At the time of liquidation, a company has following liabilities.

1. Creditors Rs. 10,000

2. Legal Expenses Rs. 3,000

3. Liquidation Expenses Rs. 580

4. Preference share capital Rs. 14,400

What will be the order of payment while preparing the Liquidator's Final Statement of Account? 

The correct answer is - 2, 3, 1 and 4

Key Points

• Order of payment
  • The payment order in a liquidation process is crucial for ensuring that all liabilities are settled appropriately according to their priority.
  • The correct order as per the given options is: 2, 3, 1 and 4.
• Legal Expenses
  • Legal expenses (Rs. 3,000) are generally settled first as they are necessary for the liquidation process.
• Liquidation Expenses
  • Liquidation expenses (Rs. 580) are settled next because they are directly related to the cost of winding up the company.
• Creditors
  • Creditors (Rs. 10,000) are paid after legal and liquidation expenses, as they hold a preferential claim over other liabilities except secured creditors.
• Preference Share Capital
  • Preference share capital (Rs. 14,400) is paid last as they are the equity holders and are only entitled to payment after all liabilities are settled.

Additional Information

• Insolvency and Bankruptcy Code
  • The order of payment is guided by the Insolvency and Bankruptcy Code (IBC) in India, which outlines the priority for settling claims during liquidation.
• Secured Creditors
  • Secured creditors are usually given higher priority and are paid before unsecured creditors and preference shareholders.
• Unsecured Creditors
  • Unsecured creditors are paid after secured creditors but before preference shareholders.
• Equity Shareholders
  • Equity shareholders are paid last, only if any assets remain after settling all other liabilities.