Liquidation (winding up) is the process of closing a company by realising (selling) its assets and paying liabilities in a prescribed order. Corporate Accounting questions commonly test:
You should be able to:
Liquidation is a legal process where:
Commonly stated types:
For exam: a short listing is enough unless asked.
Liquidator’s key functions:
A typical order (write as a clean list; exact legal wording may vary by syllabus):
Access the complete note and unlock all topic-wise content
It's free and takes just 5 seconds
Get instant access to notes, practice questions, and more benefits with our mobile app.
Download this note as PDF at no cost
If any AD appears on download click please wait for 30sec till it gets completed and then close it, you will be redirected to pdf/ppt notes page.
Liquidation (winding up) is the process of closing a company by realising (selling) its assets and paying liabilities in a prescribed order. Corporate Accounting questions commonly test:
You should be able to:
Liquidation is a legal process where:
Commonly stated types:
For exam: a short listing is enough unless asked.
Liquidator’s key functions:
A typical order (write as a clean list; exact legal wording may vary by syllabus):
Important concept: payments are made only if funds are available; if insufficient at a level, lower levels may get nothing.
Preferential creditors are paid in priority over ordinary unsecured creditors. Examples commonly quoted:
In exam answers, you can write “as per Companies Act provisions”.
Secured creditors have a charge on specific assets (mortgage/pledge/hypothecation).
Mini table:
Liquidator’s Final Statement is like a Receipts and Payments statement during liquidation.
Paid as per priority: liquidation expenses → preferential creditors → secured/unsecured (as applicable) → shareholders.
Common exam approach: make a two-column statement:
Suppose total cash realised = ₹5,00,000.
Payment logic:
Working (table):
Flowchart to write/draw:
Realisation of assets → Liquidation expenses → Preferential creditors → Secured creditors → Unsecured creditors → Preference SH → Equity SH
Quick priority mnemonic (write words, not necessary to memorise): E–P–S–U–P–E = Expenses, Preferential, Secured, Unsecured, Preference, Equity
From this topic
Order of payment (basic waterfall):
Expenses → Preferential creditors → Secured/Unsecured creditors → Shareholders
Lower priorities are paid only if funds remain.
If security proceeds are insufficient, the deficiency becomes an unsecured claim.
So secured creditors get priority only to the extent of the security value.
Order of payment (waterfall) means claims are settled in a fixed priority. A lower priority receives payment only after higher priorities are fully paid.
Realisation → Liquidation expenses → Preferential creditors → Secured creditors → Unsecured creditors → Preference shareholders → Equity shareholders
Thus, the waterfall ensures fair and legally compliant distribution of liquidation proceeds.