Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Corporate and Economic Laws

Accounts, Audit, Dividend and Winding Up under the Companies Act for CA Final IBS

Updated 5 October 2026 · Fact-checked

This topic covers how a company prepares true and fair accounts, appoints and rotates auditors, pays dividend only from permitted sources, and closes down through winding up. To solve a case, identify the company type, apply the exact rule, check the time limits, and state a clear conclusion.

Understand Accounts, Audit, Dividend and Winding Up

A company must keep books, prepare financial statements that give a true and fair view, and follow the applicable accounting standards and Schedule III. The Board approves and signs them, attaches the Board's report, and places them before members at the annual general meeting (AGM). An independent auditor then reports to the members on them.

The auditor works for the members, not for the management. That is why the law controls how an auditor is appointed, how long the auditor can stay, and how the auditor can be removed or can leave. Rotation applies only to listed companies and to the prescribed classes of unlisted companies. An individual auditor can serve one term of five consecutive years. An audit firm can serve two such terms. After that there is a cooling-off period of five years.

Dividend is a distribution of profit to shareholders. The law protects creditors by allowing dividend only from permitted sources, mainly the current year's profit after depreciation, or accumulated profit of earlier years. Once declared, dividend must be paid within the time limit. Unclaimed amounts move to a special account and later to the Investor Education and Protection Fund.

Winding up is the process of ending a company's life. Assets are sold, creditors are paid, and any surplus goes to members. Insolvency-based winding up of companies, including inability to pay debts, is handled under the Insolvency and Bankruptcy Code, 2016 (IBC). Section 271 of the Companies Act, 2013 operates for the non-insolvency grounds for winding up by the Tribunal. Voluntary liquidation of a solvent company is also governed by the IBC. It needs a declaration of solvency that debts will be paid in full from the proceeds of assets sold in liquidation within 12 months. The members must pass a special resolution within four weeks of the declaration. Where the company has debts, creditors representing two-thirds in value must also approve. For a case question, first decide who starts the process and on what ground. Then decide who controls the process and who gets paid first.

In Paper 6, these rules come mixed with facts from tax, audit and reporting. Read the case for the company type, the dates and the amounts. Those three facts usually decide the answer.

Key rules to remember

True and fair view: Financial statements must give a true and fair view and comply with the notified accounting standards and Schedule III; Sets the standard for what the Board signs and what the auditor reports on.
First auditor: Board appoints within 30 days of registration; if the Board fails, members appoint at an EGM within 90 days; The first auditor holds office until the conclusion of the first AGM.
Subsequent auditor term: Appointed at an AGM for five consecutive years, up to the conclusion of the sixth AGM; Annual ratification is no longer required.
Mandatory rotation: Individual: maximum one term of 5 years. Firm: maximum two terms of 5 years each (10 years in all). Cooling-off: 5 years; Applies to listed companies and the prescribed unlisted classes: public companies with paid-up capital of ₹10 crore or more, private companies with paid-up capital of ₹50 crore or more, and companies with public-financial-institution, bank or public-deposit borrowings of ₹50 crore or more.
Casual vacancy of auditor: Vacancy for a reason other than resignation: the Board fills it within 30 days. Vacancy caused by resignation: the Board fills it within 30 days and the appointment must also be approved by members at a general meeting held within 3 months of the Board's recommendation; Members approve only where the vacancy is caused by resignation. The resigning auditor files a statement of reasons with the company and the Registrar within 30 days of resignation.
Removal of auditor: Special resolution of members, after previous approval of the Central Government, before the term ends; The auditor must be given a reasonable chance to be heard.
Ceiling on audits: A person can be auditor of at most 20 companies; The limit applies to each person. For a firm, it is applied to its partners individually, not to the firm as one unit. The count of 20 excludes one person companies, dormant companies, small companies and private companies with paid-up capital below ₹100 crore. Count every other company, including all public companies and private companies with paid-up capital of ₹100 crore or more.
Sources of dividend: Current year profit after depreciation, or accumulated profits of earlier years, or money provided by the Central or a State Government in pursuance of its guarantee of payment of dividend by the company; Dividend is paid only in cash, to the registered holder, by the prescribed modes. Issue of bonus shares is capitalisation of profits, not dividend. Dividend out of free reserves when profits are inadequate is covered in the next row.
Dividend out of free reserves when profits are inadequate: Rate ≤ average rate of the last 3 years; amount drawn from free reserves ≤ 10% × (paid-up capital + free reserves); free reserves left ≥ 15% of paid-up capital; Rule applies when the company has inadequate or no profit in the year. The 10% limit applies to the amount drawn from free reserves, not to the whole dividend if part is paid from current profit. Free reserves exclude revaluation reserves, so leave them out when you compute the limit. Check all three conditions.
Payment and unclaimed dividend: Pay within 30 days of declaration; unpaid or unclaimed sum goes to the Unpaid Dividend Account within 7 days after the 30 days expire; after 7 years from the date of transfer to the Unpaid Dividend Account, the amount is transferred to the IEPF; The 7 years run from the date of transfer to the Unpaid Dividend Account, not from declaration. Shares on which dividend is unclaimed for seven consecutive years are also transferred to the IEPF.
Interim dividend: Declared by the Board during the financial year, out of the permitted sources; Final dividend is declared by members at the AGM and cannot exceed the amount the Board recommended.
Winding up by Tribunal: grounds: All of these are grounds in s.271(1): inability to pay debts; special resolution of the company; acts against sovereignty, integrity or public order; fraudulent conduct of affairs; default in filing financial statements or annual returns for the five consecutive financial years immediately preceding; Tribunal's view that it is just and equitable; Learn these as a list. Answers are marked per ground. Insolvency-based winding up, including inability to pay debts, is dealt with under the IBC. Section 271 operates for the non-insolvency grounds. Read the case facts for which law applies.
Voluntary winding up: solvency: Directors' declaration of solvency: the company will pay its debts in full from the proceeds of assets sold in liquidation within a period not exceeding 12 months from the start of liquidation (IBC s.59). Then: special resolution of members within four weeks of the declaration, and approval of creditors representing two-thirds in value where the company has debts; The declaration is verified by an affidavit and supported by audited accounts and a valuation report. Voluntary liquidation is governed by the Insolvency and Bankruptcy Code, not by a separate Chapter of the Companies Act, 2013.

How to solve Accounts, Audit, Dividend and Winding Up questions

Use the same sequence for every case in this chapter. It keeps you from missing a fact and gives you the provision-facts-conclusion form that examiners reward.

1Identify the company type: listed, unlisted public or private; check paid-up capital and borrowings, because rotation and many limits depend on them.
2Identify which of the four areas the question tests: accounts, auditor appointment or removal, dividend, or winding up. Many cases test two.
3Write the rule in plain words with its exact condition, such as the term of five years or the 30-day limit.
4Pick the dates and amounts from the case and apply the rule to them. Do the arithmetic where needed and show it.
5Check each time limit and each approval needed, such as the Board, members, special resolution or Central Government.
6State the conclusion in one line. Say whether the act is valid, who must act, and what the company should do now.
7For MCQs, test each option against the condition in the rule. Do not choose an option just because it names the right section or body.

Quickest way: Four-fact scan for case questions

When to use it: Use this when you have about 8 to 10 minutes for a case and the question gives many facts.

Underline the company type and size, because this decides whether rotation or a reserve-drawing rule applies.
Underline every date, period and amount in the case.
Match each underlined fact to one rule from the key list and tick or cross it.
Write the answer as rule, fact, conclusion in three lines for each issue. Add the corrective step if the action was wrong.

Common mistakes in Accounts, Audit, Dividend and Winding Up

Applying rotation to every company
Students remember the five-year individual and ten-year (two terms) firm limits but forget they apply only to listed companies and the prescribed classes.
Fix: Check the company type and its paid-up capital or borrowings first. If it falls outside the classes, rotation does not apply by law, although the five-year appointment term still does.
Treating the five-year limit as the same for individuals and firms
The two limits sit close together and get blurred.
Fix: Write individual as one term and firm as two terms, each of five consecutive years, with a five-year cooling-off.
Saying the auditor can be removed by an ordinary resolution
Appointment is by ordinary resolution, so removal seems the same.
Fix: Removal before the term ends needs a special resolution and previous Central Government approval. Mention the auditor's right to be heard.
Paying dividend out of any reserve at any rate
Students forget the extra conditions that apply when profits are inadequate.
Fix: Test all three: rate not above the three-year average, amount drawn from free reserves not above 10% of paid-up capital plus free reserves, and at least 15% of paid-up capital left in free reserves. Do not count revaluation reserves as free reserves.
Confusing the 30-day payment limit with the 7-year transfer to IEPF
Both are time limits on dividend, and students merge them.
Fix: Payment is within 30 days of declaration. The unpaid amount goes to the Unpaid Dividend Account, and only after seven years from the date of that transfer does it go to the IEPF.
Mixing up the two modes of winding up
Students write general points that fit both modes.
Fix: For each mode state who starts it, the ground, and who controls the process. The Tribunal route needs a ground and a petition, and insolvency-based cases go through the IBC. The voluntary route needs a declaration of solvency under the IBC (debts payable in full within 12 months), a special resolution of members within four weeks of the declaration, and, where the company has debts, approval of creditors representing two-thirds in value.
Treating a casual vacancy as always needing member approval
Students remember the 3-month general meeting rule and apply it to every vacancy.
Fix: The Board alone fills a vacancy within 30 days. Member approval within 3 months is needed only where the vacancy is caused by resignation.

Worked examples

Example 1

Sharma & Co., a firm of chartered accountants, was appointed auditor of Deltek Ltd., a listed company, at its AGM in 2019 for one term. The firm has completed that term. The Board wants to reappoint the firm for a further five years and proposes that the firm continue after that as well. Advise on the position.

Show the solution

Rule: for a listed company, an audit firm may be appointed for at most two terms of five consecutive years each. After that there is a cooling-off of five years.
Facts: the firm has completed one term, so it has one term remaining.
Reappointment for a second term of five consecutive years is permitted, because the firm has served only one term so far.
Continuation after the second term is not allowed. The firm must wait for the five-year cooling-off to end before it can be appointed again.
The Board should plan the change of auditor before the end of the second term.

Answer: Reappointment for one more term of five years is valid. Appointment beyond that, without the five-year cooling-off, is not permitted.

Example 2

Granite Ltd. has paid-up capital of ₹20 crore and free reserves of ₹30 crore (excluding any revaluation reserve). The company made a loss this year. Dividend rates for the last three years were 8%, 9% and 10%. The Board proposes a dividend of 12% on paid-up capital, to be paid out of free reserves. Is this proposal valid? What is the highest rate allowed?

Show the solution

Rule: with inadequate or no profit, dividend can be paid from free reserves only if the rate is not above the average of the last 3 years, the amount drawn from free reserves is not above 10% of paid-up capital plus free reserves, and free reserves left are at least 15% of paid-up capital.
Average rate = (8 + 9 + 10) ÷ 3 = 9%. The proposed 12% is above this, so the proposal fails the rate test.
Amount for 12%: 12% × ₹20 crore = ₹2.4 crore. Because the company made a loss, the whole dividend is drawn from free reserves, so the amount drawn is ₹2.4 crore.
Amount limit: 10% × (₹20 crore + ₹30 crore) = 10% × ₹50 crore = ₹5 crore. The amount drawn of ₹2.4 crore is within it.
At 9%, the dividend is 9% × ₹20 crore = ₹1.8 crore, all drawn from free reserves. Free reserves left = ₹30 crore − ₹1.8 crore = ₹28.2 crore.
Reserve test: 15% × ₹20 crore = ₹3 crore. ₹28.2 crore is more than ₹3 crore, so this condition is met.

Answer: The proposal of 12% is not valid, as it exceeds the three-year average of 9%. The highest rate allowed is 9%, which costs ₹1.8 crore and passes the other two tests.

Exam tips

In the written answer, give provision, facts and conclusion in that order. Even a short answer scores better in this form.
Learn the numbers as a pair with the event they belong to, for example 30 days and Board appointment of the first auditor, 90 days and the EGM.
In MCQs, look for the company type in the case. A large number of options are built on rotation applying or not applying.
For winding up, prepare a short comparison of the two modes in four points: who starts, ground, control and role of the Tribunal.
In Paper 6, connect the law with another subject when the case does. For example, link a dividend question to the cash position or tax effect given in the facts.

Practice questions from Corporate and Economic Laws

Accounts, Audit, Dividend and Winding Up in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Accounts, Audit, Dividend and Winding Up: frequently asked questions

Does auditor rotation apply to all companies?

No. It applies to listed companies and to the prescribed classes of unlisted companies based on paid-up capital or borrowings. Check these facts in the case before you apply the five-year individual limit and the ten-year (two terms) firm limit.

How long is an auditor appointed for?

A subsequent auditor is appointed at an AGM for five consecutive years, up to the conclusion of the sixth AGM. Yearly ratification is no longer needed. The first auditor holds office until the first AGM.

Can a company pay dividend out of reserves?

Yes, but only when profits are inadequate or absent and the extra conditions are met. The rate must not exceed the three-year average, the amount drawn from free reserves must stay within 10% of paid-up capital plus free reserves, and free reserves must remain at least 15% of paid-up capital. Free reserves do not include revaluation reserves.

What is the difference between winding up by Tribunal and voluntary winding up?

Winding up by Tribunal starts with a petition and needs one of the grounds in s.271(1), and the Tribunal passes the order. Insolvency-based winding up, including inability to pay debts, is handled under the IBC, so s.271 operates for the non-insolvency grounds. Voluntary liquidation starts with a declaration of solvency that debts will be paid in full within 12 months, followed by a special resolution of members within four weeks and, where the company has debts, approval of creditors representing two-thirds in value. It is governed by the Insolvency and Bankruptcy Code. Read the case facts to see which law applies.

What happens to dividend that shareholders do not claim?

The company must pay dividend within 30 days of declaring it. Any unpaid amount goes to the Unpaid Dividend Account within 7 days after those 30 days expire. After 7 years from the date of that transfer, it is transferred to the Investor Education and Protection Fund.