Question

Question 6

A shareholder of a company in liquidation was told ‘Creditors are to be paid in full but there is insufficient funds to pay out all contributories.’. The shareholder is unsure of what this means and asks your advice.

Required

Explain to the shareholder the meaning of the above statement. Your explanation will include a discussion of the principles to be followed in apportioning a deficiency among contributories.

Answer 1

The term contributories is a legal term used to refer to the persons who have contributed the capital of the entity under insolvency.

As per the general principles of corporate law, in case of liquidation, the secured creditors are paid off first, followed by the unsecured creditors. If after paying off all the creditors, any residual or excess assets remain with the company, the same are applied towards the payment of preferential contributories (Preferred Stockholders) and lastly if still any excess assets remain, the same is distributed to the contributories (Equity Stockholders) in the ratio of their shareholding. Any loss due to fall in value of the assets or loss on realisation of the assets if fully borne by the contributories.