SUBJECT- FINANCIAL ACCOUNTING

Name: Slery Richard Dbritto

Roll No. HTBC0226
Div: B
Class: T.Y. Bcom
Topic: Liquidation of Companies

Meaning of liquidation or winding up

Liquidation or winding up is a legal term and refers to the procedure through which the affairs of
a company are wound up by law. A company is the creation of law, it cannot die itself as an
natural death. So it comes to its end by law through the process of liquidation. The Liquidation
or winding up a company is a process through which life of company and it’s all affairs are
wound up and its property administered for benefits of its creditors and members. An
administrator, who is called liquidator, is appoint to take control of company, collect its assents,
pay its debts and finally if any surplus assents are left, they are divided among the members of
the company in proportion to their rights under the articles. This being done the company is
dissolved on compliance within the requisite formalities prescribed by the companies’ ordinance.
Process of winding up:
1. Selling of the assets of the company
2. Paying off the liabilities of the company
3. If there is any deficiency to pay to the creditors and the shareholders are called upon to pay
unpaid amount on their articles.
4. In case of surplus, after paying off the liabilities, it may be distributed to the contributories
according to their rights under the articles.
5. At the end, the Registrar of Companies removes the name of the company from the Register of
Companies which is maintained by his office.
Modes of Winding Up:
There are three modes of winding up of the company:
1. Compulsory winding up by the court
2. Voluntary winding up by members or creditors
3. Winding up under the supervision of the court

1.Compulsory winding up by the court

A company formed and registered under the ordinance, may be wound up by the court. This
kind of winding up is also called compulsory winding up.
Explanations:
1) A company needs to pass a special resolution and also court orders for winding upon the basis
of some specific grounds
2) When company is unable to pay its debts
3) If company is carrying any illegal business
4) In case of non-maintenance of accounts
5) When the statutory meaning is not conducted then the Court may give orders to windup the
company
6) In case of non-submission of Statutory Report to the Registrar
7) if company unable to start its business within a year after incorporation
8) If company is not having minimum number of members
In case of public: minimum 7 members
In case of private: minimum 2 members
9) If company doesn't follow the directions of the court or registrar or commission etc.
2.Voluntary winding up by members or creditors
The main object of a voluntary winding is that the company and its creditors shall be left to settle
their affairs without going to Court, but they may apply to the court for any directions and order
if and when necessary.
Explanations:
A) When the period fixed for the duration of the company has expired.
B) If the company passes the special resolution of its winding up by voluntary.
C) When the event occurs and the articles provide information that when this event will occur
then company has to be wound up.

3. Winding up under the supervision of the court

When company has passed special or extra-ordinary resolution for its liquidation or winding up,
court can pass an order on application of creditors, contributors or other persons for conducting
of liquidation or winding up of company under supervision of court.

Preferential payments
(1) In a winding up, subject to the provisions of section 326, there shall be paid in priority to all
other debts,
(a) all revenues, taxes, cesses and rates due from the company to the Central Government or a
State Government or to a local authority at the relevant date, and having become due and payable
within the twelve months immediately before that date;
(b) 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 immediately before the
relevant date, subject to the condition that the amount payable under this clause to any workman
shall not exceed such amount as may be notified;
(c) all accrued holiday remuneration becoming payable to any employee, or in the case of his
death, to any other person claiming under him, on the termination of his employment before, or
by the winding up order, or, as the case may be, the dissolution of the company;
(d) unless the company is being wound up voluntarily merely for the purposes of reconstruction
or amalgamation with another company, all amount due in respect of contributions payable
during the period of twelve months immediately before the relevant date by the company as the
employer of persons under the Employees’ State Insurance Act, 1948 or any other law for the
time being in force;
(e) unless the company has, at the commencement of winding up, under such a contract with any
insurer as is mentioned in section 14 of the Workmen’s Compensation Act, 1923, rights capable
of being transferred to and vested in the workmen, all amount due in respect of any
compensation or liability for compensation under the said Act in respect of the death or
disablement of any employee of the company:
Provided that where any compensation under the said Act is a weekly payment, the amount
payable under this clause shall be taken to be the amount of the lump sum for which such weekly
payment could, if redeemable, be redeemed, if the employer has made an application under that
Act;
(f) all sums due to any employee from the provident fund, the pension fund, the gratuity fund or
any other fund for the welfare of the employees, maintained by the company; and
(g) the expenses of any investigation held in pursuance of sections 213 and 216, in so far as they
are payable by the company.
(2) Where any payment has been made to any employee of a company on account of wages or
salary or accrued holiday remuneration, himself or, in the case of his death, to any other person
claiming through him, out of money advanced by some person for that purpose, the person by
whom the money was advanced shall, in a winding up, have a right of priority in respect of the
money so advanced and paid-up to the amount by which the sum in respect of which the
employee or other person in his right would have been entitled to priority in the winding up has
been reduced by reason of the payment having been made.
(3) The debts enumerated in this section shall
(a) rank equally among themselves and be paid in full, unless the assets are insufficient to meet
them, in which case they shall abate in equal proportions; and
(b) so far as the assets of the company available for payment to general creditors are insufficient
to meet them, have priority over the claims of holders of debenture under any floating charge
created by the company, and be paid accordingly out of any property comprised in or subject to
that charge.
4) Subject to the retention of such sums as may be necessary for the costs and expenses of the
winding up, the debts under this section shall be discharged forthwith so far as the assets are
sufficient to meet them, and in the case of the debts to which priority is given under clause (d) of
sub-section (1), formal proof thereof shall not be required except in so far as may be otherwise
prescribed.
(5) In the event of a landlord or other person distraining or having distrained on any goods or
effects of the company within three months immediately before the date of a winding up order,
the debts to which priority is given under this section shall be a first charge on the goods or
effects so distrained on or the proceeds of the sale thereof:
Provided that, in respect of any money paid under any such charge, the landlord or other person
shall have the same rights of priority as the person to whom the payment is made.
(6) Any remuneration in respect of a period of holiday or of absence from work on medical
grounds through sickness or other good cause shall be deemed to be wages in respect of services
rendered to the company during that period.
7) Sections 326 and 327 shall not be applicable in the event of liquidation under the Insolvency
and Bankruptcy Code, 2016.
Explanation -For the purposes of this section,-
(a) the expression “accrued holiday remuneration” includes, in relation to any person, all sums
which, by virtue either of his contract of employment or of any enactment including any order
made or direction given there under, are payable on account of the remuneration which would, in
the ordinary course, have become payable to him in respect of a period of holiday, had his
employment with the company continued until he became entitled to be allowed the holiday;
(b) the expression “employee” does not include a workman; and
(c) the expression relevant date means in the case of a company being wound up by the Tribunal,
the date of appointment or first appointment of a provisional liquidator, or if no such
appointment was made, the date of the winding up order, unless, in either case, the company had
commenced to be wound up voluntarily before that date under the Insolvency and Bankruptcy
Code, 2016

Overriding preferential payments

Section 326. Overriding preferential payments:
(1) In the winding up of a company under this Act, the following debts shall be paid in priority
to all other debts:—
(a) workmen’s dues; and
(b) where a secured creditor has realised a secured asset, so much of the debts due to such
secured creditor as could not be realised by him or the amount of the workmen’s portion in his
security (if payable under the law), whichever is less, pari passu with the workmen’s dues:
Provided that in case of the winding up of a company, the sums referred to in sub-clauses (i) and
(ii) of clause (b) of the Explanation, which are payable for a period of two years preceding the
winding up order or such other period as may be prescribed, shall be paid in priority to all other
debts (including debts due to secured creditors), within a period of thirty days of sale of assets
and shall be subject to such charge over the security of secured creditors as may be prescribed.
(2) The debts payable under the proviso to sub-section (1) shall be paid in full before any
payment is made to secured creditors and thereafter debts payable under that subsection shall be
paid in full, unless the assets are insufficient to meet them, in which case they shall abate in
equal proportions.
Explanation.—For the purposes of this section, and section 327—
(a) “workmen”, in relation to a company, means the employees of the company, being workmen
within the meaning of clause (s) of section 2 of the Industrial Disputes Act, 1947 (14 of 1947);
(b) “workmen’s dues”, in relation to a company, means the aggregate of the following sums due
from the company to its workmen, namely:—
(i) 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 workman in respect of services rendered to the company
and any compensation payable to any workman under any of the provisions of the Industrial
Disputes Act, 1947 (14 of 1947);
(ii) all accrued holiday remuneration becoming payable to any workman or, in the case of his
death, to any other person in his right on the termination of his employment before or by the
effect of the winding up order or resolution;
(iii) unless the company is being wound up voluntarily merely for the purposes of reconstruction
or amalgamation with another company or unless the company has, at the commencement of the
winding up, under such a contract with insurers as is mentioned in section 14 of the Workmen’s
Compensation Act, 1923 (19 of 1923), rights capable of being transferred to and vested in the
workmen, all amount due in respect of any compensation or liability for compensation under the
said Act in respect of the death or disablement of any workman of the company;
(iv) all sums due to any workman from the provident fund, the pension fund, the gratuity fund or
any other fund for the welfare of the workmen, maintained by the company;
(c) “workmen’s portion”, in relation to the security of any secured creditor of a company, means
the amount which bears to the value of the security the same proportion as the amount of the
workmen’s dues bears to the aggregate of the amount of workmen’s dues and the amount of the
debts due to the secured creditors.
Preparation of statement of affairs
Proforma of Statement of Affairs
Assets not specially pledged (as per list ‘A’) Estimated
realisable
value
`
_____________
Balance at Bank
Cash in Hand Marketable
Securities Bills Receivable
Trade Debtors
Loans and Advances
Unpaid Calls
Stock-in-Trade
Work-in-Progress
_____________
_____________
Freehold Property, Land and Buildings
Leasehold Property
Plant and Machinery
Furniture, Fittings, Utensils, etc.
Investments other than Marketable Securities
Livestock
Other Property, viz.,
____________
*Assets specially pledged (as per List ‘B’)
(a) (b) (c) (d)
Estimated Due to Deficiency Surplus
Realizable Secured Ranking as Carried to
Values Creditors Unsecured Last Column
````
Freehold Property
____________
____________
Estimated surplus from assets specially pledged
Estimated total assets available for preferential creditors, debenture-holders
secured by a floating charge, and unsecured creditors (carried forward)
Summary of Gross Assets
`
Gross realisable value of assets specially pledged –
Other Assets –
________
Gross Assets
Gross Liabilities ` `
` 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 specially
pledged item (a) or (b) whichever is less
[(Insert in ‘Gross Liabilities’ column only) –
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’) –
________ ________
Estimated Surplus/Deficiency as regards Debenture holders
Unsecured Creditors (as per list ‘E’)
Estimated unsecured balance of claims of creditors partly
secured on specific assets, brought from preceding page
Trade Accounts –
Bills payable –
Outstanding Expenses –
Contingent liabilities (state nature) –
Estimated Surplus/Deficiency as regards
Creditors (being difference between
Gross Assets and Gross
Liabilities) –
________ ________
`
________ ________
`
Issued and Called-up Capital:
Preference Shares of .......... each
Called-up (as per list ‘F’)
Equity Shares of .......... each
.......... Called-up (as per list ‘G’)
________
________
Estimated Surplus/Deficiency as regards Members
(as per list ‘H’)
Deficiency/Surplus Account (List H)
Statement of Affairs shows the Deficiency/Surplus as regards creditors and members. This
account explains how the deficiency or surplus has arose. This statement must cover at least a 3
year period preceeding the date of winding up order.
This statement starts with capital and liabilities in excess of assets as on a given date. To this are
added items contributing to deficiency (or reducing surplus) such as Net trading Losses, Losses
other than trading losses written off, etc. From the total, items reducing deficiency (or
contributing to surplus) such as excess of assets over capital and liabilities, Net trading profit
made during the period, profits and income other than trading profits etc., are deducted. The
resultant Net surplus/deficiency must tally with the figure shown in the Statement of Affairs
Form of Deficiency or Surplus Account (List H)
Items contributing to Deficiency or Reducing Surplus: `
1. Excess (if any) of Capital and Liabilities over Assets on the
as shown by Balance Sheet (copy annexed)
2. Net dividend and bonus declared during the period from
to the date of statement.
3. Losses on realization of assets
4. Net trading losses (after charging items shown in note below) for the same period.
5. Losses other than trading losses written off or for which provision has been made
in the books during the same period (give particulars or annex schedule)
6. Estimated losses not written off or for which provision has been made
for purposes of preparing the statement (give particulars or annex schedule)
7. Other items contributing to Deficiency or reducing Surplus:
Items reducing Deficiency or Contributing to Surplus:
8. Excess (if any) of assets over capital and liabilities on the
as shown in the Balance Sheet (copy annexed)
9. Net trading profit (after charging items shown in note below) for the period,
and from to date of statement
10. Profit on realization of assets
11. Profits and income other than trading profits during the same period
(give particulars or annex schedule)
12. Other items reducing Deficiency or contributing to Surplus:
Deficiency/Surplus as shown by the Statement

Liquidator’s final statement of account.

The main duty of the liquidator is to collect the assets of the company and realize them and
distribute the amounts realized among the right claimants. He is required to prepare a statement
and submit the same to registrar of companies, IBBI, and NCLT after the company is completely
woundup. In case of voluntary winding up such statement is called “Liquidators Statement
Account”. In case of winding up by Tribunal it is called as “Official Liquidators Final Account”.
It is a statement of receipts and payments which is prepared in the form of an account.
 Liquidator’s’ Final Statement of Account of the winding up
(Members’/Creditors’ Voluntary winding up)
1. Name of the Company:
2. Nature of Proceeding:
3. Date of commencement
4. Name and address of the liquidator:
Receipts Realised Payments amt
Value
To Assets By Legal charges
-cash at bank By Liquidator’s Remuneration
- cash in hand where applicable-
- marketable securities % on amt realized
- bills receivable % on amt distributed
- trade debtors Total xxx
- loans and advances By Auctioneers’ and valuers’
- stock in trade charges
- work-in-progress By cost of possessing and
- Freehold property maintainence of estate
- Leasehold Property By cost of notice in gazette and
- Plant and machinery newspaper
- furniture and fittings By incidental outlay
- patents trademarks Total cost and charges
- investments other than marketable i. Debenture holders
securities ii. Creditors
- Surplus from securities iii. Returns to
Contributories
To Proceeds of call
-Unpaid call at the commencement
of winding up
To Amount received from call on
contributories made in the winding
up
To receipts per trading A/c
- Other property
Total

Less:
-Payments to redeem securities
- Costs of execution
- payments per trading A/c xxx xxx