Page 180 - DCOM205_ACCOUNTING_FOR_COMPANIES_II

Unit 9: Fundamentals of Liquidation of Companies

A company comes into existence by law and can come to an end only through a legal process. notes
The legal procedure to wind up a company is called liquidation. Therefore, when the process
of winding up begins, the company is said to be in liquidation. The procedure of winding up
of a company is laid down in the Companies Act, 1956. A company can be liquidated at any
time. It is not compulsory that only insolvent companies should be liquidated. Sometimes, even
solvent companies maybe liquidated. Liquidation of a company is different from insolvency.
The word insolvency is used in the case of individual, partnership firms and Hindu Undivided
Families, while the word liquidation is applicable to the companies. Secondly, insolvency of
firm, individual or H.U.F. is governed by the Insolvency Act, while liquidation of companies is
governed by the companies Act.

9.1 concept of liquidation

A company is an artificial person which comes into existence through a process of law. Therefore,
its life can also be brought to an end, but only through the process of law. Since a company has
a separate existence from its members, its life span is not affected by the life span of any of its
members. One of the ways to dissolve a company is to resort to the process of winding up or
liquidation. Therefore, when the process of winding up commences, the company is said to be
in liquidation. When the directors or members want to liquidate the company, they will have to
follow the procedure stated in the company law.

Liquidation of a company is the process whereby its life is ended and its property administered
for the benefit of its creditors and members. An administrator, called a liquidator, is appointed
and he takes control of the company, realises its assets, pays its debts and finally distributes any
surplus among the members in accordance with their rights as per the company law. The term
‘Liquidation’ and ‘Winding up’ has been used synonymously.

In the case of liquidation of a company, all the assets of the company are realised and amount
is collected from unpaid calls on the shares. Then out of the proceeds claims of the external
liabilities are settled. After the settlement of the claims of the liabilities and creditors, if any
amount is left, it is given to the preferential and equity shareholders according to their rights. A
person is appointed to realise the various assets and to make the payments of various liabilities,
who is called liquidator.

self assessment

Fill in the blanks:
1. ............... of a company is the process whereby its life is ended and its property administered
for the benefit of its creditors and members.
2. In the case of liquidation of a company, all the ............... of the company are realised and
amount is collected from unpaid calls on the shares.

9.2 types of liquidation

Under Section 425 (1) of the Companies Act, a company can be liquidated in any of the following
three ways:
(i) Compulsory Winding Up (by court)
(ii) Voluntary Winding Up (by the members or creditors)

(iii) Winding up Subject to Supervision of Court.

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