1. LIQUIDATION
Liquidation or winding up is a Legal term and refers to the procedure through which the affairs of the company are wound up by law.

2. Winding up of a company has been defined in the Companies Act 1956 as “ the process whereby its life is ended and its property is administered for the benefit of its creditors & members. An Administrator called the Liquidator is appointed and he takes control of the company, collects its assets , pays its debts & finally distributes any surplus among the members in accordance with their rights.

3. MODES OF LIQUIDATION MODES OF LIQUIDATION VOLUNTARY WINDING UP
COMPULSORY WINDING UP
VOLUNTARY WINDING UP
SUPERVISION BY COURT

4. Section 425 (1) of the companies act provides that a company can be liquidated in any of the following three ways :
COMPULSORY WINDING UP BY THE COURT
VOLUNTARY WINDING UP BY THE MEMBERS
WINDING UP UNDER THE SUPREVISION OF COURT
Generally the provisions of the Act with respect to the winding up apply to winding up of a company whether it be by the court or voluntary or subject to the supervision of the court [Section 425 (2)]

5. CONSEQUENCES OF WINDING UP
The following are the consequences of winding up:
An officer called a liquidator is appointed & he takes over the administration of the company. He may be appointed by High Court, members or by the creditors as the case may be.
The powers of the board of directors will cease & will now vest the liquidator.
Winding up order or resolution of voluntary winding up shall operate as a notice of discharge to all the members of the company. Members of company are called CONTRIBUTORIES.

6. Liquidator of the company will prepare a list of contributories who be made liable to contribute to the assets of the company in case assets are not sufficient to meet the claims of various claimants . In case there is a surplus in the assets, the liquidator of the company will prepare a list of those members, who are entitled to share this surplus.
Liquidator of the company will collect & realise its assets & distribute the proceeds among right claimants as per the procedure of the law.
Winding up ultimately leads to dissolution of the company. The companies life will come to an end & it will be no more an artificial person in the eyes of law.

7. FRAUDULENT PREFERENCE
CONTRIBUTORY
According to section 428 of the Companies Act, 1956, a contributory is “every person liable to contribute to the assets of a company in the event of it being wound up & includes a holder of fully paid up shares, & also any person alleged to be contributory “
A Contributory can be either a present member or a past member.
FRAUDULENT PREFERENCE
Fraudulent preference takes place when one creditor is preferred to another creditor in the matter of payment of his dues. It has been made in the provisions of section 531 that every transfer of property or money made with in 6 months before the commencement of winding up which amounts to fraudulent preference is invalid.

8. INTEREST ON LIABILITIES
VOLUNTARY TRANSFER
All voluntary transfers made by the company within a period of one year or before the presentation or petition for winding up or the passing of a resolution for voluntary winding up, are void as against the liquidator.
EMPLOYEES & OFFICERS
According to section 444, a winding up order operates as a notice of discharge to the employees & officers of the company, except when the business of the company is being continue.
INTEREST ON LIABILITIES
Interest on liabilities is payable upto the date of actual payment if the company is solvent. But if the company is insolvent, interest on liabilities is payable upto the date of commencement of insolvency proceedings.

9. ORDER OF PAYMENT
The amount received from the assets not specifically pledged & the amounts contributed by the contributories must be distributed by the liquidator in the following order:
Expenses of winding up including the liquidators remuneration
Creditors secured by the floating charge on the assets of the company
Preferential creditors
Unsecured creditors
The surplus, if any, amongst the contributories (i.e. preference shareholders & equity shareholders) according to their respective rights & interests.

10. PREFERENCE SHAREHOLDERS
Preference shareholders get the priority over the equity shareholders as regards the payment of their capital & the dividend payable upto the ate of winding up. The holders of cumulative preference shares are entitled to arrears of dividend if there is a surplus after the return of the amount of the equity shareholders or if the Articles state that arrears of preference dividend are to be paid before anything is paid to equity shareholders.
EQUITY SHAREHOLDERS
Any surplus left after making payment to preference shareholders is distributed among the equity shareholders if all the shares are equally paid up. But if the shares are called in unequal proportions, the liquidator should see that the capital contribution by the shareholders should be the same.
It may be remembered that calls in advance will have priority in repayment over the paid up share capital of that class.

11. PREFERENTIAL CREDITORS
Under Section 530 of the Companies Act , the following creditors are treated as preferential creditors:
all revenues, taxes, cesses & rates payable to the government or local authority will be treated as preferential creditors provided that it must become due within 12 months before the date of winding up.
4 months salary & wages due to the employees of the company will be treated as preferential provided that it must become due within 12 months before the date of winding up. Maximum of Rs will be treated as preferential creditors.
All accrued holiday remuneration payable to an employee due to termination of his employment is treated as preferential.

12. The person who advances money for making the payment under (ii) & (iii) mentioned above will be treated as preferential.
Any sum payable by the company under the Employees State Insurance Act, 1948 will be treated as preferential provided that it must become due within 12 months before the date of winding up.
Compensation payable by the company under Workmen Compensation Act, 1923 is treated as preferential.
Any sum payable by the company to its employees from a Providend Fund, Pension Fund, Gratuity Fund or any other fund maintained foe the welfare of the employees.
the expenses of investigation held Under Section 235 or 237 will be treated as preferential.

13. FORMAT OF STATEMENT OF AFFAIRS
ASSETS NOT SPECIFICALLY PLEDGED (list ‘A’)
ESTIMATED REALISABLE VALUE (Rs.)
Balance at Bank
Cash in hand
Debtors
Leasehold Property
Plant & Machinery
Investments
Other Assets

14. ASSETS SPECIFICALLY PLDGED (list ‘B’) ESTIMATED REALISABLE VALUE
Rs.
DUE TO SECURED CREDITORS
DEFICIENCY RANKING AS UNSECURED
SURPLUS CARRIED TO LAST COLUMN
Freehold property
ESTIMATED SURPLUS FROM ASSETS SPECIFICALLY PLEDGED
ESTIMATED TOTAL ASSESTS AVAILABLE FOR PREFRENTIAL CREDITORS, DEBENTUREHOLDERS & UNSECURED CREDITORS
SUMMARY OF GROSS ASSETS
AMOUNT
Estimated value of assets specifically pledged
Other assets

15. Secured creditors (list ‘B’) to the extent it is secured
GROSS LIABILITIES
Rs.
LIABILITIES
AMOUNT
Secured creditors (list ‘B’) to the extent it is secured
Preferential creditors (list ‘C’)
Estimated balance of assets available for debenture holders
Debenture holders secured by floating charge (list ‘D’)
Estimated surplus/deficiency as regards debenture holders
Unsecured creditors (list ‘E’)
liability for purchases
telephone rent o/s
bills payable
Estimated surplus/deficiency as regards creditors (being diff. of gross assets & gross liabilities)

16. EXAMPLE REALAED TO STATEMENT OF AFFAIRS
Q. The following information is extracted from books of lucky limited on 31st July ,2010 on which date a winding up order was made.
Unsecured creditors
Salaries due for five months
Managing director’s remuneration
Bills payable
Debtors --- good
--- doubtful(estimated to produce rs. 62,000)
--- bad
Bills receivable (good rs. 10,000)
Bank overdraft
Land (estimated to produce rs.5,00,000)
Stock (estimated to produce rs.5,80,000)
Furniture and fixtures
Cash in hand
Estimated liability for bills discounted
Secured creditors holding first mortgage on land
Partly secured creditors holding second mortgage on land
Weekly wages unpaid
3,50,000
20,000
30,000
1,06,000
4,30,000
1,30,000
88,000
16,000
40,000
3,60,000
8,20,000
80,000
4,000
60,000
4,00,000
2,00,000
6,000

17. Liabilities under workmen’s compensation Act,1925 Income tax due
5000 9% Mortgage debentures of 100 each interest payable to 30th June and 31st December, paid 30th June, 2008
Share capital :
20,000 10% preference share s of rs. 10 each
50,000 Equity shares of rs. 10 each
General reserve since 31st December, 2004
2,000
8,000
5,00,000
2,00,000
1,00,000
In 2004 , the company earned profit of rs. 4,50,000 but thereafter it suffered trading losses totaling Rs. 5,84,000 . The company also suffered a speculation loss of Rs. 50,000 during the year Excise authorities imposed a penalty of Rs. 3,50,000 in 2006 for evasion of tax which was paid in 2007.
From the foregoing information, prepare the Statement of Affairs and the Deficiency Account.

18. Unsecured Creditors as per List E : Rs.
SOLUTION
Unsecured Creditors as per List E : Rs.
Unsecured creditors ,50,000
One month’s Salaries ( 4 month’ salaries are preferential) ,000
Managing Director's Remuneration ,000
Bills Payable ,06,000
Bank Overdraft ,000
Liability on Bills Discounted ,000
Amount uncovered in respect of partly secured creditors
( Rs. 2,00,000 – Rs. 1,00, value of security of
second mortgage on land) ,00,000
________
6,90,000
======
Preferential creditors as per List C : Rs.
Salaries for 4 months ,000
Weekly wages ,000
Liabilities under Workmen’s Compensation Act, ,000
Income Tax due ,000
32,000

19. ------------------------11,66,000
LUCKY LTD (IN LIQUIDATION)
STATEMENT OF AFFAIRS
As on July, 2008
Estimated
Realisable value
4,000
10,000
4,92,000
5,80,000
80,000
,66,000
Assets
Assets not specifically pledged ( as per list A)
Cash in hand
Bills Receivable
Trade Debtors
Stock
Furniture and Fixtures
Assets specifically pledged (as per List B)
estimated due to deficiency surplus
realisable secured ranking as carried to
value creditors unsecured last column
Rs Rs Rs Rs.
Land ,00, ,00, ,00,
Estimated total assets available for preferential creditors , debenture holders secured by a floating charge and unsecured creditors
Summary of Gross Assets: Rs.
Specifically pledged ,00,000
Others ,66,000
16,66,000

20. --------------16,66,000 -------------- Gross Liabilities Rs. 5,20,000
32,000
5,03,750
6,90,000
17,25,750
Liabilities
( to be deducted from surplus or added to deficiency as the case
may be )
Secured creditors (as per list B ) to the extent to which claims
are estimated to be covered by assets specifically pledged
Preferential Creditors (as per list C)
Estimated balance of assets available for debenture holders
secured by a floating charge and unsecured creditors
Debenture holders secured by a floating charge (as per list D)
5,00,000
Interest due for 1 month 9% p.a ,750
Estimated surplus as regards debenture holders
Unsecured creditors (as per list E)
Estimated deficiency as regards creditors ,being the difference
between gross liabilities and gross assets
Issued and called up capital:
20,000 10% Preference shares of Rs. 10 each fully paid (as per list F)
50,000 equity shares of Rs. 10 each fully paid (as per list G)
Estimated Deficiency as regards contributories (as per list H)
32,000
11,34,000
5,03,750
6,30,000
6,90,000
59,750
2,00,000
5,00,000
7,59,750

21. DEFICIENCY ACCOUNT (LIST H)
PARTICULARS
AMOUNT
AMOUT
TO EXCESS OF ASSET OVER CAPITAL
TO NET TRADING ASSSET
TO PROFITS AND INCOME OTHER THAN TRADING PROFITS
TO DEFICENCY
1,00,000
4,50,.000
1,40,000
7,59,750
BY NET TRADING LOSSES AFTER DEPRICIATION , TAXATION ETC
BY LOSSES OTHER THAN TRADING LOSSES
SEPECULATION LOSS 50,000
PENALTY IMPOSED BY EXISCE AUTORITIES ,50,000
BY ASTIMATED LOSSES NOW WRITTEN OFF
B/R ,000
DEBTORS ,56,000
STOCK ,40,000
CONTIGENT
LIABILTY ,000
5,87,750
4,00,000
4,62,000

22. LIQUIDQTORS FINAL STATEMENT OF ACCOUNTS
The main job of the liquidator is to collect the assets of the company & realise them & distribute the money realised among right claimants.
For this purpose he maintains a cash book for recording the receipts & payments & is required to submit an abstract of the cash book to the court in case of compulsory winding up & to the company in case of voluntary winding up.
The liquidator is also required to prepare an account known as the Liquidator’s Final Statement of accounts after the affairs of the company are fully wound up.

23. LIQIDATOR’S FINAL STATEMENT OF ACCOUNT
Receipts
Amount
(Rs.)
Payments
To Assets Realised :-
-- Cash at Bank
-- Cash in Hand
-- Marketable Securities
-- Bills Receivable
-- Trade Debtors
-- Stock in trade
-- Freehold property
-- Plant and Machinery
-- Furniture and Fittings
To Surplus from Securities
held by Secured Creditors
To Proceeds of calls made on
contributories (on 7500
Equity
By Legal Charges
By Liquidation Expenses
By Liquidator Remuneration
By Preferential Creditors
By Debenture -holders (having
a floating charge on the
assets of the co.)
By Unsecured Creditors
By Preference Shareholders
By Equity Shareholders
(42500 Rs. 1.50)

24. Example of Liquidators final statement of Accounts
Ex: Bekar Ltd. Went into voluntary liquidation. The details regarding liquidation are as follows:
Share Capital:
2,000 8% preference shares of Rs.100 each(fully paid up)
ClassA-2,000 equity shares of Rs.100 each (Rs.75 paid up)
ClassB-1,600 equity shares of Rs.100 each (Rs.60 paid up)
ClassC-1,400 equity shares of Rs. 100 each (RS.50 paid up)
Assets including machinery realized Rs.4,20,000.
Liquidation expenses amount to Rs.15,000.
Bekar Ltd. Has borrowed a loan of Rs.50,000 from Patel Brothers against the mortgage of machinery (which realized Rs.80,500). In the books of the company salaries of four clerks for four months at a rate of Rs.300 per month & salaries of four peons four three months at a rate of Rs.150 per month, are outstanding. In addition to this, the company’s books show the creditors worth Rs.87,400. Prepare liquidator’s statement of receipts & payments.

25. SOLUTION: Liquidator’s Statement Of Receipts & Payments
Assets Realised
Surplus from secured creditors(80,500-50,000)
Call on equity
Rs.
3,39,500
30,500
1,400
Liq. Expenses
Liq. Remuneration
Preferential creditors
Unsecured creditors
Preference Sh. Holder
Equity Sh. Holder
15,000
5,800
88,200
2,00,000
48,000
14,400
3,71,400

26. Working notes: 1. Calculation of preferential & unsecured creditors
Salaries of 4 Rs.1000
(salary of Rs.200/clerk in excess of preferential amount of Rs.800 treated as unsecured)
Salaries of 4 Rs.450
Other unsecured creditors
4,000
1,800
800
87,400
5,800
88,200
2 . Calculation of amount returnable to equity shareholders or Receivable from Equity Shareholders:
Rs.
Assets Realised ,20,000
Less: Payments: Rs.
Secured creditors ,000
Liquidation Expenses ,000
Preferential Creditors ,800
Unsecured Creditors ,200
1,59,000
Balance available for shareholders ,61,000

27. Total No. of Equity shares
Amount available for Shareholder ,61,000
Less: Capital to be returned to preference shareholder ,00,000
Balance available for equity shareholder ,000
Less: Equity share paid up:
Class A- 2,000 equity Rs = 1,50,000
Class B- 1,600 equity Rs = 96,000
Class C- 1,400 equity Rs = 70,000
3,16,000
Loss to be borne by equity shareholders ,55,000
Therefore loss per equity share= Total Loss
= 2,55,000/5,000
= Rs. 51
CLASS A B C
Paid up Rs
Loss per share
Called / returned Rs (1)
Total No. of Equity shares