Introduction
The process of winding up a company, regardless of its business inefficiency, insolvency, or strategic decision-making, comes with a number of legal and procedural steps that need to be considered in ensuring that the company complies with the law and does not create any future liabilities. In India, two main methods of dissolving or closing companies are applicable to a company that is registered in India:
- Striking Off (inactive companies made easier)
- Winding Up (more formal and is usually applied to solvent or insolvent companies)
This guide will take you through the two ways of closing a company in an effective manner, paying attention to the legal framework, the procedural requirements as well as the critical steps.
Closing a Company in India: Key Considerations
It is worth noting before jumping in the procedures of striking off or winding up a firm, the circumstances that can be used to close a firm:
- Inactivity: The business is out of activity or is long term out of business.
- Financial Distress: The company cannot settle its debts or it is experiencing insolvency.
- Strategic Decision: The stakeholders or management of the company might choose to liquidate the company due to a number of reasons which include restructuring or mergers.
Closing a Company via Striking Off
Striking Off a Company: Overview
The process of striking off is generally used for companies that have not conducted business for a certain period. This is a relatively simple and cost-effective method to dissolve a company and is typically available to inactive companies that have no liabilities or outstanding dues.
Legal Framework
The striking-off process is governed under Section 248 of the Companies Act, 2013, which grants the Ministry of Corporate Affairs (MCA) the power to remove a company from the Register of Companies.
MCA (Ministry of Corporate Affairs), through its Registrar of Companies (ROC), administers the process.
Eligibility for Striking Off
- It has not conducted any business for a period of two years or more.
- It has no outstanding liabilities, debts, or dues.
- The company has not filed any returns with the Registrar for a period of two consecutive financial years.
Procedure for Striking Off
Hold a Board Meeting:
- The directors must hold a board meeting to discuss and approve the proposal for striking off. They must pass a board resolution.
- The board should confirm that the company is not carrying on business or operations and has no outstanding liabilities.
Clearance of Outstanding Liabilities:
- Ensure all liabilities, including statutory dues, taxes, loans, and other financial obligations, are cleared.
- Settle all pending accounts or get confirmations from creditors that the liabilities have been settled.
File an Application with the Registrar of Companies (ROC):
- A company may file an Application for Striking Off with the ROC under Form STK-2.
- The application must be signed by a director of the company.
- It should also include:
- A statement of accounts showing that the company has no liabilities.
- A board resolution passed for striking off.
- A copy of the newspaper publication regarding the proposed closure (to ensure public notice).
Submit an Indemnity Bond:
- An indemnity bond may need to be signed by all the directors, stating that the company has no debts or liabilities.
Obtain No Objection from Tax Authorities:
- The company must ensure that it has filed all its tax returns and cleared all taxes, including Goods and Services Tax (GST), Income Tax, etc.
- A No Objection Certificate (NOC) may be required from the Income Tax Department.
ROC Notification:
- Upon reviewing the application, if the Registrar of Companies is satisfied with the documents, they will publish a notice in the Official Gazette.
- The ROC will then send a confirmation to the company, after which the company will be struck off from the register.
Completion:
- Once the striking off process is complete, the company is officially dissolved. The company ceases to exist, and the ROC will remove the company from the records.
Timeline for Striking Off
The entire process typically takes about 3 to 6 months, depending on the nature of the company’s records, the time taken for the application review, and other factors like pending tax clearance.
Closing a Company via Winding Up
Winding Up: Overview
The winding-up process is a more formal process which entails the process of liquidating the assets of the company to settle the debts of the company before it is dissolved. Winding up is of two kinds, namely:
- Voluntary Winding Up: This is where the company members voluntarily choose to wind up the company.
- Compulsory Winding Up: This is where the court directs that the company be dissolved normally as a result of insolvency or default on the part of the company in fulfilling its legal requirements.
Legal Framework for Winding Up
Winding up is under the Companies Act, 2013, that is, under the Sections 270 to 365.
Procedure for Voluntary Winding Up
Hold a Board Meeting:
- Directors are expected to conduct a meeting in which they propose voluntary winding up and a resolution in favor of the same.
- This meeting should also agree on the appointment of a liquidator who will see to it that the assets of the company are liquidated and the proceeds distributed to creditors.
Hold a General Meeting:
- To initiate the winding-up process a Special Resolution should be passed by the company by a General Meeting.
- This has to be resolved by at least three-fourths of the members present during the meeting.
Appoint a Liquidator:
- The liquidator should be appointed by the members of the company to facilitate the process of winding up, and to include the sale of assets as well as the clearance of debts.
- The liquidator has the responsibility of preparing a report on the assets, liabilities and proceedings of the company.
File with the ROC:
- Once the resolution is passed, the company should provide the special resolution to the Registrar of Companies together with a copy of the appointment of the liquidator and a declaration of solvency (in case the company is not in insolvency).
Settlement of Liabilities:
- Liquidators should ensure that the debts and liabilities of the company are paid off, such as the creditors, employees and other stakeholders.
- The shareholders are then given the remaining of funds after clearing liabilities.
File Final Accounts:
- The liquidator will write a final account and send it to the ROC, after making certain that all the company debts are settled.
ROC Approval:
- At the end of all the steps, the firm submits the final dissolution application to the ROC, and the firm is struck off the register.
Completion:
- The process of winding up is approved by the ROC and the company is officially dissolved.
Timeline for Winding Up
The winding-up process may take a few months to several years, depending on the complexity of the assets and liabilities of the company and the nature of liquidation.
Key Differences Between Striking Off and Winding Up
| Aspect | Striking Off | Winding Up |
|---|---|---|
| Nature of Process | Simplified, for inactive companies. | Formal liquidation of assets, usually for solvent or insolvent companies. |
| Eligibility | For companies that have ceased business and have no liabilities. | For companies with outstanding liabilities or solvency issues. |
| Procedure | Filing with ROC, no creditors involved. | Appointment of a liquidator, settlement of creditors’ claims, filing of final accounts. |
| Time Taken | 3 to 6 months. | Can take 1 to 2 years or more, depending on complexity. |
| Cost | Relatively low cost. | Higher cost due to the involvement of a liquidator and settlement of liabilities. |
Common Mistakes to Avoid When Closing a Company
- Not Settling Liabilities: Directors may face legal action because of failure to pay off all the debts before striking off or winding up.
- Improper Documentation: Not all and/or misplaced documentation in the filing process may slow down dissolution or even lead to the rejection of the application.
- Ignoring Tax Compliance: Failure to acquire a No Objection Certificate by the tax authorities may result in problems in winding up or striking off the process.
- Not Informing Creditors: Creditors should be informed in instances of a winding up and their claims settled before the close.
Conclusion
Shutting down or dissolving a company in India is a procedural legal process, be it striking off dormant companies or winding up of companies incurring liabilities. Through the right legal protocols, clearing of all debts, and submission of relevant paperwork with the ROC, dissolution of a company can be easily done without any upcoming liabilities. Legal and financial professionals are always good to consult with, as there are always lots of details surrounding the closure of a company, and the company is in full compliance with the Indian laws.
