Liquidation of Companies | Accounting

In this article we will discuss about:- 1. Meaning of Liquidation 2. Liquidation and Insolvency 3. Consequences of Winding Up.

Meaning of Liquidation:

The word ‘Liquidation’ has not been used anywhere in the Companies Act, 1956. It is the word ‘winding up’ which has been used in this Act. By winding up of a Company, we mean, “Winding up of a Company is the process whereby its life is ended and its property is administered for the benefit of its creditors and members. And an administrator, called a Liquidator, is appointed and he takes control of the Company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”

A Company is an artificial person. It is created by law. Therefore, the law alone can dissolve it. On dissolution, Company’s name is struck off from the Register of Companies (maintained by Registrar of Companies). This fact may also be published in the official gazette.

Liquidation of a Company, which is also called winding up of a Company, may be defined as the process through which the affairs of the Company are stopped for the purpose of liquidation, for which an officer, called liquidator, is appointed to take charge of the assets and liabilities of the Company. His duties are to realize the assets, discharge the liabilities and distribute the surplus, if any, to the members of the Company.

Liquidation and Insolvency:

Liquidation is different from insolvency. Liquidation resembles insolvency in the respect that in both cases the assets are realised, proceeds applied to discharge the liabilities and surplus, if any, is distributed to members – proprietors or partners. The term ‘insolvency’ is applicable to individuals, partnerships and Hindu Undivided Family whereas the term ‘liquidation’ is appropriate to a Joint Stock Company.

A person is said to be an insolvent when his liabilities exceed his assets or has committed an act of insolvency, and against whom an order of adjudication is passed by a competent court. It is not necessary that a Company should be liquidated although it may be in insolvent circumstances and further it may sometimes become necessary to liquidate even a solvent Company.

Insolvency of a person is governed by the Insolvency Act whereas liquidation of a Company is governed by the Companies Act. Proceedings under the Insolvency Acts are known as insolvency proceedings, whereas proceedings for the winding up of a Company are known as liquidation proceedings. An Official Receiver or Official Assignee is appointed in case of insolvency and Liquidator is appointed in case of liquidation.

An order of discharge entitles the person, who was declared insolvent, to start a business afresh. In case of Companies, there is no question of starting the business by the same Company as the liquidation puts an end to the Company once and for all.

Consequences of Winding Up:

The consequences of winding up may be discussed under the following heads:

1. An official designated as liquidator will take over the administration of the Company. In case of compulsory winding up, the official liquidator, attached to the High Court, functions as liquidator of the Company. In case of voluntary winding up, such an official is appointed by the members or the creditors depending upon members, or creditor’s voluntary winding up.

2. The powers of the Board of Directors will terminate and will now vest in the liquidator.

3. No suit or other legal proceedings can be proceeded with against the Company except with permission of the court.

4. The order for winding up has the effect of a notice of discharge to the employees of the company, except where the business of the company is continued by the order of the court.

5. A shareholder is liable to pay the full amount up to the face value of the shares held by him. Not only the present members but past members are also liable in the event of winding up of the company.

The liabilities of present member is the amount remaining unpaid on the shares held by him while a past member can be called upon to pay if the contributions made by the present members are not adequate.

6. A Company, whether solvent or insolvent, can be wound up under the Act. In case of solvent company, all claims of its creditors when proved are fully met. In case of insolvent company, the rules under the Law of Insolvency shall apply.