1. Week 12- Lecture Topic: Liquidations and Receiverships
Textbook Reference:
Leo et al. Company Accounting 8th Edition
Chapter 20
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

2. What is a winding-up? Process whereby a company is dissolved
At this point the company ceases to be a legal entity
Also referred to as a liquidation
Legal requirements contained in chapter 5 of Corporations Act
Two modes of winding up a company:
Winding-up in insolvency and by the court
Voluntary winding-up by members or creditors
Accounting entries are the same in both cases
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

3. Winding-up in Insolvency and by the court
Where a company is insolvent, application may be made to the court for winding-up, s459- s462.
Application to the court may be made by the company itself, a creditor, a director and a contributory, even ASIC, s459P.
Once an application is made, the court may order the insolvent company to be wound up
Insolvency is presumed to exist under a number of circumstances set out in the Corporations Act. These include where:
A creditor serves a demand for unpaid debts over $2,000 and the debt remains unpaid after 3 months
A receiver has been appointed under a floating charge on property
A contributory refers to the holders or immediate past holders of shares in the company
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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4. Corporations Act also contains general grounds for winding-up by the court, s461. These include:
The company has resolved by special resolution that it be wound-up
The company does not commence business within a year of incorporation or suspends business for more than a year
The company has no members
Directors have acted in their own interests, or in a manner that is unfair or unjust to other members
Affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to, or unfairly discriminatory against a member or members, or in a manner that is contrary to the interests of the members as a whole
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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5. Take possession of the company’s assets
Insolvency is the most common reason for liquidation – therefore the major accounting problem in liquidation is the apportionment of limited assets between creditors and shareholders
A liquidator is appointed after the filing of the applications in order to see that the status quo of the company is maintained i.e. that the assets are not quickly drained from the company
Liquidator is appointed to oversee the liquidation. The task of the liquidator is to:
Take possession of the company’s assets
Realize the assets or carry on the business as necessary for the beneficial disposal of the assets
Determine the creditors and order of priority of payment
Pay the creditors
Distribute the balance of funds (if any) to shareholders, or if necessary to make calls on shareholders for extra funds to meet creditors claims
Bring about the dissolution of the company
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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6. The Statement of Affairs includes(Form 507):
The directors and secretary of the company must prepare and submit a Statement of Affairs to the liquidator within 14 days of the making of the order for winding-up
The Statement of Affairs includes(Form 507):
Summary of assets and liabilities
Details of charges over assets(fixed/floating), schedules of Sundry debtors and secured liabilities.
Aim of the Statement of Affairs is to provide information concerning the company’s estimated realizable values of assets and any expected surplus or deficiency of assets after deducting creditors’ claims
After the liquidator has realized all the property, discharged the liability to creditors, and made a final return (if any) to contributories, he/she may apply to the court for the company to be deregistered.
After deregistration, the company ceases to exist
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

7. Voluntary winding-up,s494:
A company may be wound-up voluntarily at the instance of either the members or the creditors
Members’ voluntary winding-up
The company is wound up by the members passing a special resolution to wind up
Can only occur if the company is solvent
Declaration of solvency must be made by the directors and attached to the statement of affairs, Form 520.
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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8. Creditors’ voluntary winding-up
Occurs where there is no declaration of solvency. In such cases the winding-up is under the control of both members and creditors
Company must provide creditors with a summary of affairs as well as a list of all creditors(form 509). S475; summary of affairs is less detail than a statement of affairs.
Creditors can nominate a liquidator, who will then proceed to wind up the company
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

9. Powers of the liquidator, s477(1) &(2)
Liquidator has wide ranging powers under the Corporations Act. Powers depend on whether the liquidation had been ordered by the court or is voluntary.
In both cases liquidators must:
Not make any concessions on any debts owing to the company of $20,000 or more
Keep proper records in which entries and details of proceedings of meetings must be made
Every 6 months during the liquidation appointment, the liquidator must prepare a statement of receipts and payments, Form 524.
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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10. Pay any class of creditors in full
In the case of a court ordered liquidation key powers of the liquidator include:
Carry on the business of the company so far as is necessary for beneficial disposal or winding-up
Pay any class of creditors in full
Make arrangements with creditors or parties claiming to be creditors
Come to agreements regarding calls, liabilities and claims existing, and take any security for the payment of such calls, liabilities and claims
Other powers include everything that is necessary to wind up the affairs of the company and distribute the property
Additional powers in relation to performing roles that are performed by the courts in court appointed liquidations (e.g. fixing a time when debts and claims must be proved)
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

11. Priority of payment of debts
The general principle under the Act is that all debts and claims rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately, s555.
Many expectations to this rule. Four different categories of creditors
Secured
Preferential unsecured
Ordinary unsecured
Deferred
A summary of priority of payment of creditors (assuming insolvency) is set out on the following slide
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

12. Priority of creditors Secured creditors Secured by a specific charge
Those claims against the company whereby the creditor has a charge against specific property, and holds a registered mortgage, bill of sale or lien over that property
Any excess is returned to the liquidator
Any shortfall is classified as an unsecured creditor
Secured by a floating charge
The security in this case does not relate to a specific item of property but relates to all assets of the company, i.e. It ‘floats’ over whatever assets the company has at a particular time
S561, Where there are limited funds available, debts mentioned in items 12, 14 and 15 receive priority…pg 1005.
Expenses incurred by a liquidator or other relevant authority in preserving, realizing, to getting in property of the company, or in carrying on the company’s business
Costs relating to court ordered applications
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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13. Debts relating to the indemnification of the administrator
Debts incurred by an official manager (where the management ceased < 2 months prior to the appointment of the liquidator)
Costs associated with the preparation of a report as to the affairs of the company in the case of a court ordered liquidation
Costs of the audit of the liquidators accounts
Auditors fees related to the period of official management referred to in 5 above
Any other expenses properly incurred by a liquidator or other relevant authority
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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14. Liquidator’s remuneration
Expenses incurred by members of a committee of inspection
Wages and superannuation contributions payable to employees
Limited to $2,000 for directors
Workers compensation payable
Employees leave entitlements
Limited to $1,500 for directors
Retrenchment payments to employees (excluding directors)
Compiled By: Mrs Maheshwari Chand,Tr2, 2014
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15. Includes all debts payable to the government – eg PAYE tax, VAT
Unsecured creditors
Includes shortfalls of secured debts and salary & wages, employee entitlements and retrenchment payment to directors
Includes all debts payable to the government – eg PAYE tax, VAT
Although utility companies (electricity, etc) are unsecured they commonly receive preferential treatment by threatening to withdraw services
Deferred creditors
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

16. Rights of contributories
Contributories are defined as members or past members of a company
In certain circumstance past shareholders may be required to contribute in the winding-up
Three possible situations may arise
Insufficient funds for creditors, requiring calls to be made on contributories
Sufficient funds to pay creditors, but not to repay all share capital
A surplus of funds over and above creditors’ claims and share capital
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

17. Insufficient funds for creditors
Where partly paid shares exist an order may be made to make calls on all or any of the contributories to the extent of their liability
Once all shares have been paid in full, any deficiency is borne by creditors
Most common scenario in practice
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

18. Sufficient funds to pay creditors, but not to repay share capital
Distributions made in accordance with the company’s constitution
For example, preference shareholders may receive preferential treatment over ordinary shareholders
Distributions proposed by the liquidator are approved by a special resolution of members
It is common for company’s constitutions to specify that distributions are made on the basis of the number of shares held, regardless of the issue price of the shares
Uncommon in practice now…
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

19. Surplus of funds
The rights of contributories to participate in a surplus should be specified in the constitution
Note that a preference shareholders claim to preferential return of capital does not necessarily give them a right for preferential treatment with regard to a surplus
Rare in practice even…
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

20. Accounting for liquidation
Five main tasks
Prepare relevant forms
Statement of Affairs
Summary of Affairs (creditors voluntary winding-up only)
Declaration of solvency (members voluntary winding-up only)
Realization of assets
Possession of assets by secured creditors
Payment to the creditors in order of priority
Return of capital and surplus (if any) to shareholders
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

21. Accounting for liquidation
Realization of assets
Realization of assets accounted for in the company’s records using a “liquidation” account
All assets (except cash) and all contra-asset accounts are transferred to this account
On realization of the assets the cash account is debited and the liquidation account is credited
Possession of assets by secured creditors
Assets over which a specific security is held are commonly taken into possessions by the secured creditor and sold
Any net proceeds are handed to the liquidator, with any gain or loss credited to the liquidation account
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

22. Accounting for liquidation
Payment of creditors in order of priority
The remaining creditors are paid in order of priority
Unrecorded liabilities (such as liquidation expenses) are accounted for by debiting the liquidation account and crediting the appropriate liability
On settlement, the liability account is debited and cash credited
Where creditors accept an amount lower than the carrying amount of the debt, this represents a discount given to the company and is accounted for by crediting the liquidation account
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

23. Accounting for liquidation
Return of capital to contributories
Accounting procedures are:
Calculate the distribution for each class of shareholder
Make any necessary calls on unpaid capital
Transfer share capital to a shareholders distribution account
Transfer reserve accounts to the liquidation account
Pay distributions by crediting the cash account and debiting the shareholders distribution account
Transfer the balance of the liquidation account to the shareholders distribution account
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

24. Basic format as follows: Liquidation
Carrying amts. of assets Contra-assets transferred xx
transferred (excluding cash) xx Proceeds of sale xx
Unrecorded liabilities xx Gain on disposal of secured asset
after satisfaction of secured creditor xx
Discounts from creditors xx
Other reserves & retained earnings xx
Balance (deficiency) transferred to
Shareholders’ Distribution a/c xx
xx xx
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

25. Shareholders’ Distribution
Liquidator’s Cash
Balance xx Payment to creditors xx
Net amts. from secured creditors xx Distribution to contributories xx
Proceeds on sale by liquidator xx
Any calls on contributories xx
xx xx
Shareholders’ Distribution
Distribution of cash to contributories xx Share capital xx
Transfer of deficiency from
Liquidation a/c xx
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

26. Example: Bobby Ltd went into voluntary liquidation on 30 June 2011, its summarized statement of financial position then being:s
Equity Current Assets
Share Capital:
shares issued at a price Receivables 5 000
Of $1, called to 50c Inventory
Less: Calls in arrears ( at 25c) (5 000) Cash
Non-current assets
Land
Plant
Total assets
Current Liabilities
Payables
Total Equity Net Assets
All assets realized $30,000. Calls in arrears were fully collected. Payables allowed $500 discount. Costs of liquidation were $2,500. Record the above in the Liquidation a/c, the Liquidators Cash a/c and the Shareholders’ Distribution a/c
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

27. Land 20 000 Cash (from sale of assets) 30 000
Liquidation
Carrying Amts:
Land Cash (from sale of assets)
Plant Discount from creditors
Receivables Deficiency (to shareholders
Inventory distribution a/c)
Liquidation exp. Payable 2 500
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

28. Shareholders Distribution
Liquidators Cash
Balance Liquidation exp payable
Liquidation (sale of assets) Payables
Calls in arrears Shareholders distribution
Shareholders Distribution
Liquidation (deficiency) Share capital
Cash (SH dist’)
Compiled By: Mrs Maheshwari Chand,Tr2, 2014

29. End of
Lecture
Compiled By: Mrs Maheshwari Chand,Tr2, 2014