Differentiate between striking off and liquidation procedures in India. Explore the legal mechanisms for winding up a company, including the implications for stakeholders such as creditors, shareholders, and directors.
What is Striking Off and Liquidation?
In the corporate world, businesses may reach a point where they need to cease operations. Two primary methods for formally dissolving a company in India are striking off and liquidation. Understanding the differences between these methods is crucial for directors, shareholders, and creditors.
Striking Off refers to the process where a defunct company’s name is removed from the official register of companies maintained by the Registrar of Companies (ROC). This process is typically initiated when a company is no longer operational or has not been carrying on any business activity for a certain period.
Liquidation, on the other hand, involves winding up a company’s operations and distributing its assets to satisfy its liabilities. This process can be voluntary or ordered by a court and is more comprehensive than striking off, involving the appointment of a liquidator to oversee the dissolution and settlement of the company’s affairs.
Key Differences Between Striking Off and Liquidation
Legal Process
Striking Off: The process of striking off a company is governed by Section 248 of the Companies Act, 2013. It can be initiated by the ROC or voluntarily by the company. For voluntary striking off, the company must apply to the ROC, demonstrating that it has no pending liabilities and has ceased operations for a prescribed period.
Liquidation: Liquidation, also known as winding up, is governed by the Insolvency and Bankruptcy Code, of 2016, and the Companies Act, of 2013. The process begins with the appointment of a liquidator, who manages the sale of the company’s assets and the payment of debts. Liquidation can be voluntary (initiated by the company’s members or creditors) or compulsory (ordered by a court or tribunal).
Purpose and Outcome
Striking Off: The primary purpose of striking off is to remove a non-operational company from the register, simplifying the process for companies that have no liabilities and do not need a comprehensive wind-up procedure. The outcome is a straightforward dissolution without extensive court involvement.
Liquidation: The purpose of liquidation is to settle all of the company’s liabilities through the sale of its assets. This ensures that creditors are paid to the extent possible before the company is dissolved. The outcome of liquidation is a thorough winding up of the company’s affairs, ensuring all debts are addressed and any remaining assets are distributed among shareholders.
Applicability to Different Entities
Striking Off: Striking off is typically applicable to private limited companies that have ceased operations and have no significant assets or liabilities. It is a more straightforward and less costly method suitable for companies that are dormant or defunct.
Liquidation: Liquidation applies to a broader range of entities, including private and public companies that have substantial assets, liabilities, or ongoing business operations that need to be formally closed down. It is necessary for companies facing insolvency or those requiring a structured approach to settle debts.
Impact on Creditors and Shareholders
Striking Off: In striking off, creditors may face challenges since the process primarily focuses on dissolving the company without a detailed assessment of liabilities. Creditors are expected to make claims before the company is struck off, but the process does not guarantee the settlement of debts.
Liquidation: Liquidation offers a structured process for creditors to file claims and receive payments from the sale of the company’s assets. The liquidator ensures that creditors are paid in a legally defined order of priority. Shareholders receive any remaining assets only after all liabilities are settled, providing a more transparent and fair approach for all parties involved.
Financial Implications
Striking Off: The cost of striking off a company is generally lower than liquidation since it involves fewer legal and administrative procedures. However, directors must ensure that all statutory dues and liabilities are settled before applying for striking off to avoid future legal complications.
Liquidation: Liquidation involves higher costs due to the appointment of a liquidator, legal fees, and administrative expenses related to asset sales and debt settlement. Despite the higher costs, liquidation ensures a thorough settlement of the company’s financial obligations.
Conclusion
Striking off and liquidation are two distinct processes for dissolving a company in India, each with its specific procedures, purposes, and implications. Striking off is a simpler, cost-effective method suitable for defunct companies with no significant liabilities. In contrast, liquidation is a comprehensive process designed to settle all financial obligations before dissolving the company, providing a clear framework for creditors and shareholders.
Understanding the differences between these methods is essential for directors and stakeholders to make informed decisions about the best course of action for closing a company. Legal and financial advice is often necessary to navigate the complexities of either process effectively.
FAQs on the Difference Between Striking Off and Liquidation in India
What is the primary purpose of striking off a company?
The primary purpose of striking off a company is to remove a defunct or non-operational company from the official register of companies. It is a simplified procedure intended for companies with no ongoing business activities or significant liabilities.
How does liquidation differ from striking off?
Liquidation involves winding up a company’s operations, selling its assets, and settling its liabilities before dissolution. It is a comprehensive process applicable to companies with significant financial obligations, whereas striking off is a simpler process suitable for defunct companies with no liabilities.
Are directors personally liable during striking off?
Directors are not generally personally liable during the striking off process, provided they have settled all statutory dues and liabilities. However, if any undisclosed liabilities emerge after the company is struck off, directors may face legal consequences.
What are the financial implications of striking off a company?
Striking off a company involves lower costs compared to liquidation, as it requires fewer legal and administrative procedures. Directors must ensure all liabilities are settled before applying to avoid future legal issues.
Are there tax implications for striking off a company?
Yes, before a company can be struck off, it must clear all outstanding tax liabilities. Failure to do so can lead to penalties and legal action against the directors.
Is professional assistance necessary for the striking off process?
While it is not mandatory to hire professional assistance for striking off, it is highly recommended to consult with legal and financial experts from Vakilsearch to ensure all statutory requirements are met and the process is carried out correctly.
