Book Solution Company Accounting Insolvency Liquidation

Solutions Manual to accompany

Company Accounting 10e prepared by Ken Leo John Hoggett John Sweeting Jeffrey Knapp Sue McGowan

© John Wiley & Sons Australia, Ltd 2015

Chapter 25: Insolvency and liquidation

Chapter 25 – Insolvency and Liquidation 1.

Role of Administrator and directors while company is under administration.

If a company is insolvent, Directors must not allow the company to continue trading. s. 436A of the Act provides that: directors are expected to appoint a voluntary administrator to the company even before it becomes insolvent: (1) A company may appoint an administrator if the board has resolved to that: (a) in the opinion of the directors voting for the resolution, the company is insolvent, or is likely to become insolvent at some future time; and (b) an administrator of the company should be appointed. Section 437A(1) spells out the role of an administrator: (1) While a company is under administration, the administrator: (a) has control of the company’s business, property and affairs; and (b) may carry on that business and manage that property and those affairs; and (c) may terminate or dispose of all or part of that business, and may dispose of any of that property; and (d) may perform any function, and exercise any power, that the company or any of its officers could perform or exercise if the company were not under administration. After taking control of the company, the administrator must:  Investigate and report to creditors about the company’s business, property, affairs and financial circumstances  Provide 3 options available to creditors: 1. End the administration and return the company to the directors’ control 2. Approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts, or 3. Wind up the company and appoint a liquidator.  Give an opinion on each option and recommend which option is in the best interests of creditors  Must report to ASIC about possible offences by people involved with the company  Keep proper accounting records and submit a statement of receipts and payments every 6 months using the prescribed Form 524 The creditors then make the decision as to which option should be taken. If option 2 is taken, the administrator will continue his/her duties in order to see the deed of arrangement through to its end, if suitable to the creditors. If option 3 is taken, the administrator can become the company’s liquidator and the liquidation process will proceed under the requirements of a creditors’ voluntary winding up. Powers of the administrator  The administrator takes over all the powers of the company and its directors, and the powers of directors are suspended  The power to sell or close down the company’s business or sell individual assets in the lead up to the creditors’ decision on the company’s future.  Only the administrator can deal with company’s property, thus any such transaction or dealing is void unless: (a) The administrator entered into it on the company’s behalf; or (b) The administrator consented to it in writing before it was entered into; or (c) It was entered into under an order of the Court. (s. 437D(2)) 

The administrator of a company is liable for debts he/she incurs, in the performance or exercise of any of his/her functions and powers as administrator.

Additional powers of the administrator given by s. 442A enables them to: 25.1

(a) remove from office a director of the company; (b) appoint a person as such a director, whether to fill a vacancy or not; (c) execute a document, bring or defend proceedings, or do anything else, in the company’s name and on its behalf; (d) whatever else is necessary for the purposes of this Part. The role of the company’s directors is to help the administrator in performing his/her necessary tasks. Directors must: (1) Deliver to the administrator all books in the director’s possession that relate to the company, and or tell the administrator where those books are. (2) Provide to the administrator a statement about the company’s business, property, affairs and financial circumstances within 5 business days after the administration of a company begins, or such longer period as the administrator allows. (3) Attend to the administrator at such times; and give the administrator necessary information about the company’s business, property, affairs and financial circumstances.

2.

Winding-up of Companies (Liquidation)

There are two types of "windings-up" of companies:  court ordered; and  voluntary winding up by creditors or members. Court Ordered This type of winding-up most commonly proceeds when a creditor demands the repayment of a sum exceeding $2 000 owed by the company. The Court presumes that a company is insolvent if 3 months after an application is made the company has failed to comply with a statutory demand (i.e. repayment of a debt of greater than $2 000). The following may make an application to the court for the winding up of a company:  the company itself;  Creditor(s)  director(s);  ASIC; and a  contributory (present or past shareholder in the company. Other than a statutory demand made by a creditor, the court may wind up a company if: a. b. c. d. e.

the company has by special resolution resolved that it be wound up by the court the company does not commence business within one year from its incorporation the company has no members the directors have acted in their own interests rather than in the interests of members the affairs of the company are being conducted in a manner that is oppressive or unfairly prejudicial to members of the company.

Voluntary Winding Up – Members  Occurs when members pass a special resolution to wind up the company  Can only occur if the company is solvent  Directors must make Declaration of solvency (using Form 520)  Directors must also include a statement of affairs - shows the estimated realisable value of assets & amounts payable for liabilities and amount of surplus

25.2

Chapter 25: Insolvency and liquidation *Declaration of Solvency = written declaration that states they believe the company can pay its debts in full within a period not exceeding 12 months.

Voluntary Winding Up – Creditors  No Declaration of solvency  Company is insolvent (unable to pay its debts)  Winding-up is under the control of both members & creditors (in separate meetings)  Prior to the meeting of creditors, the company must provide creditors with a summary of affairs (form 509)  At the meeting of creditors, directors must provide the more detailed form 507 Report as to affairs  At the meeting, creditors can nominate a liquidator (can replace member’s chosen liquidator)

3.

Powers of a liquidator in winding up a company (a) under a court order and (b) in a voluntary winding up. The liquidator must pay the debts of the company as far as possible and settle the rights of contributories.

The powers of a liquidator in a court ordered winding up (s.477(1))    

Carry on the business of the company so far as it is necessary for its beneficial winding up Pay any class of creditors in full Make compromises with creditors and come to agreements regarding calls, liabilities and existing claims between the company & contributories S.477(2) includes the power to do everything that is necessary to wind up the affairs of the company and distribute the property

The powers of a liquidator under a voluntary winding up (s.506)  Same powers as a liquidator in a court ordered winding-up  Fixing a time to have debts and claims proved and convene a general meeting of the company to obtain agreement for matters as the liquidator thinks fit

4.

Report as to affairs   

A Report as to Affairs (Form 507) is required as an accompanying document to the Declaration of Solvency (Form 520) in a voluntary winding up by members Must be submitted by directors of the company to the liquidator within 14 days after the making of the winding-up order in a court ordered winding-up. Purpose is to provide information about the company's estimated realisable value of assets and any expected surplus or deficiency of assets after deducting creditors' claims.

It is really a statement of financial position prepared on a realisation basis excluding the usual reporting assumptions of going concern and historical cost. Incl. estimated realisable values of assets & expected defiency/surplus

5.

When is Form 509 used?

Form 509 – Presentation of Summary of Affairs of a Company (Summary of Affairs) is similar to Form 507 except that it is less detailed. It is required to be submitted by the company to the creditors along with a list of creditors. It is only used in a creditors’ voluntary winding up.

6.

When is Form 524 used?

Form 524 is provides a statement of receipts and payments and is used by an administrator, a provisional liquidator, a liquidator and a receiver.

7.

Who are the contributories of a company?

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The contributories of a company are past or existing members who are likely to contribute to the property of the company in the event of it being wound up. In general terms the liability for existing shareholders only relates to those who have uncalled capital (partly paid shares). In this case their liability only extends to the amount unpaid on their shares. Former shareholders are not liable to contribute where: a. they dispose their shareholding more than twelve months after the commencement of winding up. b. the debt or liability of the company occurred after they ceased to be members. The liability of such former shareholders will only arise where existing members cannot make the required contribution i.e. the former shareholder will be required to contribute the uncalled part of the share capital that was unable to be recovered from the existing shareholder.

8.

Outline the principles to be followed in apportioning a deficiency among contributories.

Assuming the creditors are to be paid in full but there is insufficient funds to pay out all shareholders, reference will be made to the company's constitution to determine whether there exists a priority as to repayment of capital. If there are different classes of shareholders with different rights in the event of a winding up (i.e. Preference Shares or different categories of Ordinary Capital with different rights enshrined in the constitution) calls will be made on the contributing class of ordinary capital in order to satisfy the priority enjoyed by the other classes of share capital. If there is only one class of shareholder, then the deficiency of capital will be borne equally amongst that class.

9.

What must a liquidator do if he/she is unable to collect unpaid call money from shareholders?

If there are insufficient funds to pay creditors requiring a call on contributories and there is no response to that call, the liquidator may take action against that contributory as the requirement to pay the call is a specialty debt permitting the liquidator then to sue the contributory for recovery. The liquidator assess the situation as to whether there is reasonable chance of recovery before proceeding with the action of recovery being conscious of the cost/benefit consequences these actions as liquidator. 10. The following liabilities is in order of priority of payment in the event of winding-up a company:  Costs of administration prior to liquidation  Long-service leave payable  Amount payable for research into mining techniques  PAYG income tax instalments  Salary of an employee who is the spouse of a director, $3 000  Directors’ fees  Liquidation expenses  Telephone bill payable  Audit fees payable for normal audit of company's accounts  Debentures secured by a circulating security interest (floating charge)  Workers’ compensation claim  Accounts payable  Deferred tax liability The order of recovery is as follows: 1. 2.

Secured Creditor (i) Debentures secured by a floating change Preferential Unsecured Creditors (i) Liquidation expenses (the liquidator is a relevant authority (ii) Costs of administration prior to liquidation (iii) Other liquidation expenses 25.4

Chapter 25: Insolvency and liquidation

(iv) Salary (maximum of $2 000) (v) Workers’ compensation (vi) Long service leave Unsecured Creditors (rank equally). NB No order of listing:  Research costs  PAYG income tax  Salary excess of director’s spouse $1 000  Directors' fees  Telephone bill payable  Audit fees  Accounts payable/Trade creditors

3.

11. Arrears of preference dividends are paid in the winding up process of these certain circumstances Reference to the constitution is required to ascertain the degree of preference existing to the preference capital and any arrears of dividend. If the dividend is a legal debt and not yet paid, those shareholders will have a priority over other classes of shares but after payment of unsecured creditors. If there is no substance to the claim of preference, there will be no claim recognised.

12. How surplus on liquidation is to be apportioned among contributories In the case of a surplus of capital, reference will be made to the constitution to assess the rights of shareholders. If, for e.g., there exists preference shareholders as a class (and that preferential status is recognised in the constitution) then that class will be paid first with ordinary shareholders receiving the balance equally amongst themselves. Also a surplus might attract the interest of the ATO. Companies in liquidation are subject to taxation laws equally with those not in liquidation, and if necessary the liquidator would lodge a tax return.

13. The aim of the Corporations Act is to avoid liquidation if possible. The main intention of the Corporations Act 2001 is to treat liquidation as a last resort. In an attempt to avoid liquidation, Part 5.3A of the Act deals with the topic of appointing an administrator to a company whenever the directors believe that the company may be insolvent. Administration is designed to resolve the company’s future direction quickly. The administrator takes full control of the company to try to work out a way to save either the company or the company’s business. If this is not possible, a liquidator will ultimately be appointed to wind up the company.

14. The role of a receiver.   

   

A receiver or both a receiver & manager may be appointed by a court or by creditors, e.g., debenture holders, according to the terms of the agreement, in order to protect the security of those creditors. A receiver must always be a registered liquidator. (cannot be auditor of corporation) In most cases, a receiver & a manager is appointed together - Without the status of ‘manager’ the receiver cant buy or sell properties - The main purpose of appointing a receiver is to sell the secured property in order to repay the debt of of the secured creditor - The receiver is responsible to the secured creditor, no to the company Receivers are appointed by secured creditors who are given such power in his/her trust deed. (as a result of failure by the company to pay interest to the debenture holders). When a receiver is appointed, the company is required to submit to him/her a report as to affairs of the company (Form 507). A receiver is required to open his or her own special bank account and, Lodge an account of the receiver’s receipts and payments (Form 524) every 6 months. 25.5

-

within 1 month of the end of each 6 month period within 1 month of conclusion of the receivership

25.6

Chapter 25: Insolvency and liquidation

CASE STUDIES Case Study 1

Trading during insolvency

Read the following article: Hewson, Elderslie directors face claim Former Liberal leader John Hewson and other directors of the failed Elderslie Finance Corporation are facing an $18 million claim against them by the company’s liquidator, who claims they must have known the group was trading while insolvent for some time. Dr Hewson was the chairman of Elderslie until shortly before it collapsed in July 2008 owing 4000 noteholders $140 million. The directors are also accused of failing to provide accurate continuous disclosure to investors. Liquidator Nicholas Crouch has instructed lawyer Amanda Banton from Piper Alderman to file proceedings. The claim is expected to be lodged soon in the Federal Court in Sydney. The foreshadowed case was news to Dr Hewson yesterday and he declined to comment on the allegations until he had seen them for himself. Among them is expected to be an assertion that he received preferential payments totalling $270,000 before Elderslie collapsed. ‘That’s ridiculous, I was owed money,’ he said. ‘I was a creditor. I don’t know who’s feeding you this stuff, but I was a creditor.’ In February 2008, in a prospectus for a $60 million raising, Dr Hewson assured investors the company was not directly exposed to the sub-prime meltdown, and claimed that in fact it was able to offer even more attractive interest rates in that sort of climate. ‘I am glad to say that Elderslie has no direct exposure to this market,’ he said. ‘Ironically, much of our leasing business tends to be countercyclical, performing better in more difficult market circumstances, thereby giving us the capacity to offer even more attractive interest rates to our debenture holders.’ Elderslie, which was founded in Perth in 1957 before shifting its head office to Sydney several years ago, is believed by the liquidators to have been trading while insolvent for a year or more, possibly using trust funds to pay day-to-day expenses. Dr Hewson, the former member for the NSW Federal seat of Wentworth, was leader of the Opposition from 1990 to 1994. Mr Crouch said he hoped anything recovered would go some way to recouping the substantial losses of investors and creditors. ‘Our investigations reveal that the Elderslie group was trading while insolvent for a significant period before the receivers and managers were appointed and it was ultimately wound up,’ Mr Crouch said yesterday. ‘It is difficult to see how the directors of the Elderslie group would not have been aware of its financial difficulties during the period in which it continued to issue unsecured notes and debentures to its mums-and-dads investors and incurred debts, which remain unpaid.’ Noteholders have been told they would recover about 10c in the dollar. One of the major assets of the Elderslie group was a related party debt of $69 million to Elderslie Finance Corporation Limited’s holding company, Hotel Nominees. That company is now in receivership. Source: Lahey, K 2010, ‘Hewson, Elderslie directors face claim’, The West Australian, Saturday, 12 June, p. 74. Required A. Consult the ASIC website (www.asic.gov.au) and find out the responsibilities of directors when a company is insolvent. B. What role would have been played by the receivers in Elderslie Finance Corporation before the company was handed over to liquidators?

A.

The responsibilities of directors in an insolvent company is specified on ASIC’s website and is also covered to some extent in Section 25.1 of the text. See also the answer to review question 1 above.

25.7

B.

The role played by the receivers would be to sell sufficient assets of the company in order to pay the noteholders and debentureholders, as per the trust deeds of the respective securities.

Case Study 2

The rights of shareholders and creditors in liquidation

Read the following news report: Government to reverse rules on shareholders during insolvency The Federal Government is reversing a High Court ruling on how money from failed companies should be distributed. Corporate Law Minister Chris Bowen said that changes to the Corporations Act would ensure that claims by shareholders of insolvent companies ranked after other creditors’ claims. This followed a High Court decision in the Sons of Gwalia case, in which the court found that the claims of some shareholders in the failed gold miner were not subordinate to other claims. Mr Bowen said people invested in a company in the hope of sharing in its profits and, while they were entitled to expect proper disclosure from the company — which was an issue in the Sons of Gwalia case — they must accept they were taking a risk. In contrast, creditors were not gambling on the company’s future profitability. Often they were simply owed money for work they’d done or materials they’d supplied. Mr Bowen said the decision tended to shift the losses suffered by a company’s shareholders to its unsecured creditors. This would have the effect of increasing the cost of unsecured debt and reducing the availability of credit. Source: AAP 2010, ‘Government to reverse rules on shareholders during insolvency’, 2 June, www.heraldsun.com.au. © 2009 AAP. See full copyright notice on the acknowledgements page. Required Via the Internet, find out what had happened to creditors’ rights in the case of the liquidation of the company, Sons of Gwalia. Do you agree with the High court decision and do you support Mr Bowen’s reversal of the decision? Why or why not? Via the internet, you will find those who agree with the government’s decision to reverse the High court’s ruling in favour of shareholders e.g. the Australian Institute of Company Directors (AICD), and those who don’t e.g. legal firms trying to protect shareholders who purchase shares not knowing that a company is on the verge of insolvency. Check it out. There are lots of sites to choose from via Google. What do you think? Should shareholders be the ultimate risk takers, or do they deserve greater protection? Note, in December 2010, the Corporations Amendment (Sons of Gwalia) Act 2010 was passed which amended the Corporations Act 2001 and means that in future all shareholder claims will once again be subordinated, i.e. all claims by creditors must be paid in full before any claims by shareholders. Thus, the Corporations Amendment (Sons of Gwalia) Act effectively reverses the decision by the High Court.

Case Study 3

Rescuing Waterford Crystal in Australia

Read the following article: A crystal clear result For 250 years the fine china, ceramics and crystal produced by Waterford Wedgwood at its Irish and UK operations has graced dining tables the world over. But, by January 2009, the business was insolvent and had been trading at a loss for some time when its banking backers pulled the plug and appointed Deloitte as the global administrator. It could have been the end of an icon. However, the innovative efforts of insolvency experts at the Australian end of the wind-up have saved the profitable sections of the company, retained jobs and

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Chapter 25: Insolvency and liquidation

secured buy-out funding from the bank that had called in its outstanding debt. It is an inspiring tale of business planning, problem solving, global teamwork and sheer determination. The Waterford Wedgwood Group is headquartered in Ireland, and when the administrators moved in it became apparent the Australian arm, which included the Royal Doulton brand, was well managed and trading profitably but was mired within a group laden with almost A$1 billion in debt. The international group’s banking syndicate, led by the Bank of America and equity providers had reached the limits of their funding appetite and put the entire business up for sale. Almost 200 parties registered interest in buying all or some of the crystal and ceramics maker, but a protracted sales process identified one realistic purchaser — KPS Capital Partners, a private equity fund in the US. Keeping the profitable Australian business alive amid a crumbling empire became the objective, if not obsession, of Tim Norman, a partner with Deloitte and Michael Sloan, a partner in commercial law firm Blake Dawson. Together, they implemented Australia’s first ‘pre-pack’ sale that would ultimately save the local operations and the 450 jobs that went with it. Although the Australian operation was profitable and the cash flow was positive, it was lumbered with a A$300 million bondholder debt after guaranteeing the rest of the group. ‘We had to find a legal mechanism to release that debt so that the Australian business could be sold as a going concern. No one would buy an Australian company with a A$300 million debt. The pre-pack was the legal mechanism we used,’ Sloan says. A pre-packaged insolvency is one where all the work, planning and hard yards are done before the insolvency event. A sale will be structured and worked out ahead of the appointment, but it is implemented immediately following the insolvency appointment. It is orderly, planned, quick and relatively straightforward to execute. It means a lot of uncertainty inherent in the insolvency process is removed. ‘What we did in this case, as part of the international sale to release that high-yield bond debt, was a receiver’s sale. But we needed to keep the business going. To retain consumer confidence in the business, the duration had to be as short as possible. And, in this case, it was one day. So we went in and out very quickly so as not to interrupt the business. We used the pre-pack to do the sale in a day without its guarantee to high-yield bondholders,’ he says. As the pre-pack was an Australian first, there was no blueprint. ‘What we did was examine relevant law, worked out what would comply with the law before obtaining senior legal advice that would, if need be, satisfy a court.’ Sloan and Norman did all the incredibly difficult planning, while managing the people in Australia, managing the suppliers and liaising with the Deloitte team internationally to make it all happen seamlessly. Australia’s legal regulatory regime discourages pre-pack sales by making them much more difficult to implement than in the US and UK. ‘Because of the Australian legal regime and the Corporations Act duties, which focus on process rather than outcome, there’s a degree of risk, indeed a high degree of risk, for conducting a very quick sale. In relation to this one, Deloitte had run a very proper, detailed international sales process, so we felt comfortable that the process had been followed,’ Sloan says. The risks of pre-packs are ‘sweetheart deals’ and ‘phoenix activities’, where people abuse the process and do quick sales to parties who are associated with either the current management or a security holder. Australian law has a lot of protective mechanisms to stop that. ‘But we were using a pre-pack to find the most favourable outcome, so we had to jump over high hurdles in Australia,’ Sloan says. Norman and his Deloitte team had to ensure they were complying not only with their legal duties, but were doing the right thing by employees, the company, customers and suppliers. The easy thing for Norman to do would have been to take the appointment and just put the company into receivership. ‘Both our firms would have earned a lot more money if the company had gone into receivership. The hard thing to do was to keep it alive and to find an innovative solution and that’s what we achieved,’ Norman says. He says about 100 pre-pack sales are done in the UK each month amid a more conducive regulatory regime. ‘Here, [in Australia] we are tainted with a history of related-party, nontransparent, behind-the-scenes, director-related phoenixes,’ he says. ‘Combine that with a much tighter and more stringent legal framework, there are more hoops to jump through to do one. But in the right circumstances and with absolute transparency for all stakeholders, pre-packs can make commercial and compelling sense.’ The reason for Waterford Wedgwood’s demise was a combination of a high cost structure, a change in consumer preferences, a lack of synergies and a fall in sales leading to cash flow shortages. Time ran out after it failed to meet debt repayment deadlines. Norman says Waterford Wedgwood’s high-cost production plants in the UK and Ireland proved to be uneconomic on a global scale. He says it cost four times as much to produce a pair of shiraz wine glasses in Ireland as in 25.9

Czechoslovakia. ‘Thankfully, there were no production plants in Australia,’ he says. ‘Australian operations were very well run, cash flow positive and a profitable venture. All Australia did was take product out of the UK (china and ceramics) and Ireland (crystal) and sell it through 87 retail sites around Australia, principally the major department stores.’ During the sale process, Norman says the eventual buyer KPS Capital Partners ‘cherry-picked the profitable core-income generating assets’, such as plant assets in the UK and Ireland to preserve the china, ceramics and crystal manufacturing businesses. KPS also bought other selected businesses around the globe as part of the package for an undisclosed sum. What made the Australian sale unique was that KPS took on the company’s normal business liabilities. ‘Because the Australian operations were so well run, we encouraged the purchaser to buy the shares, unhitch that carriage and to take the business in full,’ Norman says. ‘It did.’ Norman’s core advice in such a turnaround is that the first move is to establish the facts. ‘The key to any workout or turnaround is understanding the cash flow, the cash position and the immediate cash requirements of the group,’ he says. ‘The more cash you have, the more time you have to implement options. It was Christmas 2008 when we parachuted in on the Australian operations.’ Norman, who met Sloan on new year’s eve in Sydney, devised a plan in January and February 2009 and conducted the pre-pack sale for the entire Australian group in March. Norman and Sloan’s efforts were recently recognised with a Turnaround Management Association (TMA) award. The TMA is a global organisation dedicated to corporate renewal and turnaround management. It has been active in Australia for more than six years and has more than 300 members, including specialist turnaround firms, accounting, legal and private equity firms and financiers. Sloan and Norman say they feel honoured to receive an award that acknowledges their part in saving a business and jobs. ‘We spend our corporate lives involved in distress and failure. When you can help something get off life support, that’s when you do your best work as a practitioner. There’s nothing better than keeping businesses alive and people in jobs,’ Sloan says. It also required tight teamwork involving both firms. ‘It involved a lot of people doing innovative and complex work in very short time periods under considerable pressure.’ Source: Black, A 2010, ‘A crystal clear result’, InTheBlack, February, pp. 42–45. This article was written by the financial journalist, Anthony Black, who has extensive experience writing on corporate and financial matters. For enquiries on past articles refer to [email protected]. Required From the article, describe the actions taken by Tim Norman and Michael Sloan to save the Australian operations of Waterford Wedgwood from liquidation. Norman and Sloan used a “pre-packaged insolvency plan”. They did all the work, planning and “hard yards” before the insolvency event, so that a sale of the whole Australian business was structured ahead of the appointment of the receiver/liquidator, and implemented immediately following the appointment of the receiver/liquidator. In the Australian case the purchaser of the business, KPS Capital Partners, not only purchased the business assets but also purchased the company’s normal business liabilities. Hence, these liabilities were taken away from the normal task of a liquidator to settle these claims in a business failure. The profitable business in Australia continued with a new owner, and jobs in Australia were saved.

Case Study 4

Liquidation of family company

Assume that you are the managing director of a small, family-owned proprietary company operating in Australia. The members of the company have decided to wind up its operations for family reasons. The company has been trading profitably and has had no problem in paying its accounts when they fall due. Required

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Chapter 25: Insolvency and liquidation

Investigate what you must do in order to wind up the company properly in accordance with the law. (Hint: Visit the ASIC website.) Report your findings to the class and show details of the forms that must be completed. The winding up procedure will differ depending on whether the company is solvent or insolvent. If insolvent, then a members’ voluntary winding up cannot occur. It will usually be either a creditors’ voluntary wind-up or a wind-up by the court. See Section 25.2 of the chapter for details of forms to be used etc. In a members’ voluntary winding up, directors must provide a declaration of solvency attached to the report as to affairs. A declaration of solvency is not needed in any other winding up. The ASIC website (http://www.asic.gov.au) provides information as to what must be done to wind up a family company. See the section on For companies > Closing down your company, where much information is available, including deregistering a company.

Case Study 5

Current liquidations of previously listed companies

Visit such websites as www.delisted.com.au, and present to the class brief details of three companies which have been listed on the securities exchange, and which are currently going through the process of liquidation. As part of your presentation, provide reasons (if possible) for such liquidations occurring. From the Delisted website (http://www.delisted.com.au/), the home page provides the names of companies who have recently been delisted from the ASX. From this list, identify companies who are in the process of liquidation and select three. From there, access can be found to each of those company news sites or websites, which provide some details of liquidation proceedings. Use the company listings on the Delisted website to search for more data, as well as search engines such as Google.

25.11

PRACTICE QUESTIONS Question 25.1

Three main ledger accounts for liquidation

Insect Ltd went into voluntary liquidation on 30 June 2017, its summarised statement of financial position then being: INSECT LTD Statement of Financial Position as at 30 June 2017 Equity Current assets Share capital: Receivables 160 000 shares issued at a price Inventory of $1, called to 50c $ 80 000 Cash Less: Calls in arrears (40 000 at 25c) (10 000) Non-current assets Land Plant Total assets Current liabilities Payables Total equity $ 70 000 Net assets

$ 10 000 12 000 8 000

40 000 18 000

58 000 88 000

$

All assets realised $60 000. Calls in arrears were fully collected. Payables allowed $1000 discount. Costs of liquidation were $5000. Required Record the above in the Liquidation account, the Liquidator’s Cash account and the Shareholders’ Distribution account.

Liquidation Carrying amounts: Land

40 000

Plant

18 000

Receivables

10 000

Inventory Liquidation exps payable

12 000 5 000

Cash (from sale of assets Discount from Creditors Loss (to S/Hs' distribution)

85 000

60 000 1 000 24 000

85 000

Cash Balance

8 000

Liquidation (sale of assets) Calls in arrears

60 000 10 000 78 000

Liquidation exps payable Payables Shareholders’ distribution

$ 30 000

5 000 17 000 56 000 78 000

25.12

(18 000) $ 70 000

Chapter 25: Insolvency and liquidation

Shareholders’ Distribution Liquidation (loss)

24 000

Cash

56 000 80 000

Question 25.2

Share capital

80 000

80 000

Order of priority for paying creditors

Mosquito Ltd, whose capital consisted of $50 000 in fully paid shares, was wound up as a result of a court order. Its liquidator realised $671 650 from the sale of the company’s assets. This amount included $170 000 from the proceeds on sale of the company’s land and buildings. Debts proved and admitted were: Unsecured notes Debentures (secured by circulating security interest) First mortgage on land and buildings

$100 000 300 000 100 000 25.13

Trade accounts payable PAYG tax instalment Fringe benefits tax Directors’ fees GST Employees’ holiday pay Employees’ wages — 5 employees for 2 weeks at $400 per week Secretary’s salary — 3 weeks at $240 per week Managing director’s salary — 4 weeks at $600 per week Sales commission Liquidation expenses Second mortgage on land and buildings Liquidator’s remuneration

80 000 780 2 000 3 000 1 989 5 000 4 000 720 2 400 500 3 000 80 000 8 000

Required Show the order of priority of payment of debts for Mosquito Ltd and calculate the amount payable to the company’s trade accounts payable.

Proceeds from sale of assets Less payment of debts (in order of priority) 1. Liquidator's expenses 2. Secured debts First mortgage Second mortgage 3. Circulating security interest: Debentures 4. Liquidator’s remuneration 5. Wages: Employees Secretary Managing director Sales commission 6. Employees' holiday pay Amount available for unsecured creditors 7. Ordinary unsecured creditors

$671 650 $3 000 $100 000 70 000

300 000 8 000 4 000 720 2 000 500

Owed Unsecured notes Trade accounts payable Fringe benefits tax PAYG tax instalment GST Directors' fees Managing director's salary Second mortgage

170 000

100 000 80 000 2 000 780 1 989 3 000 400 10 000 198 169

7 220 5 000

Percent dividends 90.04 90.04 90.04 90.04 90.04 90.04 90.04 90.04

493 220 178 430 Paid 90 040 72 032 1 801 702 1 790 2 701 360 9 004 178 430

Percentage dividend to trade accounts payable = $178 430/198 169 = 90.04c in $

25.14

Chapter 25: Insolvency and liquidation

Question 25.3

Distribution to different classes of shareholders

On 30 April 2017, Moth Ltd went into voluntary liquidation. At that date, equity comprised: Share capital: 100 000 preference shares issued for $1 and fully paid 220 000 ordinary shares issued for $1 and fully paid 160 000 ‘A’ ordinary shares issued for $1 and paid to 60c 20 000 ‘B’ ordinary shares issued for $1, called and paid to 50c Retained earnings Total equity

$ 100 000 220 000 96 000 10 000 426 000 (256 000) $ 170 000

The liquidator proceeded to realise all of the company’s assets. The loss on liquidation amounted to $64 000 and, after paying sundry creditors, there was a cash balance of $106 000 available for distribution to the shareholders. (The constitution gives preference shareholders a prior claim to return of capital, and other shareholders are to rank equally, based on the number of shares held.) Required Prepare a statement of the distribution to shareholders supported by a detailed explanation of the apportionment of any cash among the various classes of shareholders.

Liquidator's Statement of Receipt and Payments

25.15

Receipts

$

Balance after paying liabilities. Call on ‘A’ Ordinary Call on ‘B’ Ordinary

Payments

106 000

Distribution to:

32 000 6 000

Preference S/Hs Ordinary S/Hs

144 000

$

100 000 44 000 144 000

Distribution of cash No of Shares

Ordinary ‘A’ ordinary ‘B’ ordinary Cash available* Deficiency** Total notional cash

220 000 160 000 20 000 400 000

Paid to

Notional Call

$ 220 000 96 000 10 000 326 000 (6 000) 320 000

$ 64 000 10 000 74 000 6 000 . 80 000

Notional Refund 20c $ 44 000 32 000 4 000 80 000

Actual Deficiency Refund share (Call) $ $ 44 000 176 000 (32 000) 128 000 (6 000) 16 000 6 000 320 000

Total notional cash per share = $80 000 ÷ 400 000 = 20c per share * $6 000 = $106 000 - $100 000 ** Alternatively $320 000 = $64 000 + $256 000

25.16

Chapter 25: Insolvency and liquidation

Question 25.4 Receipts and payments with final distribution to shareholders Butterfly Ltd went into liquidation on 30 June 2018, its equity being as follows: 20 000 10% preference shares each fully paid at $1 10 000 1st issue ordinary shares each fully paid at $1 50 000 2nd issue ordinary shares issued for $1 and paid to 50c Retained earnings (credit balance) $1500 The constitution states that preference shares carry the right to payment of arrears of dividends whether declared or undeclared up to the commencement of the winding up. The last preference dividend was paid to 30 June 2017. To adjust the rights of contributories, the liquidator made a call of 50c per share on the 2nd issue ordinary shares. All call money was received except that in respect of 500 2nd issue ordinary shares. This money proved to be irrecoverable and the shares were subsequently forfeited. Claims admitted for payment amounted to $16 870, assets realised $30 000, and liquidation expenses were $150. Liquidator’s remuneration was fixed at 1% of gross proceeds from sale of assets. Required A. Prepare the liquidator’s final statement of receipts and payments. B. Provide a statement showing the final distribution to shareholders, based on the statement in the constitution that all shares, by number, rank equally on distribution of final cash.

A. Liquidator's Statement of Receipts and Payments Receipts

$'000

Proceeds on sale of assets Call on 2nd issue ordinary

30 000 24 750

Payments Liquidation expenses Liquidator's remuneration Other Claims Arrears of preference dividend Payment to: Preference First issue ordinary Second issue ordinary

54 750

$'000 150 300 16 870 2 000

8 913 4 457 22 060

54 750

B. Share of cash (after forfeiture of 500 2nd issue ordinary shares) No of Shares

Preference 1st issue ordinary 2nd issue ordinary Cash available Deficiency Total notional cash

20 000 10 000 49 500 79 500

Paid to

Notional Call

$ 20 000 10 000 49 500 79 500 (35 430) 44 070

$ 35 430 . 35 430

Notional Refund 44.566c $ 8 913 4 457 22 060 35 430

Actual Deficiency Refund share (Call) $ $ 8 913 11 087 4 457 5 543 22 060 27 440 35 430 44 070

25.17

Total notional cash per share = $35 430 ÷ 79 500 = 44.566c per share

Question 25.5

Distribution to different classes of shareholders

On 31 May 2017, Termite Ltd went into liquidation. At that date, the equity of Termite Ltd comprised: 400 000 preference shares issued for $1 paid to 50c 1 000 000 ordinary shares issued for $1 paid to 80c

$ 200 000 800 000 $ 1 000 000

After realising the assets and paying all creditors, the liquidator had $300 000 cash available to distribute to shareholders. Required 25.18

Chapter 25: Insolvency and liquidation

A. B.

Prepare a statement detailing the distribution of cash to shareholders assuming the company’s constitution was silent regarding the rights of shareholders upon winding up. Prepare a statement detailing the distribution of cash to shareholders assuming the company’s constitution provides that upon winding up, preference shareholders are preferential as to return of capital.

A. Share of cash No of Shares

Preference Ordinary Cash available Deficiency Total notional cash

400 000 1 000 000 1 400 000

Paid to

Notional Call

$ 200 000 800 000 1 000 000 (300 000) 700 000

$ 200 000 200 000 400 000 300 000 . 700 000

Notional Refund 50c $ 200 000 500 000 700 000

Actual Deficiency Refund share $ 300 000 300 000

$ 200 000 500 000 700 000

Total notional cash per share = $700 000 ÷ 1 400 000 = 50c per share

B. Share of cash Preference shareholders receive $200 000. Ordinary shareholders receive $100 000 ($300 000 [cash available] - $200 000 [distribution to preference shareholders]).

25.19

Question 25.6 Order of payment of debt and shareholders’ distributions Weevil Ltd went into liquidation on 31 March 2017, its equity being as follows: 75 000 ordinary shares issued and fully paid Retained earnings Debts proved and admitted for payment by the liquidator were: Debentures (secured by circulating security interest) Mortgage loan (secured over land and buildings) Unpaid annual leave Employee retrenchment payments Director’s salary Directors’ fees PAYG tax instalments Accounts payable Liquidation expenses Liquidator’s remuneration

$ 175 000 (35 600) $ 139 400 $ 100 000 240 000 45 800 56 400 8 400 2 400 6 200 125 000 1 300 5 000

The land and buildings were seized by the secured creditor and sold to repay the mortgage loan. Surplus funds amounting to $5000 were forwarded to the liquidator. All other assets were sold and realised $230 000. Any calls which the liquidator may need to make are expected to be recoverable. Required Prepare the liquidator’s statement of receipts and payments (show debts in order of priority of payment) and the Shareholders’ Distribution account for Weevil Ltd. (Show all calculations.)

Receipts

Liquidator's Statement of Receipts and Payments $ Payments

Proceeds on sale of assets Net proceeds from land & buildings

230 000 5 000

$

Liquidation expenses

1 300

Director’s salary

2 000

Annual leave Retrenchment payments Debentures Liquidator’s remuneration

45 800 56 400 100 000 5 000 210 500

Unsecured: Director’s salary Directors’ fees PAYG instalments Accounts payable 235 000

Total debts amount to: Secured Unsecured Cash from proceeds of sale of assets Deficiency

1 120 420 1 085 21 875 235 000

$100 000 250 500 350 500 235 000 115 500

25.20

Chapter 25: Insolvency and liquidation

As there is a deficiency to pay creditors, and there is no amount to be called up on ordinary shares, the amount available is insufficient to satisfy all creditors’ claims. The deficiency must be borne in reverse order of priority. Section 556 of the Corporations Act provides that certain creditors, namely wages, annual leave and retrenchment payments, will be paid prior to the floating charge security. Cash available for unsecured creditors = $24 500* *$24 500 = $235 000 [receipts] - $210 500 [payments to debenture holders and preferential unsecured creditors] Cash per $1 owed = $24 500 /140 000 = 17.5c per $1 Creditors Director’s salary Directors’ fees PAYG instalments Accounts payable

Total amount $6 400 2 400 6 200 125 000 140 000

Payment @ 17.5c $ 1 120 420 1 085 21 875 24 500

Shareholders’ Distribution Deficiency

175 000 175 000

Ord. share capital

175 000 175 000

25.21

Question 25.7

Journal entries and ledger accounts for liquidation

The trial balance of Grasshopper Ltd on 1 June 2017, the date on which the court ordered that the company be wound up, is presented below. GRASSHOPPER LTD Trial Balance as at 1 June 2017 Cash Inventories Plant and machinery Land and buildings Accumulated losses Accounts payable Mortgage (secured over land and buildings) Share capital: 350 000 ordinary shares issued for $1 each, fully paid

Debit $9 000 188 800 211 400 60 000 80 800

Credit

$160 000 40 000 350 000 $550 000

$550 000

Additional information (a) The sale proceeds of assets realised the following amounts in cash: Inventories Plant and machinery

$120 000 140 000

(b) The mortgage holder took possession of the land and buildings and sold them for $90 000 and after settlement of the debt paid any excess funds to the liquidator. (c) Liquidation costs amounted to $19 000. (d) The liquidator paid all liabilities. Required A. Prepare journal entries to wind up the affairs of Grasshopper Ltd. B. Prepare the liquidation account, the cash account and the shareholders’ distribution account. A. Liquidation Inventory Plant & Machinery (Transfer asset carrying amounts to liquidation)

Dr Cr Cr

400 200

Cash

Dr Cr

260 000

Dr Cr

19 000

Cash ($90 000 - $40 000) Dr Mortgage on Land & Buildings Dr Land & Buildings Cr Liquidation (gain on sale: $90 000 - $60 000) Cr (Gain on sale of land & buildings by mortgage holder)

50 000 40 000

Liquidation (Sale of assets) Liquidation Liquidator’s Costs Payable (Recognition of liability to liquidator)

Liquidator’s Costs Payable Accounts payable Cash

Dr Dr Cr

188 800 211 400

260 000

19 000

60 000 30 000

19 000 160 000 179 000

25.22

Chapter 25: Insolvency and liquidation

(Payment of liabilities) Liquidation Accumulated Losses (Transfer of accumulated losses to liquidation)

Dr Cr

80 800 80 800

Note: Cash in = $9 000 + $260 000 + $50 000 = $319 000 less cash out $179 000 = $140 000 left Share Capital – Ordinary Shares Shareholders’ Distribution (Transfer share capital account to shareholders’ distribution)

Dr Cr

350 000

Shareholders’ Distribution Cash (Payment to shareholders)

Dr Cr

140 000

Shareholders’ Distribution Liquidation (Transfer of deficiency from liquidation)

Dr Cr

210 000

350 000

140 000

210 000

B.

Carrying amounts of assets: Inventories Plant and machinery Liquidation costs payable Accumulated losses

GRASSHOPPER LTD Liquidation Proceeds on sale of assets: $188 800 211 400 19 000 80 800

Inventories Plant and machinery Gain on sale of L&B Shareholders’ distribution

$500 000

Opening balance Proceeds on sale of assets: Inventories Plant and machinery Land & buildings

Shareholders’ distribution

$319 000

Cash Liquidation

210 000 $500 000

Cash $9 000 Payments: Liquidation costs payable Accounts payable 120 000 140 000 50 000

$120 000 140 000 30 000

Shareholders’ distribution $140 000 Share capital – ordinary shares 210 000 $350 000

$19 000 160 000

140 000

$319 000

$350 000

$350 000

25.23

Question 25.8

Summary of affairs

The trial balance below is of Gnat Ltd’s accounts as at 30 June 2017: GNAT LTD Trial Balance as at 30 June 2017 Debit Share capital Calls in arrears (on 8000 shares) Calls in advance Revaluation surplus Retained earnings Land Buildings Accumulated depreciation – buildings Plant Accumulated depreciation – plant Cash at bank Inventory Accounts receivable Bills receivable Goodwill 12% debentures Mortgage payable Secured creditor (for plant) Unsecured creditors

Credit $ 315 000

$ 2 000 1 500 2 500 72 500 91 000 150 000 36 000 170 000 20 000 15 000 50 000 47 500 40 000 25 000

$663 000

100 000 110 000 25 000 53 000 $663 000

Share capital consisted of 350 000 ordinary shares, issued at a price of $1 and called to 90c. It was decided on 30 June 2017 to wind up Gnat Ltd. Additional information is as follows: (a) Debentures are secured by circulating security interest; mortgage is secured over buildings. (b) Assets are estimated to realise the following amounts: Land Buildings Inventory Plant Bills receivable Accounts receivable Calls in arrears Goodwill

$ 90 000 100 000 35 000 100 000 29 000 43 500 1 500 —

(c) There is an impending lawsuit against the company. Expected damages payout is $15 000. (d) Unsecured creditors comprise: Accounts payable GST Director’s salary Directors’ fees Local government rates

$42 500 2 000 3 500 3 000 2 000 $53 000

Required Present a summary of affairs (as per figure 25.3) for sending to creditors. COMPANIES FORM 509 SUMMARY OF AFFAIRS Assets and Liabilities as at 30 June 2017

25.24

Chapter 25: Insolvency and liquidation

Valuation

Estimated Realisable Value

1. Assets not specifically charged (a) Interests in land

$91 000

$90 000

(b) Sundry debtors: Debtors

47 500

43 500

Bill Receivable

40 000

29 000

Calls in Arrears

2 000

1 500

(c) Cash on hand

-

-

(d) Cash at Bank

15 000

15 000

(e) Stock as detailed in inventory

50 000

35 000

(f) Work in progress

-

-

(g) Plant and Equipment

-

-

25 000

-

270 500

214 000

125 000

75 000

4 000

-

399 500

289 000

(h) Other assets: Goodwill

2. Assets subject to specific charges Plant Less Secured Creditor

150 000 25 000

Buildings

114 000

Less Mortgage Payable

110 000

Total Assets Total estimated realisable value 3. Less preferential creditors entitled to priority over the holders of debentures under floating charge Director's salary

289 000

2 000 287 000

4. Less amounts owing and secured by debenture or floating charge over company's assets 12% debentures

100 000 187 000

Estimated Realisable Value 5. Less Preferential creditors Estimated amount available for unsecured creditors 6. Creditors (unsecured)

187 000

25.25

Trade creditors

42 500

GST

2 000

Local government rates

2 000

Director’s salary

1 500

Directors’ fees

3 000

7. Balances owing to partly secured creditors Mortgages (total claim)

110 000

Security held (building)

100 000

10 000

61 000 126 000

8. Contingent assets

-

9. Contingent liabilities

-

Estimated surplus

126 000

(Subject to costs to liquidation) Share capital Issued: 350 000 ordinary shares at $1

350 000

Paid-up: 342 000 shares paid to 90c

307 800

8 000 shares paid to 65c

5 200

350 000

313 000

25.26

Chapter 25: Insolvency and liquidation

Question 25.9

Ledger accounts for liquidation

A court order for the winding up of Slater Ltd was made on 31 March 2017. A statement of financial position prepared on that date was as follows: SLATER LTD Statement of Financial Position as at 31 March 2017 Current assets Cash at bank Cash in hand Accounts receivable Inventories Total current assets Non-current assets Plant and equipment (at cost less depreciation) Land and buildings (at cost) Goodwill Total non-current assets Total assets Current liabilities Accounts payable PAYG tax instalments Accrued expenses Total current liabilities Non-current liabilities 2000 $20 10% debentures 11% mortgage on land and buildings Total non-current liabilities Total liabilities Net assets Share capital 20 000 7% cumulative preference shares issued for $2, called to $1.50 each 100 000 ordinary shares issued for $2, called to $1.50 each Less: Calls in arrears: 2000 ordinary shares at 50c

$ 4 000 300 46 500 49 500 $ 100 300 96 200 30 000 39 500 165 700 266 000 29 300 5 700 5 000 40 000 40 000 20 000 60 000 100 000 $ 166 000

$30 000 150 000

Reserves Retained earnings Total equity

$ 180 000 (1000) 179 000 (13 000) $ 166 000

Note: Arrears of preference dividends $4200. Additional information (a) Accrued expenses include: Interest on mortgage Interest on debentures Salary (four employees, $800 each) (b) Assets are expected to realise:

$ 1000 800 3200

Accounts receivable $ 16 400 Inventories 10 500 Plant and equipment 30 000 Unpaid calls 500 (1000 at 50c) (c) The mortgage holder took possession of the land and buildings and sold them for $60 000, paying any residue to the liquidator. (d) The debentures are secured by a circulating security interest over the assets of Slater Ltd. (e) On 1 May 2017, the liquidator realised the assets in (b) for the above amounts. The balance of the unpaid calls was treated as irrecoverable and the shares were forfeited. 25.27

(f) On 1 June 2017 the liquidator paid all liabilities and adjusted the rights of shareholders. The constitution, regarding rights of shareholders in a winding up, gives preference shareholders a right to receive arrears of dividend. (g) Uncalled capital (where required to be called up) proved to be recoverable. (h) The winding up of the company was completed on 1 July 2017, costs of liquidation being $3000. Required A. Prepare the Liquidation account and the Shareholders’ Distribution account (show clearly any working in relation to final distribution to shareholders). B. Prepare the liquidator’s statement of receipts and payments. A. Liquidation Carrying amount of assets: Accounts receivable Inventories Plant and equip. Goodwill

46 500 49 500 96 200 39 500

Liquidation Expenses Arrears of Pref. Div

3 000 4 200

Retained earnings

13 000

Proceeds from Sale of Assets: Accounts receivable Inventories Plant and equipment Gain on disposal of secured asset (L&B)

Forfeited Shares Reserve Share of Deficiency: Preference Ordinary

251 900

16 400 10 500 30 000 30 000

1 000 27 563 136 437 251 900

Shareholders’ Distribution* Share of Deficiency: Preference Ordinary Return of Capital to: Preference Ordinary

Share capital: Preference Ordinary

27 563 136 437

30 000 148 500

2 437 12 063

178 500

178 500

* after forfeiture of 1 000 ordinary shares Share of cash (after forfeiture of 1 000 ordinary shares for not paying calls in arrears) No of Shares

Paid to

Notional Call

$

$

Notional Refund 62.185c $

Actual Deficiency Refund share (Call) $ $

25.28

Chapter 25: Insolvency and liquidation

Preference Ordinary

20 000 99 000 119 000

Cash available Deficiency Total notional cash

30 000 148 500 178 500 (14 500) 164 000

10 000 49 500 59 500 14 500 . 74 000

12 437 61 563 74 000

2 437 12 063 14 500

27 563 136 437 164 000

Total notional cash per share = $74 000 ÷ 119 000 = 62.185c per share

B. Receipts

Liquidator's Statement of Receipts and Payments $ Payments

Balance of Cash Proceeds on sale of assets: Accounts receivable Inventories Plant and Equipment Net amount received from secured creditors Calls in arrears (ordinary)

4 300

16 400 10 500 30 000

Liquidation expenses Debentures and Interest Salaries Accounts payable PAYG tax instalment Arrears of preference dividend

39 000

$ 3 000 40 800 3 200 29 300 5 700 4 200 86 200

500 Return of Capital: Preference Ordinary 100 700

2 437 12 063 100 700

25.29

Question 25.10 Order of payment of debts, journal entries for liquidation

surplus

Glowworm Ltd went into voluntary liquidation on 30 June 2018. The statement of financial position prepared on that date is as follows: GLOWWORM LTD Statement of Financial Position as at 30 June 2018 Current assets Cash Inventory Accounts receivable Less: Allowance for doubtful debts Non-current assets Plant and equipment Less: Accumulated depreciation Land Shares in listed companies Total assets Current liabilities Accounts payable Other payables Non-current liabilities Mortgage on land Debentures Total liabilities Net assets Equity Share capital: Preference: 20 000 shares, issued at $1, fully paid Ordinary ‘A’ 25 000 shares, issued at $1, fully paid Ordinary ‘B’ 20 000 shares, issued at $1, called to 60c General reserve Retained earnings Total equity

$ 16 000 63 000 $ 36 100 (4 100) 168 000 (35 200)

32 000

132 800 90 600 52 000 386 400 43 200 16 100 85 000 150 000 294 300 $ 92 100

$ 20 000 25 000 12 000

$ 57 000 7 000 28 100 $ 92 100

Additional information (a) Liquidator’s remuneration and expenses amounted to $1800. (b) Other payables of $16 100 comprise: Wages payable — employees Salary payable — managing director Annual leave payable — employees Income tax payable Telephone bill payable

$6 000 2 800 4 400 2 000 900

(c) The debentures are secured by a circulating security interest over the company’s assets. (d) The mortgage holder took possession of the land and sold it for $81 700. (e) Other assets realised: Inventory Accounts receivable Plant and equipment Shares in listed companies

$54 000 26 000 134 000 61 000

(f) Uncalled capital (if required to be called up) is recoverable. (g) Preference shareholders are preferential as to dividends and return of capital. The constitution does not provide any further rights for preference shareholders.

25.30

Chapter 25: Insolvency and liquidation

(h) In relation to return of capital, Ordinary ‘A’ shareholders and Ordinary ‘B’ shareholders rank equally after preference shareholders. Required A. List the debts paid by the liquidator in their order of priority of payment. B. Prepare journal entries to wind up Glowworm Ltd.

A.

Order of priority of payment of debts 1. 2. 3. 4. 5. 6.

B.

Liquidator’s remuneration & expenses Mortgage on land (secured by a non-circulating security interest) Debentures (secured by a circulating security interest)) Salary & wages payable (6 000 + 2 000) Annual leave payable Ordinary unsecured: Mortgage loan – balance $3 300 Director’s salary – balance 800 Accounts payable 43 200 Income Tax payable 2 000 Telephone bill payable 900

$1 800 81 700 150 000 8 000 4 400

50 200

Journal entries Liquidation Inventory Accounts Receivable Plant & Equipment Shares in Listed Companies (Transfer asset carrying amounts to liquidation)

Dr Cr Cr Cr Cr

319 100

Allowance for Doubtful Debts Accumulated Dep’n – Plant & Equip Liquidation (Transfer contra-assets to liquidation)

Dr Dr Cr

4 100 35 200

Liquidation Liquidator’s Remun. & Exps Payable (Recognition of liability to liquidator)

Dr Cr

1 800

63 000 36 100 168 000 52 000

39 300

1 800

25.31

Liquidation (loss on sale) Mortgage on Land Land (Loss on sale of land by mortgage holder)

Dr Dr Cr

8 900 81 700

Liquidator’s Cash Liquidation (Sale of assets = 54 + 26 + 134 + 61)

Dr Cr

275 000

General Reserve Retained Earnings Liquidation (Transfer of reserves to liquidation)

Dr Dr Cr

7 000 28 100

Liquidator’s Remun & Exps Payable Mortgage on Land Debentures Accounts payable Other payables Liquidator’s Cash (Payment of liabilities in order of priority)

Dr Dr Dr Dr Dr Cr

1 800 3 300 150 000 43 200 16 100

90 600

275 000

35 100

214 400

Note: Cash in = $16 000 + $275 000 = $291 000 less cash out $214 400 = $76 600 left Share Capital – Preference Share Capital – Ordinary ‘A’ Share Capital – Ordinary ‘B’ Shareholders’ Distribution (Transfer capital accounts to shareholders’ distribution)

Dr Dr Dr Cr

20 000 25 000 12 000

Shareholders’ Distribution Liquidator’s Cash (Payment firstly to preference shareholders)

Dr Cr

20 000

Liquidation Shareholders’ Distribution (Transfer of surplus from liquidation)

Dr Cr

19 600

Shareholders’ Distribution Liquidator’s Cash (Payment of surplus on liquidation to ordinary shareholders) [as per the table below]

Dr Cr

56 600

57 000

20000

19 600

56 600

Share of cash and surplus

25.32

Chapter 25: Insolvency and liquidation

No of Shares Ordinary ‘A’ Ordinary ‘B’ Cash available* Surplus Total notional cash

25 000 20 000 45 000

Paid to

Notional Call

$ 25 000 12 000 37 000 (56 600) 19 600

$ 8 000 8 000 56 600 . 64 600

Notional Refund $1.43556 $ 35 889 28 711 64 600

Actual Refund

Surplus share

$ 35 889 20 711 56 600

$ 10 889 8 711 19 600

Total notional cash per share = $64 600 ÷ 45 000 = $1.43556 per share * $76 600 less payment to preference shareholders $20 000 = $56 600

25.33

Question 25.11 Receivership and liquidation On 31 March 2017, you were appointed receiver, at a remuneration of 5% of the gross proceeds on sale of assets, in respect of Cicada Ltd. Your appointment was made by the ACE Bank, which held an equitable mortgage over the assets of Cicada Ltd, in respect of an advance of $42 000 which was still owing. On 30 April 2017, Cicada Ltd went into voluntary liquidation and you were appointed liquidator for the purposes of the winding up. The trial balance of Cicada Ltd at 31 March 2017 is shown on page 0000. Cicada Ltd Trial Balance as at 31 March 2017 Debits Inventory Plant — subject to hire purchase agreement with Easy Finance Co. Ltd Other plant Work in progress Accounts receivable Retained earnings Credits Share capital (80 000 shares issued for $1 and paid to 60c) ACE Bank Accounts payable Long-service leave payable to retrenched employee Local council rates payable PAYG tax deductions from employees (to be remitted to the Australian Taxation Office) Wages owing to Y. Young (2 weeks to 31 March 2017, at $720 per week) Amount still owing as retrenchment payment

$ 30 000 3 000 24 000 12 240 39 840 23 400 $ 132 480 $48 000 42 000 35 940 2 100 1 800 600 1 440 600 $ 132 480

All assets were sold by you in your capacity as receiver, the proceeds of which amounted to $72 000. To achieve this, you had to spend $1200 to complete the work in progress. Expenses of advertising and stocktaking amounted to $1200. You made the appropriate payments from the receivership funds. After this was completed, you retired from the receivership. You were then appointed liquidator and proceeded with the distribution of funds in hand under the liquidation. Liquidator’s expenses amounted to $600. Required A. Prepare the statement of the receiver’s receipts and payments. B. Prepare the final statement of receipts and payments of the liquidator, showing in detail the order in which the funds in hand are distributed.

A. Receipts Proceeds on sale of assets

Receiver’s Statement of Receipts and Payments $ Payments 72 000

72 000

Receiver’s remuneration Receiver’s expenses Mortgage: ACE Bank Balance (to Liquidator)

$ 3 600 2 400 42 000 24 000 72 000

B. 25.34

Chapter 25: Insolvency and liquidation

Receipts Balance from Receiver

Liquidator’s Statement of Receipts and Payments $ Payments 24 000

Liquidator’s expenses Wages Long service leave Retrenchment payment

$ 600 1 440 2 100 600 4 740

Accounts payable Rates PAYG tax 24 000

18 054 904 302 24 000

Balance available for unsecured creditors = $24 000 - $4 740 = $19 260 Total owing to unsecured creditors = $35 940 + $1 800 + $600 = $38 340 Proportion paid to unsecured creditors = $19 260 ÷ $38 340 = 50.2347c per $1

25.35

Question 25.12 Ledger accounts for liquidation Hornet Ltd went into voluntary liquidation on 1 January 2018, at which date the statement of financial position was as shown below.

Liabilities and equity Share capital: 400 000 ordinary shares fully paid Retained earnings Mortgage loan Debentures Bank overdraft Accounts payable Other payables

HORNET LTD Statement of Financial Position as at 1 January 2018 Assets Land and buildings (net) Plant (net) $460 000 Fixed deposit 10 000 Accounts receivable 150 000 Investments 100 000 Inventory 80 000 80 000 48 000 $928 000

$250 000 400 000 10 000 98 000 50 000 120 000

$928 000

Additional information (a) Creditors were called on to prove their debts. The liquidator discovered that: • debenture interest of $7500 was due on 1 January 2018 • the Grasshopper Bank holds a mortgage over the plant as security against the overdraft; as the bank has waived its right to seize the plant, the liquidator has undertaken to sell the asset and repay the overdraft • the mortgage loan is secured over land and buildings; the mortgagee has decided to sell the assets to recover the amount owing • the debentures are secured by a circulating security interest over inventory • other payables comprise loans from directors, made on 1 December 2017. (b) Assets realised the following amounts: Land and buildings Less: Rates and selling expenses Less: Mortgage loan Plant and equipment Fixed deposit Accounts receivable Investments Inventory

$ 400 000 (16 000) (150 000)

$234 000 390 000 12 000 90 000 30 000 100 000 $ 856 000

(c) The liquidator made the following payments: Debentures Debenture interest Bank overdraft Accounts payable (in full settlement) Other payables Additional amounts not recorded in the records: Liquidator’s remuneration Liquidation expenses Holiday pay — employee Retrenchment payment — employee Income tax penalty

$100 000 7 500 80 000 76 000 48 000 25 000 11 000 4 000 10 000 3 000 $364 500

Required A. Prepare the Liquidation account. B. Prepare the liquidator’s statement of receipts and payments. C. Prepare the Shareholders’ Distribution account. 25.36

Chapter 25: Insolvency and liquidation

A. Liquidation Carrying amount of assets: Accounts receivable Inventory Plant Fixed deposit Investments Liquidation expenses Liquidator’s remuneration Interest – debentures Retrenchment payment Income tax penalty Holiday pay Shareholders’ distribution (surplus)

Proceeds from sale of assets: 98 000 Accounts receivable 120 000 Inventory 400 000 Plant 10 000 Fixed deposit 50 000 Investments 11 000 Gain on sale of L & B 25 000 Discount – accounts payable 7 500 Retained earnings 10 000 3 000 4 000 738 500 31 500

770 000

90 000 100 000 390 000 12 000 30 000 134 000 4 000 10 000

770 000

B. Receipts Land & buildings Plant Fixed deposit Accounts receivable Investments Inventory

Liquidator's Statement of Receipts and Payments $ Payments 234 000 Liquidation expenses 390 000 Bank overdraft 12 000 Debentures + interest 90 000 Liquidator's remun 30 000 Holiday pay 100 000 Retrench payment Unsecured: Other payables Accounts payable Income tax penalty Shareholders' distribution 856 000

$ 11 000 80 000 107 500 25 000 4 000 10 000 48 000 76 000 3 000 364 500 491 500 856 000

C. Shareholders’ Distribution

Cash

491 500

Share capital Liquidation

460 000 31 500

25.37

491 500

491 500

25.38

Chapter 25: Insolvency and liquidation

Question 25.13

Ledger accounts, given a report as to affairs

Wasp Ltd went into liquidation on 31 March 2017. The report as to affairs prepared at that date is shown below: Valuation (1 )

Assets not specifically charged: Calls in arrears (1000 ordinary shares at 25c) Cash on hand Sundry debtors Inventory

(2 )

Assets subject to specific charge

Land Less: Mortgage and accrued interest

(3 ) (4 )

Carryin g amount $40 000 24 500

$

Estimated realisable value

250 50 24 400 51 900 76 600

$

200 50 18 100 17 940 36 290

Estimated realisable value $40 900 24 500

15 500

16 400

$92 100

$52 690 $52 690

Total estimated realisable value Less: Preferential creditors entitled to priority over the holders of a floating charge

(600) 52 090 (19 440) 32 650 (1 400) 31 250 (13 450) $ 17 800

Less: Amount owing under floating charge — bank overdraft Less: Other preferential claims

(5 ) (6 )

Less: Unsecured creditors — ordinary Estimated surplus subject to liquidation expenses Share capital Paid-up capital: Issued preference shares: 42 000 shares fully paid at $1 Issued ordinary shares: 60 000 shares called to 60c, issued for $1 Called capital Calls on ordinary shares paid in advance: 4000 shares at 40c each

$42 000 36 000 78 000 1 600 $79 600 $22 390 Dr

Balance of Retained Earnings account, 31/3/17 Except for the return of capital to shareholders, liquidation of the company was completed at 30 September 2017. The liquidator’s statement of receipts and payments is shown opposite.

Receipts Calls in arrears Cash in hand Receivables Inventory Land (net)

Liquidator’s Statement of Receipts and Payments for 6 months ended 30 September 2017 Payments $ 250 Liquidation expenses 50 Liquidator’s remuneration 17 260 Preferential creditors 34 020 Bank overdraft 24 000 Unsecured creditors less discount Surplus available to shareholders $75 580

$

1 130 2 400 2 000 19 440 13 410 37 200 $75 580

25.39

The mortgage holder had taken possession of the land, sold it for $49 000, and paid the residue to the liquidator after fully satisfying the mortgage claim. Preference shares are preferred to return of capital. All uncalled capital proved recoverable. Required Prepare the Liquidation account and the Shareholders’ Distribution account as they will appear after repayment of capital. Liquidation Carrying Amount of Assets: Receivables Inventory Liquidator's Expenses & Remuneration Interest on Mortgage Retained earnings

24 400 51 900 3 530

Proceeds on Sale of Assets: Receivables Inventory Creditors (discount) Gain on Disposal of Secured Asset (Land)

17 260 34 020 40 9 000

500 22 390

Share of Deficiency Ordinary Preference

102 720

42 400 102 720

Shareholders' Distribution Liquidation (deficiency): Ordinary Cash payments: Ordinary (Calls in Advance refund) Preference

42 400

Share Capital: Preference Ordinary (after final call)*

42 000 41 973

1 173

Calls in Advance - Ordinary

1 600

42 000 85 573

85 573

*$41 973 = $37 600 - $1 600 (calls in advance) + $5 973 (call – see table below)

25.40

Chapter 25: Insolvency and liquidation

Share of cash (showing shares with calls in advance separately) No of Shares

Preference Ordinary Ordinary

42 000 4 000 56 000 60 000 Cash available to ordinary* Deficiency Total notional cash

Paid to

Notional Call

$ 42 000 4 000 33 600 37 600 4 800 42 400

$ 22 400 22 400 (4 800) . 17 600

Notional Refund 29.333c $ 42 000 1 173 16 427 17 600

Actual Deficiency Refund share (Call) $ $ 42 000 1 173 2 827 (5 973) 39 573 (4 800) 42 400

Total notional cash per share = $17 600 ÷ 60 000 = 29.3333c per share

* After payment to preference shareholders

= $37 200 - $42 000 = ($4 800)

25.41

Question 25.14 Journal entries and ledger accounts for liquidation The trial balance of Locust Ltd on 1 September 2018, the date on which the court ordered that the company be wound up, is presented below. LOCUST LTD Trial Balance as at 1 September 2018 Debit Bank (secured over land and buildings) Accounts payable Accrued expenses Unsecured notes Debentures (secured by a circulating security interest over the company’s assets) Share capital: 7% preference issued at $1 ‘A’ ordinary issued at $1 ‘B’ ordinary issued at $1 ‘C’ ordinary issued at $1 Allowance for doubtful debts Accumulated depreciation: Vehicles Plant and equipment Cash Accounts receivable Inventory Shares in Bee Pty Ltd Vehicles Plant and equipment Land and buildings (net) Goodwill Retained earnings

Credit $ 114 000 91 000 2 000 150 000 200 000 50 000 200 000 40 000 20 000 1 000 17 000 40 000

$

100 97 000 146 400 17 500 29 000 181 000 250 000 24 000 180 000 $925 000

$925 000

Additional information (a) Share capital consisted of: 50 000 7% preference shares fully paid 200 000 ‘A’ ordinary shares fully paid 100 000 ‘B’ ordinary shares paid to 40c 100 000 ‘C’ ordinary shares paid to 20c The constitution provided that preference shareholders were preferential as to return of capital in a winding up, and ‘C’ ordinary shareholders were deferred as to return of capital until all other classes of shares had been paid in full. (b) Proceeds from sale of assets (the bank agreed to allow the liquidator to sell the land and buildings): Accounts receivable $ 71 000 Inventory 100 000 Shares in Bee Pty Ltd 10 000 Vehicles 10 000 Plant and equipment 116 000 Land and buildings 240 000 (c) Calls on shares: The liquidator called up the uncalled balance on ‘B’ ordinary shares and ‘C’ ordinary shares. Holders of 10 000 ‘C’ ordinary shares and 10 000 ‘B’ ordinary shares failed to pay the call and these shares were subsequently forfeited. (d) Payments made by liquidator after negotiation with creditors: Liquidation expenses $ 2 100 Liquidator’s remuneration 4 000 Bank overdraft and interest 116 000 Accounts payable 89 000 25.42

Chapter 25: Insolvency and liquidation

Accrued expenses Unsecured notes and interest Debentures and interest

2 200 154 500 206 000

Required A. Prepare journal entries to wind up the affairs of Locust Ltd. B. Prepare the Liquidation account, the Cash account and the Shareholders’ Distribution account, clearly showing the share of cash for each class of shares.

A. General Journal Liquidation Accounts Receivable Inventory Shares in Bee Pty Ltd Vehicles Plant & Equipment Land and Buildings Goodwill (Asset accounts transferred to liquidation)

Dr Cr Cr Cr Cr Cr Cr Cr

744 900

Dr

17 000

Dr Dr Cr

40 000 1 000

Cash Liquidation (Proceeds on sale of assets)

Dr Cr

547 000

Liquidation Liquidation Expenses Payable Liquidator’s Remun. Payable Bank Overdraft Accrued Expenses Unsecured Notes Debentures (Unrecorded liabilities, debited to liquidation account and representing interest on unsecured notes and debentures, and liquidation expenses)

Dr Cr Cr Cr Cr Cr Cr

18 800

Accounts Payable Liquidation (Discount given by payables)

Dr Cr

2 000

Call - ‘B’ Ordinary Call - ‘C’ Ordinary

Dr Dr

60 000 80 000

Accumulated Depreciation Vehicles Accumulated Depreciation Plant & Equipment Allowance for Doubtful Debts Liquidation (Contra-assets transferred)

97 000 146 400 17 500 29 000 181 000 250 000 24 000

58 000

547 000

2 100 4 000 2 000 200 4 500 6 000

2 000

25.43

Share Capital - ‘B’ Ordinary Share Capital - ‘C’ Ordinary (Call made on ‘B’ ordinary shares (60c) and ‘C’ ordinary shares (80c)

Cr Cr

Cash Call - ‘B’ Ordinary Call - ‘C’ Ordinary (Receipt of cash on 90 000 ‘B’ ordinary @ 60c and 90 000 ‘C’ ordinary @ 80c)

Dr Cr Cr

126 000

Liquidation Expenses Payable Bank Overdraft Debentures (+ interest) Liquidator’s Remun. Payable Unsecured Notes (+ interest) Accounts Payable Accrued Expenses Cash (Liabilities paid in order of priority)

Dr Dr Dr Dr Dr Dr Dr Cr

2 100 116 000 206 000 4 000 154 500 89 000 2 200

Share Capital - ‘B’ Ordinary Call - ‘B’ Ordinary Forfeited Shares Reserve (Forfeiture of 10 000 ‘B’ Ordinary shares)

Dr Cr Cr

10 000

Share Capital - ‘C’ Ordinary Call - ‘C’ Ordinary Forfeited Shares Reserve (Forfeiture of 10 000 ‘C’ ordinary shares)

Dr Cr Cr

10 000

60 000 80 000

54 000 72 000

573 800

6 000 4 000

8 000 2 000

Share Capital - Preference Share Capital - ‘A’ Ordinary Share Capital - ‘B’ Ordinary Share Capital - ‘C’ Ordinary Shareholders' Distribution (Transfer of share capital to shareholders' distribution)

Dr Dr Dr Dr Cr

50 000 200 000 90 000 90 000

Liquidation Forfeited Shares Reserve Retained Earnings (Transfer of accumulated losses and forfeited shares reserve to liquidation)

Dr Dr Cr

174 000 6 000

430 000

180 000

25.44

Chapter 25: Insolvency and liquidation

Shareholders' Distribution Liquidation (Deficiency on liquidation transferred)

Dr Cr

330 700

Shareholders' Distribution Cash (Final payment to shareholders as per schedule)

Dr Cr

99 300

330 700

99 300

B. Liquidation Asset balances transferred Unrecorded liabilities

Accumulated losses and Forfeited Shares Reserve

744 900 Contra-Assets 18 800 Cash (Sale of Assets) Creditors (discount)

58 000 547 000 2 000

Shareholder's Distrib: 174 000 (deficiency) (‘A’ Ord. $166 000) (‘B’ Ord. 74 700) (‘C’ Ord. 90 000)

330 700

937 700

937 700

Cash Balance Liquidation (Sale of Assets) Calls on ‘B’ Ordinary and ‘C’ Ordinary shares

100 547 000 126 000

Payment of liabilities Payment to: Preference ‘A’ Ordinary ‘B’ Ordinary

673 100

573 800 50 000 34 000 15 300 673 100

Shareholders' Distribution Liquidation (deficiency) (‘A’ Ord. 166 000) (‘B’ Ord. 74 700) (‘C’ Ord. 90 000) Cash (Preference 50 000) (‘A’ Ord. 34 000) (‘B’ Ord. 15 300)

330 700

Share Capital

430 000

99 300

430 000

430 000

Share of cash 25.45

(after forfeiture of shares and payment to preference shares) No of Shares ‘A’ Ordinary ‘B’ Ordinary ‘C’ Ordinary Cash available Deficiency Total notional cash

200 000 90 000 290 000 90 000 380 000

Paid to

Notional Call

$ 200 000 90 000 290 000 90 000 380 000 49 300 330 700

$ 49 300 . 49 300

Notional Refund 17c $ 34 000 15 300 49 300 49 300

Actual Deficiency Refund share (Call) $ $ 34 000 166 000 15 300 74 700 49 300 240 700 90 000 49 300 330 700

Total notional cash per ‘A’ and ‘B’ ordinary share = $49 300 ÷ 290 000 = 17c per share * After paying preference shares $50 000

25.46

Chapter 25: Insolvency and liquidation

Question 25.15

Journal entries, given a report as to affairs

At 31 July 2017, the liquidator of Ladybird Ltd, who had been appointed by the court, prepared the report as to affairs shown opposite. Other information (a) Accumulated depreciation on plant and equipment is recorded at $14 000. (b) Arrears of cumulative preference dividend, $12 000. The constitution gives the preference shareholders priority of payment of arrears of preference dividends. All shares rank equally per share as to return of capital. (c) Of the $93 000 trade creditors recognised by the liquidator, Ladybird Ltd had not recorded $3000. Further, Ladybird Ltd had not recorded unpaid salaries and wages amounting to $1400. (d) At the completion of the winding up, the following additional information was available: • interest accrued on mortgage, $2000, and on debentures, $1200 • liquidation expenses, $800, and liquidator’s remuneration, $4000 • no bill receivable was dishonoured • all other creditors were paid the amounts reported in the report as to affairs • land and buildings realised $75 000 • all other assets realised the amounts estimated. (e) In relation to the land and buildings, the mortgagee sold the assets and remitted to the liquidator any amount in excess of the debt due. LADYBIRD LTD Report as to Affairs as at 31 July 2017 Valuation (1)

(2)

(3)

(4) (5)

Assets not specifically charged: Interests in land Sundry debtors Cash on hand Cash at bank Inventory Work-in-progress Plant and equipment at cost/value Other assets — Bills receivable Assets subject to specific charge Land and buildings Less: Amounts owing (mortgage)

Estimated realisable value

— $ 58 000 — 1 000 122 000 — 82 000 48 000 311 000

— $ 36 000 — 1 000 94 000 — 44 000 28 000 203 000

91 000 (70 000) 21 000 $332 000

80 000 (70 000) 10 000 $213 000 $213 000

Total estimated realisable value Less: Preferential creditors entitled to priority over floating charge: claims by employees — salaries and wages

(1 400) 211 600 (30 000) —

Less: Amounts owing and secured by floating charge — debentures Less: Preferential creditors

181 600 (6)

Balances owing to unsecured creditors: Trade creditors Income tax payable Estimated surplus expenses Share capital

subject

to

liquidation

(93 000) (4 000)

(97 000) $ 84 600

25.47

Issued: 90 000 ordinary shares fully paid $ 125 000 50 000 6% preference shares, fully paid 50 000 Total share capital $ 175 000 Retained earnings $ 19 000 Cr Required Prepare the journal entries in Ladybird Ltd to wind up the company. (Show calculations for the distribution of cash to shareholders.)

Liquidation Sundry Debtors Inventory Plant and Equipment Bills Receivable (Transfer of assets)

Dr Cr Cr Cr Cr

310 000

Accumulated Depreciation Liquidation (Transfer of contra-assets)

Dr Cr

14 000

Liquidation Preference Dividend Payable Trade Creditors Salaries and Wages Payable Mortgage Payable Debentures Liquidation Expenses Payable Liquidator’s Remuneration Payable (Liabilities arising during liquidation)

Dr Cr Cr Cr Cr Cr Cr Cr

24 400

Cash Mortgage Payable Liquidation - loss on disposal Land and Buildings (Sale of land and buildings by mortgagee)

Dr Dr Dr Cr

3 000 72 000 16 000

Cash Liquidation (Proceeds from sale of assets)

Dr Cr

202 000

58 000 122 000 82 000 48 000

14 000

12 000 3 000 1 400 2 000 1 200 800 4 000

91 000

202 000

25.48

Chapter 25: Insolvency and liquidation

Liquidation Expenses Payable Debentures Liquidator’s Remuneration Payable Salaries and Wages Payable Trade Creditors Preference Dividends Payable Cash (Payment of liabilities)

Dr Dr Dr Dr Dr Dr Cr

800 31 200 4 000 1 400 97 000 12 000

Retained Earnings Liquidation (Transfer of reserve accounts)

Dr Cr

19 000

Share Capital - Preference Share Capital - Ordinary Shareholders’ Distribution (Transfer of capital accounts)

Dr Dr Cr

50 000 125 000

Shareholders’ Distribution Liquidation (Transfer of balance representing deficiency on liquidation)

Dr Cr

115 400

Shareholders’ Distribution Cash (Payment of $21 286 to Preference shareholders and $38 314 to Ordinary shareholders)

Dr Cr

59 600

146 400

19 000

175 000

115 400

59 600

WORKINGS: Share of cash No of Shares

Preference Ordinary

50 000 90 000 140 000

Paid to

Notional Call

$ 50 000 125 000 175 000 (59 600) 115 400

$ 59 600 . 59 600

Cash available* Deficiency Total notional cash *Cash available = $206 000 - $146 400 = $59 600

Notional Refund 42.5714c $ 21 286 38 314 59 600

Actual Deficiency Refund share (Call) $ $ 21 286 28 714 38 314 86 686 59 600 115 400

Total notional cash per share = $59 600 ÷ 140 000 = 42.5714c per share Liquidation Sundry Debtors Inventory Plant and Equipment Bills Receivable Arrears – Pref. Dividends Trade Creditors

58 000 122 000 82 000 48 000 12 000 3 000

Accumulated Depreciation Proceeds of Sale Retained earnings

14 000 202 000 19 000

25.49

Salaries and Wages Interest – mortgage Interest – Debentures Liquidation Expenses Liquidator’s Remuneration Loss on Disposal - Land & Buildings

1 400 2 000 1 200 800 4 000 16 000

Shareholders’ Distribution

350 400

115 400 350 400

Cash Opening Balance: Sundry Debtors Inventory Plant & Equipment Bills Receivable Mortgagee

1 000 36 000 94 000 44 000 28 000 3 000

Liquidation Expenses Salaries and Wages Debentures Liquidator’s Remuneration Trade Creditors Preference Dividends

800 1 400 31 200 4 000 97 000 12 000 146 400

Preference Shareholders Ordinary Shareholders

21 286 38 314 206 000

206 000

Shareholders' Distribution Liquidation (Deficiency) Cash – Preference Cash – Ordinary

115 400 21 286 38 314 175 000

Share Capital – Preference Share Capital – Ordinary

50 000 125 000 175 000

25.50

Chapter 25: Insolvency and liquidation

Question 25.16 Report as to affairs and ledger accounts The statement of financial position of Snail Ltd on page 0000 was prepared at 30 June 2017, before liquidation proceedings were commenced. SNAIL LTD Statement of Financial Position as at 30 June 2017 Equity Share capital: 30 000 10% preference shares issued at $1, fully paid 20 000 ordinary shares called to 75c, issued at $1 Less: Calls in arrears 25c on 5000 shares Retained earnings Total equity Liabilities Accounts payable GST payable Rent payable Telephone account payable Electricity account payable PAYG tax instalment Wages payable Managing director’s salary payable Fringe benefits tax payable Bank overdraft (secured by circulating security interest) Mortgage payable (secured on freehold) Partly secured creditor (holding $5000 security on plant) Total equity and liabilities Assets Freehold land and buildings (net) Plant (net) Inventory Bills receivable Accounts receivable Cash on hand Total assets

$ 15 000 (1 250)

$ 30 000 13 750

43 750 (6 310) 37 440 19 900 100 90 250 300 420 700 2 350 450 9 000 45 000 8 000

Additional information (a) It is estimated that $1000 of the calls in arrears would be received. (b) The estimated sales values of the assets are as follows: Freehold land and buildings Inventory Accounts receivable Bills receivable Plant (including $5000 on plant over which a security is held)

86 560 $124 000 $ 57 000 12 500 34 000 1 700 15 500 3 300 $124 000

$ 60 000 29 000 11 000 1 700 10 000

Required A. Prepare a report as to affairs as at 30 June 2017. B. Assuming that the liquidator realises all assets (including land and buildings, and plant) and calls in arrears at the amounts estimated, forfeits those shares that do not pay the call, pays the creditors at the amounts as listed in the statement of financial position (except for accounts payable who settle out at $19 000) and distributes the balance after deducting his expenses of $950 and his remuneration of $2850, prepare the Liquidation account, the Shareholders’ Distribution account, and liquidator’s statement of receipts and payments. The constitution provides that all shares rank equally, per share, as to return of capital.

25.51

REPORT AS TO AFFAIRS Assets and liabilities as at 30 June 2017 Valuation

$

$

Estimated Realisable Value $

1. Assets not specifically charged (a) Interest in land

-

-

(b) Sundry debtors: A/cs receivable

15 500

11 000

Sundry debtors: Bills Receivable

1 700

1 700

Sundry debtors: Calls in Arrears

1 250

1 000

(c) Cash on hand

3 300

3 300

(d) Cash at bank

-

-

34 000

29 000

-

-

7 500

5 000

63 250

51 000

12 000

15 000

-

-

75 250

66 000

(e) Stock as detailed in inventory (f) Work in progress (g) Plant and equipment (Book Value $12 500 - $5 000 partly secured) (Est. realisable value $10 000-$5 000) (h) Other assets

2. Assets subject to specific charges Freehold land and buildings Less Mortgage Plant Less Secured Creditor

57 000 45 000 5 000 5 000

Total estimated realisable value 3. Less Preferential creditors entitled to priority over the holders of debentures under any floating charge Wages Managing Director's Salary

66 000

700 2 000

2 700 63 300

4. Less Amounts owing and secured by debenture or floating charge over company assets Bank overdraft 5. Less Preferential Creditors Estimated amount available for Unsecured creditors 6. Creditors (unsecured) Accounts payable

9 000 54 300 54 300 19 900 25.52

Chapter 25: Insolvency and liquidation

GST payable Rent payable Telephone bill payable Electricity bill payable Managing Director's salary PAYG Tax Instalment Fringe Benefits Tax payable 7. Balances owing to partly secured creditors Total claims Security held 8. Contingent assets 9. Contingent liabilities Estimated surplus (Subject to costs of liquidation) Share Capital: Issued: 30 000 10% preference shares issued at $1 20 000 ordinary shares at $1 Paid: 30 000 preference shares 15 000 ordinary shares paid to 75c 5 000 ordinary shares paid to 50c

100 90 250 300 350 420 450 8 000 5 000

3 000

24 860 29 440 29 440

30 000 20 000 30 000 11 250 2 500

50 000

43 750

25.53

Liquidation Carrying Amount of Assets: Land and Buildings Plant Inventory Bills Receivable Accounts Receivable Liquidation Expenses

57 000 12 500 34 000 1 700 15 500 950

Liquidator's Remuneration

Proceeds from sale: Land and Buildings Plant Inventory Bills Receivable Accounts Receivable Discount from Accounts Payable

60 000 10 000 29 000 1 700 11 000 900

2 850

Retained Earnings

6 310

Forfeited Shares Deficiency to: Preference Ordinary

130 810

500* 10 843 6 867 130 810

Shareholders' Distribution * Deficiency: Preference Ordinary Cash Payments: Preference Ordinary

10 843 6 867

Share Capital: Preference Ordinary (19 000 @ 75c)

30 000 14 250

19 157 7 383 44 250

44 250

* After forfeiture of 1 000 ordinary shares.

25.54

Chapter 25: Insolvency and liquidation

Receipts

Liquidator's Statement of Receipts and Payments $ Payments

Cash on Hand Sale of Assets: Land and Buildings Plant Inventory Bills Receivable Accounts Receivable Call on ordinary shares

$

3 300 Liquidation Expenses Mortgage Payable 60 000 Secured Creditor 10 000 Bank Overdraft 29 000 Liquidator’s remuneration 1 700 Wages 11 000 Managing Director's Salary 1 000 Unsecured Creditors: Accounts Payable PAYG Tax Instalment GST Fringe Benefits Tax Rent Telephone Electricity Managing Director's Salary Partly secured Creditors

950 45 000 5 000 9,000 2 850 700 2 000 19 000 420 100 450 90 250 300 350 3 000 89 460

Payment to: Preference Ordinary 116 000

19 157 7 383 116 000

Share of cash (after forfeiture of 1 000 ordinary shares) No of Shares

Preference Ordinary Cash available* Deficiency Total notional cash

30 000 19 000 49 000

Paid to

Notional Call

$ 30 000 14 250 44 250 (26 540) 17 710

$ 4 750 4 750 26 540 . 31 290

Notional Refund 63.857c $ 19 157 12 133 31 290

Actual Deficiency Refund share (Call) $ $ 19 157 10 843 7 383 6 867 26 540 17 710

* Cash available = $116 000 - $89 460 = $26 540 Total notional cash per share = $31 290 ÷ 49 000 = 63.857c per share

25.55

Question 25.17 Sale of assets, final distribution to shareholders As a result of a court order, Spider Ltd went into liquidation on 30 June 2017. A statement of financial position prepared on that date was as follows: SPIDER LTD Statement of Financial Position as at 30 June 2017 Equity Share capital: 80 000 preference shares, issued at $2 and paid to $1 136 000 ‘A’ ordinary shares, issued for $2, called to $1.50 100 000 ‘B’ ordinary shares, issued for $1, called to 75c

$ 80 000 204 000 75 000 359 000

Less: Calls in arrears: 24 000 ‘A’ ordinary shares 2400 ‘B’ ordinary shares Calls in advance: 4000 ‘A’ ordinary shares at 50c General reserve Retained earnings (losses) Total equity Current assets Cash Accounts receivable Allowance for doubtful debts Inventories Total current assets Non-current assets Land Buildings Less: Accumulated depreciation Plant and equipment Less: Accumulated depreciation Goodwill Less: Accumulated impairment losses Total non-current assets Total assets Current liabilities Loan (unsecured) Creditors and accruals Total current liabilities Non-current liabilities Mortgage (secured on land and buildings) Total non-current liabilities Total liabilities Net assets

$ (6 000) (600)

(6 600) 352 400 2 000 51 600 (26 000) $380 000 $ 1 800

$

111 000 (2 000)

109 000 39 200 150 000 $ 140 000

$ 432 000 (326 000) 210 000 (160 000) 44 000 (8 000)

106 000 50 000 36 000 332 000 482 000 12 000 50 000 62 000 40 000 40 000 102 000 $380 000

Additional information (a) The company’s constitution was silent as to return of capital in the event of a winding up. (b) The mortgage holder took possession of the land and buildings, sold them for $286 000, paid off the mortgage plus interest owing of $1600 and refunded the difference to the liquidator. (c) The liquidator was able to realise the following amounts for the assets: Plant and equipment Inventories Accounts receivable

$49 000 34 000 107 000 $190 000

25.56

Chapter 25: Insolvency and liquidation

(d) The ledger account Creditors and Accruals comprises: Workers compensation owing to employee Company income tax owing Annual leave owing to a director’s son Trade creditors

$ 10 000 20 000 4 000 16 000 $50 000

(e) Additional liabilities accepted by the liquidator and not yet recorded were as follows: Interest accrued on mortgage Salaries owing to two directors ($30 000 + $32 000) Retrenchment payments owing to four employees Wages owing to 14 employees

$

1 600 62 000 40 000 270 000 $373 600

(f) All calls in arrears were received by the liquidator, except from 4000 ‘A’ ordinary shares. These shares were forfeited. (g) Calls in advance were not paid back before the final distribution by the liquidator. Uncalled capital (where required to be called up) on final distribution proved to be recoverable. (h) Liquidation expenses amounted to $7600. Required A. Prepare the journal entry in Spider Ltd’s records to record the sale by the mortgage holder of the land and buildings, and the receipt of any net cash from the mortgage holder. B. Prepare the Liquidation ledger account. C. Prepare the liquidator’s statement of receipts and payments, showing clearly the order of priority of payment of liabilities. D. Show all workings for calculation of the final distribution of deficiency or surplus to shareholders.

A Journal entry for secured creditor: Cash Dr 244 400 Mortgage Payable Dr 40 000 Interest Payable** Dr 1 600 Accum Depn - Bldgs Dr 326 000 Buildings Cr 432 000 Land Cr 140 000 Liquidation Cr 40 000 ** Assumes interest recognised by liquidator. If not, then gain on liquidation is $38 400. B. Accounts receivable Inventories Plant & equipment

Goodwill Liquidation expenses Interest on mortgage Directors’ salaries Retrenchment Wages Accumulated losses

Liquidation 111 000 Allow for doubtful debts 39 200 Accum depn – plant & equip 210 000 Accum impairment losses - goodwill Gain - Sale land & buildings 44 000 General reserve 7 600 Cash: Sale of assets 1 600 Forfeited shares reserve 62 000 40 000 S/H distrib Preference 270 000 ‘A’ Ordinary 26 000 ‘B’ Ordinary

2 000 160 000 8 000 40 000 51 600 190 000 5 000 456 600 116 616 192 415 45 769

25.57

811 400

811 400

Entry to forfeit 4 000 shares Share Capital ‘A’ Ord Call Forfeited Shares Reserve

Dr Cr Cr

6 000 1 000 5 000

C.

Receipts Balance Cash from mortgage holder Sale of Assets Call on ‘A’ Ord Call on ‘B’ Ord

Liquidator’s Statement of Receipts and Payments Payments 1 800 Liquidation expenses 244 400 Salaries - directors. 190 000 5 000 600 441 800 36 616

Call on Preference

Wages – employees Worker’s compensation Annual leave Retrenchment Unsecured Loan Trade creditors Company tax Salaries directors Annual leave Refund: ‘A’ Ordinary ‘B’ Ordinary

478 416

7 600 4 000 270 000 10 000 1 500 40 000 12 000 16 000 20 000 58 000 2 500 441 600 7 585 29 231 478 416

D. Share of cash (after forfeiture of 4 000 ‘A’ ordinary shares). ‘A’ ordinary shares with calls in advance treated separately below No of Shares

Preference ‘A’ Ord ‘A’ Ord in adv. ‘B’ Ord

80 000 128 000 4 000 100 000

Paid to

Notional Call

$ 80 000 192 000 8 000 75 000

$ 80 000 64 000 25 000

Notional Refund 54.231c $ 43 384 69 416 2 169 54 231

Actual Deficiency Refund share (Call) $ $ (36 616) 116 616 5 416 186 584 2 169 5 831 29 231 45 769 25.58

Chapter 25: Insolvency and liquidation

312 000 Cash available* Deficiency Total notional cash

355 000 (200) 354 800

169 000 200 . 169 200

169 200

200

354 800

*Cash available = $441 800 - $441 600 = $200 Total notional cash per share = $169 200 ÷ 312 000 = 54.231c per share No. of ‘A’ Ordinary shares 136 000 - 4 000 (forfeited) - 4 000 (calls in advance) = 128 000

25.59