Tag: Acquisition Accounting

Liquidator’s Final Statement of Account is a statement prepared by the liquidator at the end of the liquidation process to show how the realised assets of the company have been received and disbursed. It provides a complete summary of the liquidation proceedings, including receipts from asset realisation and payments made to various claimants in the prescribed order. This statement is submitted to the Tribunal or Registrar of Companies before the dissolution of the company and serves as evidence of proper conduct of liquidation.

Meaning of Liquidator’s Final Statement of Account

The Liquidator’s Final Statement of Account is a summary account showing:

• Amounts received from realisation of assets

• Amounts paid towards liquidation expenses, creditors, and shareholders

• The final balance, if any

It is not a profit and loss account but a cash-based statement, reflecting only actual receipts and payments during liquidation.

Purpose of Preparing the Final Statement

The main purposes are:

• To provide transparency in liquidation proceedings
• To ensure statutory compliance
• To show fair distribution of assets
• To enable approval and dissolution of the company

Format of Liquidator’s Final Statement of Account

The statement is generally prepared in account form with two sides:

• Receipts (Debit side)

• Payments (Credit side)

It is also known as the Liquidator’s Cash Account.

Receipts Side (Debit Side)

The following items are recorded on the receipts side:

• Balance in Hand / Bank (if any)
  Cash or bank balance at the commencement of liquidation.

• Realisation of Assets
  Amount realised from sale of fixed assets, investments, stock, book debts, etc.

• Calls in Arrears / Unpaid Calls Received
  Amount collected from shareholders on unpaid capital.

• Contribution from Directors (if any)
  Amount recovered due to misfeasance or breach of duty.

Payments Side (Credit Side)

Payments are recorded strictly in the statutory order of priority:

• Liquidation Expenses
  Liquidator’s remuneration, legal fees, valuation charges, and other expenses.

• Overriding Preferential Payments
  Workmen’s dues and secured creditors’ dues (where applicable).

• Preferential Payments
  Employees’ wages, provident fund, gratuity, and certain government dues.

• Secured Creditors (Balance, if any)
  Where security realisation is insufficient.

• Unsecured Creditors
  Paid pari passu if assets are insufficient.

• Interest on Unsecured Debts
  Paid only if surplus is available.

• Preference Shareholders
  Return of capital and arrears of dividend.

• Equity Shareholders
  Return of capital and surplus distribution.

Steps in Preparation of Liquidator’s Final Statement

• Ascertain total assets realised

• Calculate liquidator’s remuneration

• Identify overriding preferential and preferential claims

• Determine amounts payable to secured and unsecured creditors

• Allocate surplus, if any, to shareholders

• Prepare final statement showing receipts and payments

Specimen Format of Liquidator’s Final Statement of Account

Liquidator’s Final Statement of Account

Note:

• The statement is prepared on cash basis

• Payments are made strictly as per statutory order of priority

Numerical Illustration

ABC Ltd. went into liquidation. The following information is available:

• Assets realised:

  • Fixed assets – ₹3,50,000

  • Investments – ₹1,00,000

  • Stock – ₹90,000

  • Book debts – ₹60,000

• Liquidation expenses – ₹40,000

• Liquidator’s remuneration – 5% on assets realised

• Overriding preferential payments – ₹1,00,000

• Preferential creditors – ₹70,000

• Unsecured creditors – ₹2,00,000

• Preference share capital – ₹1,00,000

• Equity share capital – ₹1,50,000

Step 1: Total Assets Realised

Fixed assets ₹3,50,000
Investments ₹1,00,000
Stock ₹90,000
Book debts ₹60,000

Total assets realised = ₹6,00,000

Step 2: Liquidator’s Remuneration

5% of ₹6,00,000 = ₹30,000

Step 3: Prepare Liquidator’s Final Statement of Account

Liquidator’s Final Statement of Account

Step 4: Interpretation

• All liquidation expenses and statutory claims are paid first

• Unsecured creditors are paid in full

• Preference shareholders receive full capital

• Equity shareholders receive the residual balance of ₹60,000

When a company is wound up, the liquidator realises the assets and distributes the proceeds among various claimants. The liquidator cannot distribute funds arbitrarily; he must follow the statutory order of priority prescribed under the Companies Act, 2013 and the Insolvency and Bankruptcy Code (IBC), 2016. This order ensures equitable treatment, legal compliance, and protection of weaker stakeholders, especially employees and workmen.

• Liquidation Costs and Expenses

The first priority in the order of disbursement is given to the costs and expenses of liquidation. These include the liquidator’s remuneration, legal and professional charges, valuation expenses, and costs incurred for safeguarding, preserving, and realizing the company’s assets. Since liquidation proceedings cannot be carried out without meeting these essential expenses, the law grants them absolute priority over all other claims. Payment of liquidation expenses ensures that the winding-up process is conducted efficiently, lawfully, and without interruption. No distribution to creditors or shareholders can be made until these expenses are fully settled.

• Overriding Preferential Payments

After meeting liquidation costs, the liquidator must discharge overriding preferential payments. This category mainly includes workmen’s dues and secured creditors’ dues, to the extent the secured creditors have relinquished their security. Under the Insolvency and Bankruptcy Code, these claims rank pari passu, meaning they are paid proportionately without preference among themselves. The objective of granting this priority is to protect the economic interests of employees and workers who depend on wages for their livelihood. Overriding preferential payments enjoy priority over all other debts except liquidation expenses.

• Preferential Payments

The next level in the order of disbursement consists of preferential payments as specified under the Companies Act, 2013. These include wages and salaries of employees, accrued holiday remuneration, and employer’s contributions to provident fund, pension fund, and gratuity fund. Certain government dues such as taxes, duties, and cess also fall under this category, subject to prescribed time limits. Preferential payments are given statutory protection and are paid in full, as far as possible, before settling the claims of unsecured creditors. This ensures social and economic justice.

• Secured Creditors Who Realise Their Security

Secured creditors may choose not to relinquish their security and instead realise their security independently. In such cases, the secured asset is sold, and the proceeds are applied towards settlement of the secured debt. If the amount realised is insufficient, the deficiency becomes an unsecured claim and ranks along with unsecured creditors. This option allows secured creditors to protect their interests while maintaining fairness in the overall distribution process. Their treatment depends on the nature of security and their decision during liquidation.

• Unsecured Creditors

After all preferential claims have been settled, the liquidator proceeds to pay unsecured creditors. This category includes trade creditors, unsecured loan creditors, and debenture holders without any charge on the company’s assets. Unsecured creditors do not enjoy any priority and bear higher risk in liquidation. If the available assets are insufficient, unsecured creditors are paid proportionately on a pari passu basis. This principle ensures equitable treatment among creditors belonging to the same class and prevents discrimination.

• Interest on Unsecured Claims

Interest on unsecured debts is payable only after the principal amounts of all unsecured creditors have been paid in full. If the assets are insufficient to cover the principal, no interest is paid at all. This rule ensures fairness and equality among creditors and prevents undue advantage to any particular creditor. Interest is treated as a secondary claim and is settled only when surplus funds are available. Thus, interest payments occupy a lower position in the order of disbursement.

• Preference Shareholders

Once all outside liabilities are fully discharged, the liquidator distributes the remaining assets to preference shareholders. They are entitled to the return of their preference share capital and any arrears of dividend, provided such arrears are allowed under the Articles of Association. Preference shareholders rank ahead of equity shareholders but after all creditors. Their preferential rights are limited to the terms of issue and do not override the claims of creditors. Payment to preference shareholders signifies nearing completion of liquidation.

• Equity Shareholders

Equity shareholders occupy the last position in the order of disbursement. They are the residual owners of the company and are entitled to receive any surplus remaining after all liabilities and preference share capital have been paid. The surplus, if any, is distributed among equity shareholders in proportion to their shareholding. In most cases of insolvent liquidation, equity shareholders receive nothing, as assets are usually insufficient. This reflects the fundamental principle that ownership carries the highest risk in business.

Liquidator’s remuneration refers to the fees or compensation payable to a liquidator for services rendered during the liquidation of a company. Since the liquidator performs statutory, managerial, and fiduciary functions, he is entitled to reasonable remuneration. The amount and mode of remuneration are governed by the Companies Act, 2013, the Insolvency and Bankruptcy Code, 2016, and rules made thereunder. Liquidator’s remuneration is treated as a charge on the assets of the company and is payable in priority.

Meaning of Liquidator’s Remuneration

Liquidator’s remuneration means the consideration paid to the liquidator for conducting the winding-up proceedings, including realization of assets, settlement of claims, maintenance of accounts, and distribution of surplus. It may be fixed as a percentage of assets realised, amount distributed, or as a lump-sum fee, depending on the nature of liquidation and statutory provisions.

Illustrative Example

If assets realised = ₹10,00,000

Liquidator’s remuneration = 5% of assets realised

Remuneration = ₹50,000

This amount is paid first out of realised assets.

Authority to Fix Remuneration

liquidator’s remuneration refers to the fees payable to the liquidator for performing his statutory duties during the winding up of a company. Since the liquidator plays a pivotal role in taking control of assets, realising property, settling claims, and distributing surplus, it is essential that he is adequately compensated. The authority to fix his remuneration varies depending on the type of liquidation and is governed primarily by the Companies Act, 2013, the Insolvency and Bankruptcy Code, 2016, and relevant rules and regulations.

1. Compulsory Liquidation

In compulsory liquidation, the company is ordered to be wound up by a tribunal, typically the National Company Law Tribunal (NCLT), on grounds such as inability to pay debts or for public interest.

• The tribunal appoints a liquidator and has the authority to fix his remuneration.

• The remuneration may be a fixed sum, a percentage of assets realised, or a combination.

• The tribunal ensures that remuneration is reasonable and proportionate to the duties performed.

• This authority protects the interests of all creditors by avoiding overpayment.

2. Members’ Voluntary Liquidation

A members’ voluntary liquidation occurs when a company, though solvent, decides to wind up its affairs voluntarily.

• The remuneration of the liquidator is decided by the shareholders or members in a general meeting.

• Shareholders may determine the fee as a fixed amount or on a percentage basis of realised assets.

• Members’ authority ensures that the liquidator is compensated fairly while the company’s resources are efficiently utilised.

• If there is a committee of inspection, it may recommend remuneration, but the final approval lies with the members.

3. Creditors’ Voluntary Liquidation

In a creditors’ voluntary liquidation, the company is insolvent, and the creditors initiate the liquidation.

• The creditors or a committee of inspection appointed by them have the authority to fix the liquidator’s remuneration.

• The remuneration may be a lump sum, percentage of assets realised, or a combination, as agreed by the creditors.

• The aim is to ensure that the liquidator is motivated to realise assets efficiently for maximum creditor recovery.

• Creditors’ approval is necessary to avoid conflicts of interest and ensure transparency.

4. Authority under Insolvency and Bankruptcy Code (IBC), 2016

The IBC provides a modern framework for liquidation of companies.

• Section 53 of IBC governs the distribution of assets and related liquidation expenses.

• The Adjudicating Authority (NCLT) or Insolvency Resolution Professional is empowered to approve remuneration.

• Remuneration under IBC is treated as part of liquidation costs, which have overriding priority over most claims.

• The IBC framework ensures uniformity, transparency, and timely completion of liquidation.

5. Considerations in Fixing Remuneration

The authority fixing the remuneration considers the following factors:

• Size and complexity of the company
• Value of assets to be realised
• Time and effort required
• Legal and professional expertise needed
• Expenses incurred during liquidation

These factors ensure fair compensation while protecting the estate from excessive deductions.

6. Restrictions on Fixing Remuneration

Even when the authority has the power to fix fees:

• It must be reasonable and proportionate to work performed.

• Approval must comply with statutory provisions.

• Any excess or unauthorised fee can be challenged before the tribunal.

These safeguards protect creditors and shareholders from misuse of authority.

Basis of Liquidator’s Remuneration

Liquidator’s remuneration may be calculated on the following bases:

• Percentage on Assets Realised: A fixed percentage is applied to the total assets realised by the liquidator.
• Percentage on Amount Distributed: Remuneration is calculated on the amount distributed among creditors and shareholders.
• Lump-Sum Basis: A fixed amount is agreed upon in advance.
• Mixed Basis: Combination of percentage on realisation and distribution.

Restrictions on Liquidator’s Remuneration

The following restrictions apply:

• Remuneration must be reasonable and proportionate

• It cannot be increased without approval of the competent authority

• No remuneration is payable for work not authorised by law

• Liquidator cannot draw remuneration unless sanctioned

These restrictions prevent misuse of authority.

Remuneration When Assets Are Insufficient

If assets are insufficient to cover all liabilities, liquidator’s remuneration is still payable in priority, subject to approval. However, in some cases, remuneration may be reduced or waived by the tribunal in the interest of justice.

Accounting Treatment of Liquidator’s Remuneration

In liquidation accounts:

• Remuneration is shown on the debit side of the Liquidator’s Statement of Account

• Treated as liquidation expense

• Deducted before distribution to creditors and shareholders

It directly affects the amount available for distribution.

Liquidator is a person appointed to conduct the process of liquidation of a company. He acts as a statutory officer and trustee of the company’s assets. Once liquidation commences, the powers of directors cease and all management and control of the company’s affairs vest in the liquidator. His main responsibility is to realise assets, settle liabilities, and distribute surplus, if any, in accordance with the provisions of the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016.

Powers of Liquidator

• Power to Take Custody and Control of Assets

The liquidator has the power to take custody, possession, and control of all assets and properties of the company. This includes movable and immovable property, cash balances, investments, intellectual property, and actionable claims. He may take steps to protect and preserve these assets from misuse or deterioration. This power ensures that company property is secured for the benefit of creditors and shareholders.

• Power to Sell Company’s Assets

One of the most important powers of the liquidator is the authority to sell the assets of the company. Assets may be sold by public auction or private contract, either as a whole or in parts. The liquidator decides the method of sale to realise maximum value. This power is crucial because proceeds from asset sales form the primary source for payment of liabilities.

• Power to Carry on Business for Beneficial Winding Up

The liquidator may continue the business of the company for a limited period if it is necessary for beneficial winding up. This power is exercised only when continuation helps in better realisation of assets or completion of unfinished contracts. The purpose is not to run the business permanently but to maximise value during liquidation.

• Power to Raise Money on Security of Assets

The liquidator has the power to raise money by borrowing on the security of the company’s assets, with approval where required. This power may be used to meet urgent expenses of liquidation or to complete pending transactions. It enables smooth functioning of liquidation proceedings without unnecessary delays due to lack of funds.

• Power to Institute or Defend Legal Proceedings

The liquidator may institute, defend, or continue legal proceedings on behalf of the company. He can file suits to recover debts due to the company or defend claims against it. This power helps protect the company’s interests and recover amounts that contribute to the liquidation estate.

• Power to Settle, Compromise, or Abandon Claims

The liquidator has the authority to compromise, settle, or abandon claims relating to the company, subject to legal approval where required. This power allows him to resolve disputes efficiently without prolonged litigation. By settling claims, the liquidator saves time and costs, ensuring faster completion of liquidation.

• Power to Call Meetings of Creditors and Contributories

The liquidator has the power to call meetings of creditors and contributories whenever necessary. These meetings are held to obtain approvals, provide information, or seek guidance on important matters. This power ensures transparency and allows stakeholders to participate in key decisions during liquidation.

• Power to Investigate Affairs of the Company

The liquidator has the power to investigate the past affairs of the company. He may examine directors, officers, promoters, or employees to detect fraud, misfeasance, or misconduct. If irregularities are found, he may report them to the tribunal. This power promotes accountability and corporate discipline.

• Power to Distribute Assets According to Priority

The liquidator has the authority to distribute realised assets among creditors and shareholders strictly in accordance with the legally prescribed order of priority. He ensures payment of overriding preferential payments, preferential debts, unsecured claims, and shareholders’ dues. This power ensures fairness and legal compliance in distribution.

• Power to Apply for Dissolution of the Company

After completing liquidation, the liquidator has the power to apply for dissolution of the company. He submits the final statement of accounts and reports to the tribunal or authority concerned. Upon approval, the company is dissolved, and its legal existence comes to an end. This power marks the formal conclusion of the liquidation process.

Duties of Liquidator

• Duty to Take Charge of Company’s Assets

One of the foremost duties of the liquidator is to take possession and control of all assets and properties of the company. This includes movable and immovable property, cash, bank balances, investments, and actionable claims. He must safeguard these assets from loss, misuse, or deterioration. This duty ensures that the company’s property is preserved for the benefit of creditors and shareholders.

• Duty to Prepare Statement of Affairs

The liquidator is required to prepare and examine the statement of affairs of the company. This statement shows the financial position of the company, including assets, liabilities, and capital. It provides essential information for understanding the company’s solvency status. This duty helps in determining the order of payment and facilitates effective liquidation planning.

• Duty to Realise Assets

The liquidator has the duty to realise the company’s assets by converting them into cash. He must ensure that assets are sold in a manner that fetches maximum possible value. Careful planning of sales, selection of appropriate methods, and avoidance of distress sales are part of this responsibility. Realisation of assets forms the financial foundation of liquidation.

• Duty to Invite, Verify, and Settle Claims

The liquidator must invite claims from creditors, verify their authenticity, and determine their admissible amounts. He must examine supporting documents and reject invalid or inflated claims. This duty ensures that only genuine creditors are paid and that distribution of assets is fair and lawful.

• Duty to Pay Overriding Preferential and Preferential Claims

The liquidator has a statutory duty to pay overriding preferential payments and preferential debts in the order prescribed by law. These include insolvency costs, workmen’s dues, and certain employee-related claims. Failure to comply may attract personal liability. This duty reflects the social responsibility of liquidation laws.

• Duty to Maintain Proper Books and Accounts

The liquidator must maintain accurate books of accounts showing receipts, payments, and transactions during liquidation. He must prepare periodic statements and a final statement of account. This duty ensures transparency, accountability, and auditability of liquidation proceedings and protects stakeholder interests.

• Duty to Conduct Legal Proceedings if Necessary

The liquidator has the duty to initiate or defend legal proceedings on behalf of the company when required. This includes recovery of debts, enforcement of claims, and defense against lawsuits. He must act prudently and in the best interest of the liquidation estate. This duty helps in maximising recoveries.

• Duty to Investigate Affairs of the Company

The liquidator is responsible for investigating the past affairs of the company to detect fraud, misfeasance, or misconduct. He may examine directors, officers, and promoters and submit reports to the tribunal. This duty ensures accountability and discourages wrongful practices.

• Duty to Distribute Surplus to Shareholders

After settlement of all liabilities, the liquidator must distribute any remaining surplus among shareholders according to their rights. Preference shareholders are paid first, followed by equity shareholders. This duty ensures equitable and lawful distribution of residual assets.

• Duty to Apply for Dissolution of the Company

The final duty of the liquidator is to apply for dissolution of the company after completion of liquidation. He submits the final accounts and reports to the tribunal or authority concerned. Once dissolution is approved, the legal existence of the company comes to an end. This duty marks the formal conclusion of liquidation.

Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals. One of the most important aspects of liquidation under IBC is the priority of payments, commonly known as the “waterfall mechanism.” At the top of this priority structure lie Overriding Preferential Payments, which are paid before all other claims, including secured creditors in certain cases. These payments reflect the social and legal priorities recognized by the legislature.

Meaning of Overriding Preferential Payments

Overriding preferential payments refer to those payments which enjoy absolute priority during liquidation under the IBC. These payments override all other claims, including preferential debts under the Companies Act, 2013. They must be paid first out of the liquidation estate, before making any distribution to secured creditors, unsecured creditors, or shareholders. The term “overriding” signifies their supreme priority in the order of payment.

Legal Basis under the IBC

The concept of overriding preferential payments is governed by Section 53 of the Insolvency and Bankruptcy Code, 2016, which lays down the distribution of assets in liquidation. Section 53 begins with a non-obstante clause (“notwithstanding anything contained in any law”), giving it overriding effect over other laws, including the Companies Act, 2013. This ensures uniformity and certainty in liquidation proceedings.

Objectives of Overriding Preferential Payments

The key objectives of overriding preferential payments under IBC are:

• To ensure smooth conduct of liquidation proceedings

• To protect workmen and employees

• To provide certainty and transparency in distribution of assets

• To balance economic efficiency with social justice

• To prevent disputes among stakeholders regarding priority of claims

By clearly defining priority, IBC minimizes litigation and delays.

Nature and Characteristics

Overriding preferential payments have the following characteristics:

• They have statutory priority

• They are paid before all other claims

• They apply only during liquidation

• They override provisions of the Companies Act

• They are mandatory and non-discretionary

• They are paid from the liquidation estate

These features distinguish them from ordinary preferential payments.

Liquidation Estate under IBC

Before understanding payments, it is important to understand the liquidation estate. The liquidation estate includes all assets of the corporate debtor, such as:

• Tangible and intangible assets

• Proceeds from sale of assets

• Unencumbered assets

• Residual value of secured assets (if relinquished)

Overriding preferential payments are made only out of this estate.

Categories of Overriding Preferential Payments

As per Section 53(1) of the IBC, the following payments are treated as overriding preferential payments:

Insolvency Resolution Process Costs and Liquidation Costs

These costs include all expenses incurred in:

• Corporate Insolvency Resolution Process (CIRP)

• Liquidation process

Examples

• Fees of resolution professional and liquidator

• Legal and professional fees

• Costs of preserving and realizing assets

• Administrative expenses

Treatment of Employee Dues (Other than Workmen)

Employee dues other than workmen (e.g., managerial staff) for the preceding 12 months rank below workmen’s dues but above unsecured creditors.

This distinction emphasizes protection of blue-collar workers.

Government Dues under IBC

Unlike the Companies Act, government dues are not overriding preferential payments under IBC.

They rank below unsecured creditors in priority.

This reflects the policy shift towards:

• Promoting credit availability

• Protecting business confidence

Impact of Overriding Preferential Payments

Overriding preferential payments have significantly impacted liquidation accounting by:

• Reducing ambiguity in priority

• Enhancing speed of liquidation

• Increasing confidence of creditors

• Protecting vulnerable stakeholders

Accounting Treatment of Overriding Preferential Payments

In liquidation accounts:

• These payments are deducted first from realized assets

• Shown separately in the Liquidator’s Statement of Account

• Paid in full before other claims

Role of Liquidator

The liquidator is responsible for:

• Identifying eligible overriding preferential claims

• Verifying amounts and time periods

• Making payments strictly as per Section 53

• Ensuring compliance and transparency

Preferential payments refer to certain debts that are given priority over other unsecured liabilities at the time of liquidation of a company. These payments are made after secured creditors (to the extent of their security) but before unsecured creditors and shareholders. The concept of preferential payments ensures protection to specific classes of creditors whose claims are considered socially or economically important.

Meaning of Preferential Payments

Preferential payments are those payments which, under the provisions of the Companies Act, 2013, must be paid in priority to all other unsecured debts during the liquidation of a company. These include statutory dues, employee-related claims, and certain government obligations. The objective is to safeguard the interests of employees and the government and ensure fairness in the winding-up process.

Features of Preferential Payments

• Statutory in Nature

Preferential payments are created and governed by law, mainly under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. The liquidator is legally bound to follow these provisions while distributing the assets of the company. These payments are not optional or discretionary; failure to comply may lead to legal consequences.

• Priority Over Unsecured Creditors

One of the most important features of preferential payments is that they are paid before unsecured creditors. After meeting liquidation expenses and secured creditors’ claims (to the extent of their security), preferential creditors are given priority. This ensures that socially and economically important claims are settled first.

• Protection of Employees’ Interests

Preferential payments primarily aim to safeguard the interests of employees and workers. Wages, salaries, holiday pay, gratuity, and provident fund contributions are given preferential status. This feature reflects the social responsibility of company law towards employees who depend on regular income for their livelihood.

• Limited Time Period Applicability

Preferential payments are allowed only for dues that have arisen within a specified period prior to liquidation, usually 12 months. This prevents old and stale claims from enjoying preferential treatment and ensures fairness among creditors. Only recent and relevant obligations qualify for priority payment.

• Subject to Prescribed Monetary Limits

Certain preferential payments, especially wages and salaries, are subject to maximum monetary limits prescribed by law. This feature ensures equitable distribution of assets and prevents disproportionate claims by a few individuals from exhausting the company’s resources.

• Applicable Only in Case of Liquidation

Preferential payments become relevant only when a company goes into liquidation. During normal business operations, all liabilities are treated as ordinary debts. This feature highlights that preferential payments are a special mechanism applicable exclusively during winding up.

• Paid Out of Company’s Assets

Preferential payments are made out of the general assets of the company. They are not charged against specific secured assets unless specified by law. The liquidator ensures that sufficient assets are available to meet these obligations before paying unsecured creditors.

• Ensures Fair and Orderly Distribution

Preferential payments promote fairness, discipline, and order in the liquidation process. By clearly defining the order of priority, they reduce disputes among creditors and ensure transparency. This feature contributes to the smooth completion of liquidation proceedings.

Types of Preferential Payments

Preferential payments are those payments which are given priority over unsecured creditors at the time of liquidation of a company. These payments are specified under the Companies Act, 2013 and relevant provisions of the Insolvency and Bankruptcy Code, 2016. The main types of preferential payments are explained below.

1. Government Dues

Government dues constitute an important category of preferential payments. These include taxes, duties, cess, and other statutory dues payable to the Central Government, State Government, or local authorities. Only those dues which have become payable within twelve months prior to the commencement of liquidation are treated as preferential. This provision ensures timely recovery of public revenue while preventing indefinite priority to old claims.

2. Wages and Salaries of Employees

Wages and salaries payable to employees and workers are treated as preferential payments. These include remuneration for services rendered during a specified period before liquidation, generally up to four months, subject to a prescribed monetary limit. This type of preferential payment protects employees who rely on regular income for their livelihood and ensures social justice during the liquidation process.

3. Accrued Holiday Remuneration

Accrued holiday remuneration refers to the payment due to employees for leave earned but not taken before liquidation. Such unpaid holiday pay is treated as a preferential claim. This ensures that employees receive compensation for benefits accumulated during their service period. It recognizes the contractual and statutory rights of employees even when the company is being wound up.

4. Contributions to Employee Welfare Funds

Amounts due from the company towards employee welfare funds such as Provident Fund, Pension Fund, Gratuity Fund, and other similar funds are treated as preferential payments. In many cases, these contributions are protected in full and may not form part of the company’s general assets. This reflects the importance given to employee welfare and long-term financial security.

5. Compensation Under Labour Laws

Compensation payable to employees under various labour laws is also treated as a preferential payment. This includes compensation for retrenchment, termination, or injury arising out of employment prior to liquidation. Such payments ensure compliance with labour legislation and safeguard the rights of workers during the winding-up process.

6. Other Statutory Preferential Claims

Certain other statutory liabilities may also qualify as preferential payments if specified by law. These may include amounts payable to statutory authorities or regulatory bodies arising within the prescribed time period. The inclusion of such claims ensures adherence to legal obligations during liquidation.

The liquidation of a company refers to the legal process through which a company’s business is closed, its assets are realized, liabilities are paid, and the remaining amount is distributed among shareholders. Depending on who initiates the liquidation and under what authority, liquidation may be carried out through different methods. The main methods of liquidation are explained below.

1. Compulsory Liquidation (Liquidation by Tribunal)

Compulsory liquidation occurs when a company is wound up by an order of the National Company Law Tribunal (NCLT). This method is adopted when the company is unable to pay its debts, has acted against the interests of the state, or has committed fraudulent or unlawful acts. A petition for compulsory liquidation may be filed by creditors, contributories, the Registrar of Companies, or regulatory authorities.

Once the tribunal passes the winding-up order, an official liquidator is appointed. The liquidator takes custody of the company’s assets, prepares a statement of affairs, realizes assets, and pays liabilities in a legally prescribed order of priority. This method ensures strict legal supervision and safeguards the interests of creditors and other stakeholders.

2. Voluntary Liquidation

Voluntary liquidation is initiated by the company itself without direct intervention of the tribunal. It occurs when shareholders decide that the company should be wound up due to reasons such as completion of objectives, reorganization, or lack of profitability. The company passes a resolution in a general meeting and appoints a liquidator to carry out the process.

Voluntary liquidation is generally quicker and less expensive than compulsory liquidation. However, it must comply with statutory requirements. Voluntary liquidation can be classified into members’ voluntary liquidation and creditors’ voluntary liquidation, depending on the financial position of the company.

3. Members’ Voluntary Liquidation

Members’ voluntary liquidation is adopted when the company is solvent, meaning it can pay all its debts in full. Before initiating liquidation, the directors must make a declaration of solvency, stating that the company will be able to meet its liabilities within a specified period. This declaration must be supported by a statement of assets and liabilities.

Shareholders pass a special resolution for winding up and appoint a liquidator. The liquidator realizes assets, settles liabilities, and distributes the surplus among shareholders according to their rights. This method reflects an orderly and planned closure of the company.

4. Creditors’ Voluntary Liquidation

Creditors’ voluntary liquidation occurs when the company is insolvent and unable to pay its debts. In this case, directors cannot make a declaration of solvency. Although the liquidation is voluntary, creditors play a significant role in the process. A meeting of creditors is held, and they appoint the liquidator and may also form a committee of inspection.

The liquidator works primarily for the benefit of creditors. Shareholders have limited control, and any surplus after paying creditors is distributed among them. This method balances voluntary initiation with protection of creditors’ interests.

5. Liquidation under Insolvency and Bankruptcy Code (IBC), 2016

Under the Insolvency and Bankruptcy Code, 2016, liquidation is carried out in a time-bound and transparent manner. Liquidation may occur when the corporate insolvency resolution process fails or when a solvent corporate person opts for voluntary liquidation. A resolution professional or liquidator is appointed to manage the process.

The liquidator verifies claims, takes control of assets, sells them, and distributes proceeds according to the priority specified under the Code. This method aims at maximizing asset value and ensuring fairness among stakeholders.

6. Liquidation under Supervision of Tribunal

In this method, liquidation initially begins as a voluntary process but later comes under the supervision of the tribunal. The tribunal may order supervision if irregularities are noticed or if stakeholder interests require protection. The liquidator continues to function but under judicial oversight.

This method combines the flexibility of voluntary liquidation with the control of compulsory liquidation, ensuring accountability and legal compliance.

7. Summary Liquidation

Summary liquidation is applicable to small or defunct companies with limited assets and liabilities. The procedure is simplified to reduce time and cost. This method is particularly useful for companies that have ceased operations and have minimal financial complexity.

Liquidation of a company is an important concept in corporate accounting and company law. It represents the end stage of a company’s life, where its business operations are brought to a close and its assets are realized to settle liabilities. Unlike ordinary business situations where a company continues as a going concern, liquidation assumes that the company will cease to exist after completion of the process.

Liquidation generally arises due to financial failure, inability to pay debts, expiry of the company’s purpose, or a decision by shareholders to discontinue business. From an accounting perspective, liquidation requires preparation of special statements such as the Liquidator’s Statement of Account, as normal accounting principles of a going concern no longer apply. The objective shifts from profit measurement to realization and distribution of assets.

Meaning of Liquidation of Company

Liquidation, also known as winding up, refers to the process by which a company’s affairs are completely settled. Under this process, the company’s assets are sold, liabilities are paid off, and any remaining surplus is distributed among the shareholders according to their rights. Once liquidation is completed, the company is dissolved and ceases to have legal existence.

In liquidation, a liquidator is appointed to take control of the company’s assets and records. The liquidator acts as a trustee for creditors and shareholders and ensures that assets are realized in an orderly manner. The process protects the interests of creditors by giving them priority over shareholders. Thus, liquidation ensures a fair and legal closure of the company’s business.

Definition of Liquidation

Various authorities have defined liquidation in different ways, emphasizing its legal and accounting aspects.

• According to Company Law,

“Winding up is a process whereby the life of a company is brought to an end and its property is administered for the benefit of its creditors and members.”

• According to Pickles,

“Liquidation is the process by which a company’s business is closed, its assets realized, and the proceeds distributed among those entitled.”

• According to Accounting perspective,

Liquidation is the systematic realization of assets and settlement of liabilities with the ultimate aim of dissolving the company.

Objectives of Liquidation

• To Bring an End to the Company’s Existence

One of the primary objectives of liquidation is to formally bring the company’s business activities and legal existence to an end. When a company is no longer able to operate profitably or fulfill its objectives, liquidation provides a lawful method to close operations. It ensures that the company does not continue to incur losses or liabilities and marks the final stage in the corporate life cycle.

• To Realise the Assets of the Company

Liquidation aims to convert all assets of the company into cash through sale or realization. Since the company ceases to be a going concern, assets are no longer held for use but for disposal. The liquidator ensures that assets are sold in an orderly and transparent manner to obtain the maximum possible value, thereby protecting the interests of creditors and shareholders.

• To Settle Liabilities and Pay Creditors

A major objective of liquidation is to settle all outstanding liabilities of the company. Creditors are paid in a legally prescribed order of priority, ensuring fairness and compliance with company law. Secured creditors, preferential creditors, and unsecured creditors are paid before any amount is distributed to shareholders. This objective safeguards creditor interests and maintains confidence in corporate systems.

• To Distribute Surplus Among Shareholders

After payment of all liabilities, if any surplus remains, liquidation aims to distribute it among shareholders according to their rights. Preference shareholders are paid first, followed by equity shareholders. This ensures equitable treatment and fair distribution of remaining funds. The objective is to return the residual value of the business to its rightful owners in a lawful manner.

• To Ensure Legal Compliance and Transparency

Liquidation ensures that the closure of the company takes place strictly according to legal provisions. The liquidator follows statutory procedures, prepares necessary statements, and submits reports to authorities. This objective promotes transparency, prevents misuse of assets, and ensures accountability. Proper compliance protects stakeholders and prevents future legal disputes related to the company’s closure.

• To Protect the Interests of Stakeholders

Another important objective of liquidation is the protection of interests of all stakeholders, including creditors, shareholders, employees, and the government. Employees’ dues, taxes, and statutory obligations are settled appropriately. By following an orderly process, liquidation avoids arbitrary decisions and ensures that no stakeholder is unfairly disadvantaged during the winding-up process.

• To Avoid Further Losses and Risks

Liquidation helps prevent further financial losses and accumulation of liabilities when a company is no longer viable. Continuing a loss-making business may worsen the financial position and harm creditors. Liquidation minimizes risk by stopping operations and settling obligations promptly. This objective helps preserve whatever value remains in the business for distribution.

• To Achieve Final Dissolution of the Company

The ultimate objective of liquidation is the dissolution of the company, which signifies the end of its legal identity. After completion of asset realization and settlement of claims, the company is removed from the register of companies. Dissolution provides finality, ensuring that the company no longer exists in the eyes of law and cannot enter into future obligations.

Types of Liquidation

Liquidation of a company may take place in different forms depending on the circumstances under which the company is wound up. The Companies Act recognizes various types of liquidation, each having distinct features, procedures, and legal implications. The major types of liquidation are explained below.

1. Compulsory Liquidation (Winding Up by Tribunal/Court)

Compulsory liquidation occurs when a company is wound up by an order of the National Company Law Tribunal (NCLT). It usually arises when the company is unable to pay its debts, has acted against the interests of the state, or has conducted business fraudulently. Creditors, contributories, or regulatory authorities may apply for compulsory winding up. The tribunal appoints an official liquidator who takes control of the company’s assets and affairs.

2. Voluntary Liquidation

Voluntary liquidation takes place when the company decides to wind up its affairs without court intervention. This type of liquidation is initiated by the shareholders through a resolution. Voluntary liquidation reflects the company’s own decision to discontinue business due to reasons such as expiry of purpose, reorganization, or loss of profitability. Voluntary liquidation can be further classified into two types: members’ voluntary liquidation and creditors’ voluntary liquidation.

3. Members’ Voluntary Liquidation

Members’ voluntary liquidation occurs when the company is solvent, meaning it is able to pay all its debts in full. The directors make a declaration of solvency, stating that the company will be able to meet its liabilities within a specified period. Shareholders pass a special resolution for winding up, and a liquidator is appointed to realize assets and distribute surplus among shareholders after settling liabilities.

4. Creditors’ Voluntary Liquidation

Creditors’ voluntary liquidation takes place when the company is insolvent and unable to pay its debts. In this case, the directors cannot make a declaration of solvency. Although the winding up is voluntary, creditors play a significant role by appointing the liquidator and supervising the process. The interests of creditors are given priority, and shareholders have limited control in this type of liquidation.

5. Voluntary Liquidation under Insolvency and Bankruptcy Code (IBC)

Under the Insolvency and Bankruptcy Code, 2016, voluntary liquidation applies mainly to corporate persons who have not defaulted but wish to liquidate their assets. This process requires approval from shareholders and creditors. The objective is to provide a time-bound and transparent liquidation mechanism, ensuring orderly settlement of claims and dissolution of the company.

6. Liquidation Subject to Supervision of Tribunal

In this type, liquidation is initially carried out voluntarily, but later the tribunal supervises the process. The tribunal may intervene if irregularities are noticed or if protection of stakeholder interests becomes necessary. The liquidator continues operations under tribunal supervision. This type combines features of both voluntary and compulsory liquidation and ensures legal oversight where required.

7. Summary Liquidation

Summary liquidation is applicable to small or defunct companies where assets and liabilities are minimal. The procedure is simplified to save time and cost. This type of liquidation ensures speedy closure of companies that have ceased operations and have limited financial complexity.

Causes of Liquidation

• Continuous Losses and Financial Failure

One of the major causes of liquidation is continuous financial losses. When a company fails to generate sufficient profits over a long period, its financial position deteriorates. Persistent losses erode capital, reduce liquidity, and increase dependence on borrowed funds. When the company becomes unable to meet its operating expenses and financial obligations, liquidation becomes inevitable to prevent further losses and protect creditors’ interests.

• Inability to Pay Debts (Insolvency)

A company may be liquidated when it becomes insolvent, meaning it is unable to pay its debts as and when they fall due. Non-payment of creditors, defaults on loans, or failure to meet statutory dues are clear signs of insolvency. In such cases, creditors may approach the tribunal for winding up to recover their dues. Liquidation ensures orderly settlement of liabilities.

• Expiry of Company’s Purpose or Duration

Some companies are formed for a specific objective or fixed duration. Once the purpose for which the company was established is achieved, or the specified period expires, the company may no longer be required. In such cases, shareholders may decide to wind up the company voluntarily. Liquidation helps in legally closing the company and distributing its assets among stakeholders.

• Inefficient or Mismanagement

Poor management and inefficient administration often lead to liquidation. Lack of planning, improper financial control, corruption, or misuse of company funds can severely affect performance. When mismanagement results in losses, declining market position, or legal issues, the company may not be able to continue operations, making liquidation necessary to safeguard stakeholder interests.

• Changes in Market and Economic Conditions

Adverse changes in market conditions, such as reduced demand, increased competition, technological obsolescence, or economic recession, may render a company unviable. Government policy changes, inflation, or trade restrictions can also negatively impact operations. When a company fails to adapt to these changes, liquidation may be the only option to minimize losses.

• Legal and Statutory Reasons

A company may be liquidated due to legal or statutory reasons. Violation of company law provisions, failure to file statutory returns, fraudulent activities, or acting against national interest may lead to compulsory winding up by the tribunal. In such cases, liquidation acts as a corrective and disciplinary measure to enforce legal compliance.

• Internal Disputes and Loss of Confidence

Serious disputes among directors, shareholders, or promoters can disrupt the functioning of the company. Loss of mutual trust, deadlock in decision-making, or lack of coordination may paralyze operations. When internal conflicts cannot be resolved and business continuity is affected, liquidation becomes a practical solution to end disputes and distribute assets fairly.

• Reconstruction, Merger, or Reorganization

Liquidation may occur as part of corporate restructuring. During merger or reorganization, an existing company may be liquidated to transfer assets and liabilities to a new entity. In such cases, liquidation is not due to failure but is a strategic decision aimed at achieving operational efficiency, expansion, or better financial performance.

Yield Method, also known as the Earnings Method, Profit-Earning Capacity Method, or Capitalisation Method, is a method of valuation of shares based on the earning capacity of a company. Under this method, the value of shares is determined by comparing the company’s expected earnings or dividends with the normal rate of return prevailing in the industry. The basic assumption is that the value of a share depends on the income it can generate for investors.

Unlike the Net Asset Method, which focuses on asset backing, the Yield Method emphasizes profitability and future income, making it more suitable for valuing shares of a going concern.

Concept and Rationale of Yield Method

The Yield Method is based on the principle that investors invest in shares to earn returns, either in the form of dividends or capital appreciation. A rational investor compares the return offered by a company with the return available from alternative investments carrying similar risk. If a company offers a higher yield than the normal rate, its shares are valued higher, and vice versa.

This method assumes that:

• Past profits are a reliable indicator of future profits

• Profits are stable or reasonably predictable

• The business will continue operations for the foreseeable future

Hence, the Yield Method measures the true earning power of a company.

Applicability of Yield Method

The Yield Method is particularly suitable in the following cases:

• Valuation of shares of profitable and going concerns

• Companies with stable and regular earnings

• Valuation for mergers, acquisitions, and takeovers

• Determination of share exchange ratio

• Valuation of unquoted equity shares

• Settlement of disputes among shareholders

It is less suitable where profits fluctuate widely or where assets play a dominant role.

Types of Yield Method

The Yield Method can be classified into two main types:

• Earnings Yield Method

• Dividend Yield Method

Both methods are explained in detail below.

1. Earnings Yield Method

Under the Earnings Yield Method, shares are valued based on the earning capacity of the company. The maintainable profits are capitalized at the normal rate of return to determine the value of shares. This method considers profits available to equity shareholders, irrespective of the dividend actually distributed.

Steps Involved in Earnings Yield Method

Step 1. Calculate maintainable profits by adjusting past profits for abnormal items.

Step 2. Deduct preference dividend and taxes, if required.

Step 3. Determine earnings available to equity shareholders.

Step 4. Calculate Earnings Per Share (EPS).

Step 5. Capitalize EPS at the normal rate of return.

Formula

Value per Equity Share = (Earnings per Share × 100) / Normal Rate of Return

Where,

Earnings per Share (EPS) = Profit available to equity shareholders / Number of equity shares

Illustrative Explanation

If a company earns ₹2,00,000 as maintainable profit, has 20,000 equity shares, and the normal rate of return is 10%:

EPS = 2,00,000 / 20,000 = ₹10
Value per share = (10 × 100) / 10 = ₹100

Merits of Earnings Yield Method

• Focuses on earning capacity

• Suitable for profitable companies

• Reflects investor expectations

• Simple and widely accepted

• Ideal for going concerns

Limitations of Earnings Yield Method

• Ignores asset backing

• Depends on estimation of maintainable profits

• Sensitive to changes in normal rate of return

• Not suitable for companies with fluctuating profits

2. Dividend Yield Method

Dividend Yield Method is a variation of the yield method where shares are valued based on the dividend-paying capacity rather than earnings. This method assumes that dividends are the primary source of return for investors. It is especially relevant where dividends are regular and stable.

Steps Involved in Dividend Yield Method

Step 1. Ascertain the expected dividend on equity shares.

Step 2. Calculate Dividend per Share (DPS).

Step 3. Capitalize DPS at the normal rate of return.

Formula

Value per Equity Share = (Dividend per Share × 100) / Normal Rate of Return

Where,
Dividend per Share (DPS) = Total equity dividend / Number of equity shares

Illustrative Explanation

If a company pays a dividend of ₹8 per share and the normal rate of return is 10%:

Value per share = (8 × 100) / 10 = ₹80

Merits of Dividend Yield Method

• Simple and practical

• Useful where dividends are stable

• Reflects actual cash return to shareholders

• Suitable for income-oriented investors

Limitations of Dividend Yield Method

• Ignores retained earnings

• Not suitable for growth companies

• Dividend policy may distort valuation

• May undervalue companies with high retention

Valuation of equity shares is the process of determining the fair or intrinsic value of shares based on the financial position, profitability, and future prospects of a company. Equity shares represent ownership in the company and may be fully paid-up or partly paid-up depending on the amount of share capital paid by shareholders. The valuation of these two types of shares differs mainly due to the existence of future payment liability in partly paid-up shares.

1. Fully Paid-Up Equity Shares

Fully paid-up equity shares are those shares on which the entire face value has been paid by the shareholders. There is no outstanding amount payable on these shares. Holders of fully paid-up shares enjoy full ownership rights, including voting rights, dividend entitlement, and transferability. Since there is no further financial obligation, the valuation of fully paid-up equity shares is simpler and more reliable.

Need for Valuation of Fully Paid-Up Equity Shares

The valuation of fully paid-up equity shares becomes necessary in several situations such as:

• Amalgamation and merger of companies

• Acquisition or takeover

• Issue of bonus shares

• Conversion of debentures into equity shares

• Transfer of shares in private companies

• Settlement of disputes among shareholders

In such cases, market price may not reflect true value, especially when shares are unquoted.

Methods of Valuation of Fully Paid-Up Equity Shares

Fully paid-up equity shares are valued using standard valuation methods:

• Net Asset Value Method

Under this method, the value of equity shares is based on the net assets available to equity shareholders.

Formula:

Value per fully paid-up equity share = Net assets available to equity shareholders / Number of equity shares

This method is suitable during liquidation or when asset strength is important.

• Yield or Earnings Method

This method values shares based on the earning capacity of the company.

Formula:

Value per fully paid-up equity share = (Earnings per share × 100) / Normal rate of return

It is suitable for going concerns and profitable companies.

• Fair Value Method

This method takes the average of values obtained under the Net Asset Method and Yield Method.

Formula:

Fair value per share = (Net asset value per share + Yield value per share) / 2

It is widely used because it considers both assets and profitability.

2. Valuation of Partly Paid-Up Equity Shares

Partly paid-up equity shares are those shares on which only a part of the face value has been paid, and the remaining amount is yet to be called by the company. Shareholders holding partly paid-up shares have a future liability to pay the unpaid amount when calls are made. Due to this additional risk and obligation, partly paid-up shares are valued lower than fully paid-up shares.

Reasons for Lower Valuation of Partly Paid-Up Shares

The valuation of partly paid-up equity shares is lower due to the following reasons:

• Existence of future payment obligation

• Higher risk to shareholders

• Limited transferability in some cases

• Dividend entitlement only on paid-up capital

• Possibility of forfeiture if calls are not paid

These factors reduce the attractiveness and value of partly paid-up shares.

Method of Valuation of Partly Paid-Up Equity Shares

The valuation of partly paid-up equity shares is generally derived from the value of fully paid-up equity shares.

• Proportionate Value Method

Under this method, the value of a partly paid-up share is calculated in proportion to the amount paid.

Formula:

Value of partly paid-up share = Value of fully paid-up share × (Paid-up value / Face value)

• Deduction Method

Alternatively, the unpaid amount is deducted from the value of a fully paid-up share.

Formula:

Value of partly paid-up share = Value of fully paid-up share – Unpaid amount per share

This method ensures that the shareholder’s future liability is fully adjusted.

Illustration of Valuation

Suppose the value of a fully paid-up equity share of ₹100 is ₹150. If ₹60 is paid and ₹40 is unpaid:

Using proportionate method:
Value = 150 × (60/100) = ₹90

Using deduction method:
Value = 150 – 40 = ₹110

In practice, the deduction method is commonly preferred as it fully accounts for the unpaid liability.