Winding Up Procedures and Responsibilities
Uploaded by
Muhammad ObaidWinding Up Procedures and Responsibilities
Uploaded by
Muhammad Obaid9.
Winding Up (Questions) Page 658
Ch # 9: Winding Up
Practice Questions for Assessment - Open Book Perspective
Q# Question
Q1* CF (Pvt.) Limited (CF) has been incurring losses for past few years. The Board which
comprises of 4 directors, is considering members’ voluntary winding up which
requires a declaration of solvency that CF would be able to pay all its debts in full
within one year from the commencement of winding up. The board of directors plans
to appoint Agha Rafiq who is presently working as chief accountant of CF as the
liquidator on the ground that he knows the entire affairs of the company.
On 5 March 2018, CF submitted declaration of solvency to the Registrar and appointed
a liquidator in accordance with the requirements of the Companies Act, 2017. On 5
May 2018, the liquidator came to know that it would not be possible to pay the
company’s debts.
Under the provisions of Companies Act, 2017 you are required to explain:
(i) the responsibilities of the liquidator in the above situation. (03)
(ii) whether present liquidator can continue to act as liquidator in such situation.
(02)
Q2* (a) Zahid was appointed as liquidator for the purpose of members’ voluntary winding-
up of Multi Sources Limited (MSL) at a general meeting held on 25 October 2016.
After reviewing the realisable value of the company’s assets, Zahid is of the opinion
that MSL would not be able to pay its debts in full within the period as stated in
declaration made by the directors under section 362 of the Companies Act 2017.
Under the provisions of the Companies Act 2017 you are required to state:
(i) the responsibilities of Zahid in the above situation. (03)
(ii) the consequences of the above situation on the directors of MSL. (04)
(b) Zahid wants to resign as the liquidator, because of the difficulties being faced by
him in the performance of his responsibilities. He has discussed the matter with
some of the directors who have assured him that his request would be considered
in their meeting to be held soon.
Comment on the above in the light of the provisions of Companies Act 2017. (03)
9. Winding Up (Questions) Page 659
Q3* Abid Brothers Limited (ABL) owns two industrial undertakings, one in Peshawar and
the other in Karachi. ABL has decided to go into member’s voluntary winding-up.
Accordingly, an extraordinary general meeting of ABL was held on 1 December 2015 in
which Akber and Farid were appointed as the Liquidators. Akbar was responsible for
disposing of the Peshawar factory whereas disposal of Karachi factory was assigned to
Farid.
On 1 June 2016 Farid resigned without assigning any reason. He has written a letter
claiming 20% of the agreed remuneration after deduction of the amount already
advanced to him. According to him, he has completed 20% of the work assigned to
him.
Akber has held negotiations with Hercules Limited (HL), a listed company, who has
offered one million shares as purchase consideration for Peshawar factory. However,
he expressed his concerns about the time involved in the liquidation process and has
requested for reconsideration of his remuneration.
In context of the provisions of Companies Act 2017 you are required to explain the
following:
(a) Whether ABL can accept Farid’s resignation and his request for payment of
remuneration? (03)
(b) Whether Akber’s request for increase in remuneration may be accepted? (02)
(c) What conditions would have to be complied with if Peshawar factory is sold to HL
as per their offer? Describe Akbar’s response if some shareholders of ABL do not
agree to the terms of sale of Peshawar factory. (06)
Q4* Lucky Garments Limited (LGL) is being wound up by the Court. The Official Liquidator
after realization of the assets, has an amount of Rs. 5,600,000 available for payment to
the creditors. Details of creditors are as follows:
Rupees
Salam Bank Limited (Note 1) 4,000,000
Wages and salaries (100 employees; payable for three months) 1,000,000
Income tax payable 500,000
Unsecured creditors (Note 2) 8,100,000
Note 1:
LGL had created a charge on all the assets of the company in favour of Salam Bank
Limited.
Note 2:
Unsecured creditors are, Amin, Waseem and Kashif. The amounts payable to them are
Rs. 2,025,000, Rs. 4,293,000 and Rs. 1,782,000 respectively.
Required:
Under the provisions of the Companies Act 2017 show how the available funds would
be applied by the Liquidator under the above circumstances. (05)
9. Winding Up (Questions) Page 660
Q5 Naveed Textiles Limited (NTL) is being wound up by the Court. The official liquidator
after realization of assets, has an amount of Rs. 6 billion available for payment to the
creditors. However the asset under registered mortgage (as discussed in note 1) has
not been sold yet.
Details of Payables:
1) Cotton Bank Limited (Note 1) Rs. 4 billion
2) Cost of Winding up Rs.600 million
3) Income Tax Payable Rs. 500 million
4) Wages and Salaries Rs. 400 million
5) Unsecured Creditors (Note 2) Rs. 2 billion
6) Outstanding dues to Provincial Government Rs. 300 million
7) Candy Bank Limited (Note 3) Rs. 1 billion
Note 1: NTL had created a floating charge on all assets of the company in favour of
Cotton Bank Limited.
Note 2: Unsecured creditors are Amin, Waseem and Kashif. The amounts payable to
them are Rs.700 million, Rs.500 million and Rs. 800 million respectively.
Amount Payable to Mr. Amin is subject matter of adjudication and is pending
with the court.
Note 3: NTL had created a registered mortgage on an immovable property of the
company in favour of Candy Bank Limited. Luckily the latest valuation of that
property is exactly equal to the amount payable to the said bank by NTL.
Required:
Under the provisions of the Companies Act 2017 make a working to show the
preferences and amounts in which these available funds would be applied by the
official Liquidator under the following assumptions
a) The funds available are Rs 6 billion as stated above
b) The funds available are Rs 7.15 billion
c) The funds available are Rs 1.2 billion
You are also required to give the rationale behind the above treatments (20)
Q6 a) What is the concept of a “declaration of solvency” in context of winding up. When it
is needed, and what are the related formalities to make this an effective document.
Moreover you are required to explain the consequences where either declaration
of solvency is not given effectively or where it has been properly given but
directors didn’t had reasonable grounds for making the said declaration (07)
b) In the context of a winding up by court, you are required to describe any 3
different documents that the official liquidator is bound to file with the registrar
along with their filing deadlines. (06)
9. Winding Up (Questions) Page 661
Q7* Behtreen Limited (BL) is engaged in the business of home furnishings and supply of
allied products for the last 30 years. However, due to availability of cheap imported
products together with significant increase in cost of production during the last five
years, BL was unable to sustain its market share. Consequently, BL failed to honour its
commitment towards the creditors.
On the recommendation of the board of directors, BL's shareholders passed a special
resolution on 15 February 2020, to wind up the company by the Court. The petition for
winding up was filed on 1 March 2020.
The Court appointed Maroof Agha as an official liquidator at a remuneration of Rs. 1
million plus 0.5% of amount realized by him through disposal of BL’s assets. Winding
up expenses other than remuneration of liquidator was estimated to be Rs. 2 million.
Following information relating to BL as on 1 March 2020 has been gathered by Maroof
Agha:
Shareholders’ equity:
Rs. in million
Ordinary share capital (Rs. 10 each) 580
15% Irredeemable preference shares (Rs. 50 each) 160
Accumulated losses (200)
Outstanding bank loans:
Name of Loan
bank outstanding Security
(Rs. in million)
Shandar Bank 600 First charge ranking pari passu on all
Limited present and future factory buildings.
Maldar Bank 200 First charge ranking pari passu on all
Limited present and future factory buildings.
Kamdar Bank 298 First charge on plant and machinery andfloating
Limited charge on present and future
inventories.
Unsecured creditors and other liabilities:
Rs. in million
Trade and other creditors 441
Salaries and wages (payable for seven months) 144
Amount payable to funded gratuity 30
Income tax / sales tax payable 23
Legal and professional fee 12
Penalty on non-compliance of provisions of Companies Act 5
9. Winding Up (Questions) Page 662
At the beginning of winding up proceedings, Rs. 10 million was available as cash and
bank balances. During the process of winding up, Maroof Agha realized Rs. 1,200
million by disposing all assets excluding cash and bank balances. The break-up is as
under:
Rs. in million
Factory buildings 650
Plant and machinery 125
Investment 65
Inventories 146
Trade and other receivables 214
1,200
Required:
In the light of Companies Act, 2017:
(a) determine the amount to be paid to each creditor and contributory in the order of
their ranking. (09)
(b) prepare the list of creditors or contributories alongwith amount which may
remain fully or partially unpaid after the payment in (a) above. (03)
Q8* (a) The shareholders’ equity as shown in the financial statements of Indigo Fabrics
Limited (IFL), a public unlisted company, as on 30 September 2021 is as follows:
Rs. in million
Paid-up ordinary share capital of Rs. 10 each 500,000
Accumulated loss (350,000)
Total shareholders’ equity 150,000
IFL has been incurring net losses for the last five years. Moreover, since the
outbreak of the COVID-19 pandemic in March 2020, IFL’s sales has significantly
declined.
Considering this situation, Fahad Karim, IFL’s CEO, initiated a discussion in the
board meeting to consider winding up of IFL. He informed the board that Green
Fabrics Limited has shown its interest in purchasing IFL’s plant and equipment.
He also proposed that Ahmed Amin, IFL’s CFO, can be appointed as a liquidator
and since he is well conversant with IFL’s affairs, he would be able to wind up the
operations efficiently.
Required:
Under the provisions of the Companies Act, 2017, advise the steps to be taken by
IFL before commencement of winding up if both proposals of Fahad Karim are
agreed by the board. (08)
9. Winding Up (Questions) Page 663
(b) Assume that Ahmed Amin has been appointed as liquidator and the date today is
31 March 2022.
On 31 March 2022, Ahmed Amin has determined that Rs. 3,500 million can be
collected by disposing of IFL’s remaining assets whereas IFL’s outstanding
liabilities on that date are Rs. 4,000 million.
Required:
Under the provisions of the Companies Act, 2017, explain the responsibilities of
Ahmed Amin in the given situation. Also identify the effect(s) of his determination
on IFL’s stakeholders. (07)
Common questions
Powered by AITo effectively declare solvency, a company must deliver a declaration to the Registrar of Companies stating that the directors have made a full inquiry into the company’s affairs and have formed the opinion that it will be able to pay its debts in full within 12 months from the start of winding up. The declaration must also include a balance sheet not more than three months old and a statement of assets and liabilities . Failure to meet these formalities or a false declaration can result in personal liabilities for directors .
During liquidation, priorities are established by the Companies Act 2017 in a specific order. First, the costs and expenses of winding up are settled. Then, secured creditors with fixed charges are paid. Salaries and wages, with statutory limits, follow, then taxes. Finally, unsecured creditors are paid. If funds are insufficient to cover all creditors, payments must reflect this hierarchy . Any special situations, such as pending court adjudications, may affect this priority .
When a liquidator, during a voluntary winding-up process, realizes that a company cannot pay its debts in full, the liquidator is responsible to notify the registrar and must also call a creditors' meeting. This involves providing necessary details about the company's financial situation and seeking directions on how to proceed . The liquidator cannot continue if the company is insolvent and must instead convert it to a creditors’ voluntary winding-up .
The liquidator is responsible for notifying the creditors and submitting a report to the registrar if liabilities exceed the realized assets. They must also convene a meeting of the creditors to discuss the situation and agree on a way forward. The impact on stakeholders includes potential reduced payments for creditors and possible investigations into directors' conduct if insolvency resulted from mismanagement . The liquidator must ensure all assets are dealt with according to the legal framework and that all claims are prioritized and settled as far as funds permit .
If it becomes apparent that a company cannot pay its debts despite previously declaring solvency, the directors may face consequences for failing to have reasonable grounds for their declaration. This can result in personal liability for the company's debts incurred during the period of false solvency . They must demonstrate that they acted in good faith and had reasonable grounds for their declaration at the time it was made .
The official liquidator in a court-ordered winding up must file several documents, including the statement of affairs within 21 days of the winding up order. A liquidation report must be submitted, detailing the proceedings and financial status. Additionally, accounts of receipts and payments must be prepared bi-annually showing financial transactions for the period . These documents ensure compliance and transparency throughout the liquidation process, preserving stakeholders' trust and aiding legal conformity .
Before initiating a winding-up procedure, the company must pass a special resolution to commence the liquidation. They must appoint a liquidator, in this case internally, who should be approved at a general meeting. The company should also ensure the evaluation and proper transfer of assets to the purchasing party, and they must notify the registrar with necessary documents such as the statement of solvency . Additionally, they must settle any arrangements with creditors and ensure any sale agreements align with the Companies Act, 2017 .
A liquidator may face difficulties resigning if there is no provision or agreement for resignation approved by the company’s directors or members. Under the Companies Act 2017, a liquidator must notify the creditors and members of their intention to resign, and the resignation must be approved at a meeting of creditors or by a court order . Unapproved resignation may lead to continued personal liability and obligations until a proper release is obtained .
A liquidator may face challenges such as demands for renegotiation or blocking of the sale by dissenting shareholders. To address these challenges, the liquidator should ensure that the sale is in the best interest of the creditors and meets legal requirements under the Companies Act 2017. They can attempt to negotiate amendments that satisfy the majority of shareholders while proceeding within the confines of the legal authority granted during liquidation . If unresolved, they may need to seek a court directive to approve the sale, ensuring the liquidation process remains uninterrupted .
Fixed charges have priority over floating charges in the liquidation process. This means that creditors with fixed charge security are paid out before those with floating charges. Furthermore, the order of registration of these charges can also affect their priority . Secured creditors will therefore typically receive payments before unsecured creditors or other stakeholders, ensuring that assets tied under specific charges are used to satisfy specific secured debts first .