Meaning Of Liquidation, Reasons For Liquidation And Calculation Of Liquidator's Remuneration

LIQUIDATION

Meaning Of Liquidation

A company is an artificial person or body created by law and only the law can dissolve it. The legal procedure by which the corporate life of a company can be brought to an end is known as liquidation. The liquidation of company is defined as " the termination of legal existence of company by closing its business". Liquidation is as well known as "winding-up" a company.


The process of liquidation of a company is completed by selling all its assets and paying all creditors in preferential orders. For this purpose, the court appoints a liquidator to complete the liquidation process. The functions of the liquidator are to realize the assets, discharge the liabilities and distribute the surplus, if any, to the shareholders of the company.

One point should be noted here that liquidation of a company is not the same as bankruptcy of a company. A company which is liquidated need not necessarily bankrupt. Sometimes even in terms of good financial position, a company may liquidate. Thus, for liquidation, it is not necessary to be bankrupt. But bankruptcy will certainly lead to liquidation.

Reasons For Failure Of Business or Liquidation
A company may be dissolved for several reasons. Some of them are:
1. No visionary management
2. Day by day increasing debt and inability to pay it.
3. Unnecessary fictitious assets raising in accounts
4. Involvement of company in fraudulent activities
5. Exploitation of minority shareholders
6. High level competition in the market
7. Frequent change in the government policies
8. Absence of profit planning control and continuity of losses for several years.

Calculation Of Liquidator's Remuneration 

The liquidator's remuneration can be computed in the following ways:

1. Percentage On Assets Realized
Here, assets realized means the amount collected from the realization of fixed assets, current assets and other assets, other than fictitious assets. The cash and bank balance should not be included in total assets for the calculation of remuneration. But in the question, if the cash and bank balance are given in the list of assets, then cash and bank balance should be included in the total assets for the calculation of remuneration.

In the case of collateral securities depositing against secured creditors, if nothing is mentioned in the question, the total assets should include the full amount of collateral securities for the computation if remuneration. But if the securities are realized by creditors and only the surplus sent to the liquidator, then total assets should include only surplus amount realized from collateral securities. Thus the liquidator's remuneration is calculated as mentioned below:

Liquidator's Remuneration= Assets realized X Remuneration Percent/100

2. Percentage On Amount Distributed To Unsecured Creditors
Sometimes, the liquidator also receives commission on the amount distributed to unsecured creditors. For the computation of the commission, firstly the amount available for payment or surplus must be ascertained in the following way:

Amount available for payment = Total receipts - Total payment( up to the payment made to debenture holders)

Then amount available may or may not be sufficient for the payment of unsecured creditors amount. If the amount is sufficient, the commission is calculated as follows:

Commission = Unsecured creditors X Commission rate/100

If the amount available is not sufficient for the payment of unsecured creditors, the commission will be determined as follows:

Commission = Amount available X Commission rate/100+ Commission rate

3. Percentage On Amount Distributed To Equity Shareholders
For the calculation of this commission, firstly the amount available for equity shareholders should be ascertained. For finding out the amount available for equity share holders, the following equation can be used:

Amount available = Total receipt - Total Payment ( up to the payment made to preference shareholders)

If the amount available is sufficient for the payment of equity share capital amount:

Commission = Equity share capital amount X Commission rate/100

If the amount available is not sufficient:

Commission = Amount available X Commission rate/100+ Commission rate