Liquidation of Company

 Meaning: 

Liquidation of a company means the termination of the legal existence of a company. Under the circumstances, the assets of the company are disposed off and debts are paid, out of the amount realised from assets or from the contributions made by the members and the surplus, if any, is distributed among members in proportion to their holding.

Methods of Winding up of Companies. 

The methods of winding up of companies are: 

• Compulsory winding up by the court 
• Voluntary winding up: 
•     Member’s Voluntary winding up 
•     Creditor’s voluntary winding up 

• Voluntary winding up under the supervision of the court. 

Liquidator

When there is liquidation of a company, one or more persons are required to be appointed specially for conducting the liquidation or winding up proceedings of the company. Such a person’s are called Liquidator’s. He/She is required to realise the assets, discharge the liabilities and distribute the surplus, if any among shareholders.

Preferential Creditors

Creditor’s to whom following are due, as preferential creditors under Sec. 530 of the Companies Act. 

• All revenues, taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date and having become due and payable within the twelve months next before that date; 
• All wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date, and any compensation payable to any workman under any provisions of Chapter V A of the Industrial Disputes Act, 1947, provided the amount payable to any one claimant does not exceed ₹ 20,000.

Secured Creditors

A secured creditor is generally a bank or other asset-based lender that holds a fixed or floating charge over a business asset or assets. When a business becomes insolvent, sale of the specific asset over which security is held provides repayment for this category of creditor. 

Secured creditors rank highly when it comes to receiving payment. This is because secured creditors have a charge over assets held by the company. These assets can include property, as well as vehicles, machinery and fixtures and fittings. A secured creditor stands a higher chance than most of receiving payment following liquidation. Examples of secured creditors are banks, asset-based lenders, and finance and agreement providers. 

Secured creditors are then divided into two sub-categories, those with a fixed charge, and those with a floating charge. 

Unsecured Creditors

Unsecured creditors rank below secured creditors when it comes to receiving payment following the liquidation of a company. Unsecured creditors do not have the benefit of having a claim over a particular asset, and can include suppliers, contractors, landlords and customers. 

 Liquidators Final Statement of Account

At the time of Liquidation of a company, the liquidator realises all the assets and discharge the liabilities and capital. The statement prepared to record to such receipts and payments is called Liquidator’s Final Statement of Account. This statement is prepared after the affairs of the company are fully wound –up .  

Calculation of Liquidator’s Remuneration

A.    Where the remuneration is to be paid on assets realised:

I.            Exclude the cash as it is in realised form, if the problem has instruction of including then include with assets realised.

II.         No remuneration should be paid to liquidator on calls in arrears and call money realised.

III.       Surplus received from secured creditors must be considered in calculating liquidator’s remuneration. If the problem states that remuneration to be paid as a percentage on “Total assets realised” in such case total receipts need to be considered.

B.     Where the Remuneration is to be paid on payments made, the following points to be considered are:

I.          For calculating remuneration on payment made to unsecured creditors, preferential creditors must be considered as part of unsecured creditors.

II        Where the balance amount available in sufficient to pay unsecured creditors completely, liquidator’s remuneration on payment to unsecured creditors will be calculated using the following formula:

Amount Payable to Unsecured Creditors X Rate of Commission

100

III.   When the balance amount available is not sufficient enough to pay unsecured creditors completely, liquidator’s remuneration on payment to unsecured creditors will be calculated using the following formula:

Amount Available X Rate of Commission

100 + Rate of Commission