Liquidation of Company: Meaning, Order of Payment, Liquidator’s Final Statement (Basics) Questions

Q: State any three items that may be included under preferential payments.

Preferential payments (any three, as per law): - **Employee wages/salaries** up to prescribed limits - **Government dues/taxes** (as applicable) - accrued holiday pay / compensation (as applicable) Write in exam: “as per Companies Act provisions”.

Q: Prepare a basic format of Liquidator’s Final Statement (Receipts and Payments) with headings.

Basic format: | **Receipts** | Amount | **Payments** | Amount | |---|---:|---|---:| | Realisation of assets | xxx | Liquidation expenses | xxx | | Collection from debtors | xxx | Preferential creditors | xxx | | Calls on contributories (if any) | xxx | Secured/Unsecured creditors | xxx | | | | Preference/Equity shareholders | xxx | | **Total** | xxx | **Total** | xxx | Payments are shown in correct **order of payment**.

Question 1

Liquidator’s Final Statement is a type of receipts and payments statement.

Accepted Answer

True. It summarises receipts from realisation and payments to claimants in priority.

Question 2

Define liquidation (winding up) of a company.

Accepted Answer

Liquidation (winding up) is the process of closing a company by realising its assets and paying its liabilities in the prescribed order.

Question 3

Who is a liquidator?

Accepted Answer

A liquidator is the person appointed to wind up the company, realise assets and distribute proceeds among claimants as per priority.

Question 4

State one item included in liquidation expenses.

Accepted Answer

Liquidator’s remuneration (or legal costs of winding up) is included in liquidation expenses.

Question 5

Who are preferential creditors?

Accepted Answer

Preferential creditors are creditors who are paid in priority over ordinary unsecured creditors as per legal provisions.

Question 6

What is meant by secured creditor?

Accepted Answer

A secured creditor is a creditor whose claim is backed by a charge/security on specific assets of the company.

Question 7

Explain the order of payment in liquidation (any three levels) using a short flow/table.

Accepted Answer

Order of payment (basic waterfall):

**Expenses → Preferential creditors → Secured/Unsecured creditors → Shareholders**

| Priority | **Paid first** |
|---:|---|
| 1 | **Liquidation expenses** |
| 2 | **Preferential creditors** |
| 3 | **Unsecured creditors** (after priority claims) |

Lower priorities are paid only if funds remain.

Question 8

How is a secured creditor’s deficiency treated in liquidation? Explain with a small table.

Accepted Answer

If security proceeds are insufficient, the **deficiency** becomes an **unsecured** claim.

| Security realisation vs debt | Treatment |
|---|---|
| Realisation > debt | **Surplus** goes to liquidator/general pool |
| Realisation < debt | **Deficiency** treated as unsecured |

So secured creditors get priority only to the extent of the security value.

Question 9

State any three items that may be included under preferential payments.

Accepted Answer

Preferential payments (any three, as per law):

- **Employee wages/salaries** up to prescribed limits
- **Government dues/taxes** (as applicable)
- accrued holiday pay / compensation (as applicable)

Write in exam: “as per Companies Act provisions”.

Question 10

Prepare a basic format of Liquidator’s Final Statement (Receipts and Payments) with headings.

Accepted Answer

Basic format:

| **Receipts** | Amount | **Payments** | Amount |
|---|---:|---|---:|
| Realisation of assets | xxx | Liquidation expenses | xxx |
| Collection from debtors | xxx | Preferential creditors | xxx |
| Calls on contributories (if any) | xxx | Secured/Unsecured creditors | xxx |
| | | Preference/Equity shareholders | xxx |
| **Total** | xxx | **Total** | xxx |

Payments are shown in correct **order of payment**.

Question 11

Differentiate between preferential creditors and unsecured creditors (any three points).

Accepted Answer

Preferential vs unsecured creditors:

| Basis | **Preferential creditors** | **Unsecured creditors** |
|---|---|---|
| Priority | paid **before** ordinary unsecured | paid **after** expenses + preferential |
| Basis | statutory/legal preference | no security and no statutory priority |
| Examples | **wages**, certain **tax dues** (as per law) | trade creditors, bills payable (general) |

Thus, preferential creditors form a priority class under the liquidation waterfall.

Question 12

Explain 'calls on contributories' and when they are made (basic).

Accepted Answer

**Calls on contributories** are amounts demanded from members (shareholders) to meet a deficiency in winding up.

When made:
- if assets realised are **insufficient** to pay liquidation expenses and liabilities,
- the liquidator may make a **call** on contributories as per their liability.

Flow:
Deficiency → **Call** on contributories → Cash received → Pay priority claims

| Term | Meaning |
|---|---|
| **Contributory** | member liable to contribute |
| **Call** | demand for contribution |

Hence, calls are made only when liquidation proceeds are not enough.

Question 13

Explain the concept of order of payment (waterfall) in liquidation with a neat flowchart and conclusion.

Accepted Answer

### Meaning
Order of payment (waterfall) means claims are settled in a fixed **priority**. A lower priority receives payment only after higher priorities are fully paid.

### Flowchart (write/draw)
**Realisation** → **Liquidation expenses** → **Preferential creditors** → **Secured creditors** → **Unsecured creditors** → **Preference shareholders** → **Equity shareholders**

### Key points
- **Expenses** are paid first (to complete winding up).
- **Preferential** claims are statutory priorities.
- Secured creditors are paid from **security**; deficiency becomes unsecured.

| Rule | Effect |
|---|---|
| Higher paid first | protects priority classes |
| Insufficient funds | lower classes may get nil |

### Conclusion
Thus, the waterfall ensures fair and legally compliant distribution of liquidation proceeds.

Question 14

Using a small working, show how available cash is distributed up to unsecured creditors (exam-style).

Accepted Answer

Assume cash realised = ₹5,00,000; liquidation expenses = ₹20,000; preferential creditors = ₹80,000; unsecured creditors = ₹4,50,000.

### Working
Available after expenses = 5,00,000 – 20,000 = **₹4,80,000**  
Available after preferential = 4,80,000 – 80,000 = **₹4,00,000**

So unsecured creditors receive **₹4,00,000** (short by ₹50,000).

| Step | Amount (₹) |
|---|---:|
| Cash realised | 5,00,000 |
| Less: **Expenses** | (20,000) |
| Less: **Preferential** | (80,000) |
| Balance for unsecured | **4,00,000** |

### Conclusion
If funds are insufficient, unsecured creditors get proportionately up to available balance and shareholders get nil.

Question 15

Explain Liquidator’s Final Statement and how it reflects receipts and payments with priority (use a table).

Accepted Answer

### Meaning
Liquidator’s Final Statement is a summary of **receipts** (from asset realisation and collections) and **payments** (to claimants) during liquidation.

### Receipts vs Payments
- Receipts include sale of assets, debtors collection, calls on contributories (if any).
- Payments are shown strictly in **order of payment**.

| Section | Typical items |
|---|---|
| **Receipts** | realisation of assets, debtors, calls |
| **Payments** | expenses, preferential, secured/unsecured, shareholders |

### Conclusion
It provides a clear statement of how liquidation proceeds were collected and distributed as per legal priority.

Priority	Paid first
1	Liquidation expenses
2	Preferential creditors
3	Unsecured creditors (after priority claims)

Liquidation of Company: Meaning, Order of Payment, Liquidator’s Final Statement (Basics)

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