Question

Plato Pty Ltd was a successful family business that gained its shareholders’ approval to sell its operations to Socrates Ltd three months ago. In accordance with the business combination agreement, Plato Ltd transferred all of its identifiable net assets to Socrates Ltd. In return, Socrates Ltd made a $10,000,000 cash payment to Plato Pty Ltd. Plato Pty Ltd then initiated a voluntary liquidation to preserve the goodwill acquired by Socrates Ltd and to distribute the realised value of its identifiable net assets and its goodwill to its members. The purchase consideration paid by Socrates Ltd was more than sufficient to cover Plato Pty Ltd’s outstanding debts. The latter company’s directors made a declaration of solvency to their creditors. Plato Pty Ltd’s liquidation has proceeded under the control of its members.

Plato Pty Ltd’s liquidator has now paid all of all the costs of its liquidation and all of its creditors. She has $8,000,000 on hand to distribute to Plato Pty Ltd’s contributories. Details of Plato Pty Ltd’s paid-up capital are as follows:

Preference shares: 750,000 shares issued for $1, fully paid $ 750,000

Ordinary shares: 500,000 shares issued for $2, paid to $1.70 850,000

A Ordinary shares: 1,000,000 shares issued for $5, paid to $1.25 1,250,000

B Ordinary shares: 500,000 shares issued for $10, paid to $2.50   1,250,000

Additional information

(a) Plato Pty Ltd’s constitution provides for the following:

(i) Preference shareholders receive preferential treatment as to dividends and the return of paid-up capital. The constitution does not offer preference shareholders any other privileges

(ii) Ordinary shareholders, A Ordinary shareholders and B Ordinary shareholders rank equally (after preference shareholders) regarding the return of capital based on the number of shares held.

(b) Arrears of preference dividends equal $75,000.

(c) Any calls necessary to adjust the rights of contributories are recoverable.

Required

How much of the $8,000,000 available will each class of shareholders receive? Show clearly any workings in relation to the final distribution to shareholders

Answer 1

Answer:

1.Plato pty ltd has sold all its operations to socrates ltd and received a consideration of $ 10,000,000

2. Plato pty ltd started the process of liquidation and the order of priority of payment is as follows:

Priority	Description
1	Creditors and liqidation costs
2	Preferential shareholders
Remaining	Ordinary shareholders

3. It is given that Liquidator of Plato pty ltd is left with $8,000,000 after payment of creditors and cost of liquidation, This is to be distributed among preference shareholders and ordinary shareholders in the order of priority as mentioned above.

4. Amount received by Preference shareholders.

Amount to preference shareholders	Amount
Paid-in capital	$                                          750,000
Arrears in dividend	$                                            75,000
Total	$                                          825,000

5. After the payment of preference shareholders the liquidator of Plato pty ltd is left with $ 7,175,000 ( $8,000,000- $ 825,000) this is to be distributed among ordinary shareholders.

6. The ratio of ordinary shareholders is as per no of shares held 1/4 , 1/2 , 1/4 i.e; 1:2:1

Calculation:

	Ordinary shareholders	A Ordinary shareholders	B Ordinary Shareholders
Ratio	0.25	0.5	0.25
Calculation	500000/2000000	1000000/2000000	500000/2000000

Therefore the ordinary shareholders share of remaining amount is

Ordinary shareholders	1/4
A Ordinary shareholders	1/2
B Ordinary shareholders	1/4

7. The amount received by ordinary shareholders

	Ratio	Distribution	Calculation
Ordinary shareholders	1/4	$                            1,793,750	7175000*1/4
A Ordinary shareholders	1/2	$                            3,587,500	7175000*1/2
B Ordinary shareholders	1/4	$                            1,793,750	7175000*1/4
Total		$                            7,175,000