central Government having atleast 10 years’ experience in company matters. 

In case of voluntary winding up, the voluntary liquidator is appointed by resolution in general body meeting of the members and or of the creditors.

Liquidator’s Final Statement of Account

The main job of liquidator is to collect the assets of the company and realise them and distribute it among right claimants.He maintains a cash book for recording the receipts and payments and submit an abstract of cash book to the court (incase winding up by the Tribunal), and to the company (in case of voluntary winding up). The liquidator also prepares an account of winding up. Such an account is called as Liquidator’s Final Statement of Account.

All the receipts are shown on the debit side of this account. They include the following:

a) Amount realised on sale of assets.
b) Amount received from delinquent directors and other officers of the company.
c) Contributions made by the contributories

On the credit side of this account the following payments are shown in the given order:

a) Payment of secured creditors and dues to workmen upto their claim or upto the amount of securities held by secured creditors.
b) Cost of winding up (legal charges).
c) Liquidator’s remuneration.
d) Payment to creditors having a floating charge on the assets of the company.
e) Payment of preferential creditors.
f) Payment of unsecured creditors.
g) Amount paid to preference shareholders.
h) Amount paid to equity shareholders

In the preparation of Liquidator’s Final Statement of Account, the principle of double entry is not involved. It is only a statement although presented in the form of an account.

Form of Liquidator’s Final Statement of Account

Liquidator’s Remuneration or Commission

A liquidator gets remuneration in the form of commission. It is paid as a percentage of the assets realised as well as a certain percentage of the payments made to unsecured creditors. The following points are relevant while calculating liquidator’s remuneration: 

1. Commission on assets given as securities to secured creditors – The liquidator gets commission on the surplus from such assets left after making the payment of secured creditors because he makes an effort of realising the surplus of such assets from secured creditors. However, if he sells the assets himself, he gets commission on the total proceeds of such assets. 

2. Cash and Bank Balance – If the liquidator is to get a commission on cash and bank balance unless otherwise stated. 

3. Unsecured Creditors – If the liquidator is to get a commission on amount paid to unsecured creditors, unsecured creditors will also include preferential creditors for the purpose of calculation of remuneration unless otherwise stated.

If amount available is sufficient to make the full payment of unsecured creditors, the commission can be calculated as follows: 

Comission  

If the amount available is not sufficient to make the full payment on secured creditors, the commission can be calculated as follows:

Comission =