ACA Assignment Part 2of3
Liquidation of Companies
Assignment 1 Part 2of3
11. What are preferential payments with regards to company liquidation process.
Preferential payments refer to a specific order of payments that is to be made by the liquidator during the liquidation process. The order of payments is set out in the law and is designed to ensure that certain creditors are paid before others, based on the nature of their claims.
The order of payments for company liquidation process is typically:
- Secured creditors: Creditors who have a specific security or collateral for their debt, such as a mortgage or a security interest in the company's assets, are paid first.
- Costs of liquidation: The liquidator's expenses and costs associated with the liquidation process are paid next.
- Preferential creditors: Certain unsecured creditors, such as employees and pension scheme trustees, are given priority over other unsecured creditors and are paid next.
- Debentures having floating charge on assets: Creditors with a floating charge on assets are paid next.
- Unsecured creditors: All other unsecured creditors, such as trade creditors and bondholders, are paid next.
- Preference shareholders: Shareholders who have preference shares are paid next.
- Equity shareholders: Shareholders who have equity shares are paid last.
12. How will you calculate liquidator remuneration?
The calculation of liquidator remuneration, also known as the liquidator's fees, typically involves several factors, such as the amount of assets realized, the complexity of the liquidation process, and the time spent by the liquidator.
- Realisation of assets pledged with secured creditors: The liquidator's remuneration can be calculated as a percentage of the assets realized from the secured creditors. For example, the liquidator may charge a fee of particular percentage on the assets realized from the secured creditors.
- Cash and bank balance: The liquidator's remuneration can also be calculated as a percentage of the cash and bank balance realized during the liquidation process. For example, the liquidator may charge a fee of particular percentage on the cash and bank balance realized.
- Time spent: The liquidator's remuneration may also be calculated based on the time spent on the liquidation process. The liquidator may charge an hourly rate for their services, and the total fee will depend on the number of hours spent on the liquidation process.
It's worth noting that the exact method of calculating the liquidator's remuneration will depend on the jurisdiction, the liquidation process and the agreement reached between the liquidator and the stakeholders. It's important to note that the liquidator's remuneration must be approved by the court and the remuneration should be reasonable and in compliance with the laws and regulations.
13. Prepare the imaginary liquidator final statement.
The liquidator final statement of affairs for an imaginary company called "ABC Limited" undergoing liquidation in India might include the following information:
Details of the company:
Company name: ABC Limited
Registration number: 12345
Registered office address: 1234 Elm Street, Mumbai, Maharashtra
Details of the liquidator:
Name: John Doe
Address: 5678 Oak Avenue, Mumbai, Maharashtra
Contact details: johndoe@***.com, +91 9***54321
Summary of the liquidation process:
Date of appointment of liquidator: 01/01/2022
Date of completion of liquidation: 01/01/2023
Total number of creditors: 50
Total number of shareholders: 100
Assets of the company:
Cash: INR 1,000,000
Investments: INR 500,000
Property: INR 2,500,000
Plant and machinery: INR 1,500,000
Inventory: INR 1,000,000
Accounts receivable: INR 2,000,000
Total assets: INR 8,500,000
Liabilities of the company:
Loans: INR 2,000,000
Mortgages: INR 1,000,000
Trade debts: INR 1,500,000
Taxes: INR 500,000
Other outstanding debts: INR 1,000,000
Total liabilities: INR 6,000,000
Creditors:
Secured creditors: INR 3,500,000
Preferential creditors: INR 500,000
Unsecured creditors: INR 2,000,000
Total creditors: INR 6,000,000
Shareholders:
Preference shareholders: INR 500,000
Equity shareholders: INR 1,500,000
Total shareholders: INR 2,000,000
Signature of the liquidator:
John Doe, Liquidator
The balance sheet for the above-imaginary company might include:
| Assets | Amount (INR) |
|---|---|
| Current Assets | 4,000,000 |
| Fixed Assets | 4,500,000 |
| Total Assets | 8,500,000 |
| Liabilities | Amount (INR) |
| Current Liabilities | 3,000,000 |
| Long-term Liabilities | 3,000,000 |
| Shareholders' Equity | 2,500,000 |
| Total Liabilities and Shareholders' Equity | 8,500,000 |
14. What is the order in which liability are discharged at the time of liquidation?
In the liquidation process, the order of payments, also known as the order of priority of liabilities, is set out in the law and is designed to ensure that certain creditors are paid before others, based on the nature of their claims. The order of payments for company liquidation process is typically:- Secured creditors: Creditors who have a specific security or collateral for their debt, such as a mortgage or a security interest in the company's assets, are paid first. These creditors have a higher priority than other creditors as they have a security over specific assets of the company, which can be realized to repay the debt.
- Costs of liquidation: The liquidator's expenses and costs associated with the liquidation process are paid next. These costs include expenses such as the liquidator's fees, legal and accounting fees, and other expenses incurred in the course of the liquidation process.
- Preferential creditors: Certain unsecured creditors, such as employees and pension scheme trustees, are given priority over other unsecured creditors and are paid next. These creditors are considered preferential as they have a higher priority as per the laws and regulations of the country.
- Debentures having floating charge on assets: Creditors with a floating charge on assets are paid next. These creditors have a security over the assets of the company, but the security is not specific to any particular asset, and the assets covered by the floating charge can change over time.
- Unsecured creditors: All other unsecured creditors, such as trade creditors and bondholders, are paid next. These creditors don't have any specific security or collateral for their debt.
- Preference shareholders: Shareholders who have preference shares are paid next. These shareholders have a higher priority than equity shareholders as they have a preference over dividends and assets during liquidation.
- Equity shareholders: Shareholders who have equity shares are paid last. These shareholders have no preference over dividends or assets during liquidation and their shares are considered to be of the last priority.
15. How will you pay interest payable at the time of liquidation?
The payment of interest payable to debentures during liquidation will depend on whether the company is considered solvent or insolvent.- If the company is solvent: If the company is considered solvent, meaning it has enough assets to pay off its debts, then the liquidator is responsible for paying the interest to debenture holders out of the assets of the company. The liquidator will typically pay the interest to debenture holders on a pro-rata basis, meaning that each debenture holder will receive a proportionate share of the interest based on the number of debentures held.
- If the company is insolvent: If the company is considered insolvent, meaning it does not have enough assets to pay off its debts, then the liquidator will not be able to pay the interest to debenture holders. In this case, the debenture holders will be considered unsecured creditors and will only be paid if and when there are sufficient assets available after the secured creditors and preferential creditors have been paid.
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