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.
Striking Off and Liquidation in India
Companies occasionally need to end their operations. There are two methods for formally dissolving a company striking off and liquidation in India. It’s important for directors, shareholders, and creditors to grasp the distinctions between these approaches.
What is Striking Off?
Striking off is the procedure where a defunct company is removed from the official register of companies maintained by the Registrar of Companies (ROC). This action is typically taken when a company has ceased operations or hasn’t engaged in any business activities for a specified duration.
What is Liquidation?
Liquidation, in contrast, involves the comprehensive winding up of a company’s affairs, including the sale of its assets to pay off liabilities. This process can be initiated voluntarily or mandated by a court and is overseen by a liquidator who manages the entire dissolution process.
Differences Between Striking Off and Liquidation
1. Legal Process
- Striking Off: Governed by Section 248 of the Companies Act, 2013, striking off can be initiated either by the ROC or voluntarily by the company. For voluntary striking off, the company must prove to the ROC that it has no outstanding liabilities and has ceased operations for a prescribed period.
- Liquidation: Governed by the Insolvency and Bankruptcy Code, 2016, and the Companies Act, 2013, liquidation starts with appointing a liquidator who handles asset sales and debt settlements. It can be voluntary (by the company’s members or creditors) or compulsory (ordered by a court).
2. Purpose and Outcome
- Striking Off: The main objective is to eliminate a non-operational company from the register, simplifying the process for those with no liabilities. The outcome is a straightforward dissolution without extensive court involvement.
- Liquidation: The goal is to address all of the company’s debts through asset sales, ensuring creditors are paid as much as possible before the company is dissolved. This results in a thorough winding up of the company’s affairs.
3. Applicability to Different Entities
- Striking Off: Typically relevant for private limited companies that have ceased operations and lack significant assets or liabilities. This method is simpler and less costly, ideal for dormant or defunct entities.
- Liquidation: Applies to a wider range of entities, including private and public companies with substantial assets or ongoing operations. It is necessary for companies facing insolvency or requiring a structured method to resolve debts.
4. Impact on Creditors and Shareholders
- Striking Off: Creditors may face challenges since the focus is primarily on dissolving the company without thoroughly assessing liabilities. Creditors are expected to submit claims before the company is struck off, but this does not guarantee debt settlement.
- Liquidation: Offers a structured approach for creditors to file claims and receive payments from asset sales. The liquidator ensures creditors are paid in a defined order of priority. Shareholders receive remaining assets only after all debts are addressed.
5. Financial Implications
- Striking Off: Generally incurs lower costs than liquidation due to fewer legal and administrative procedures. However, directors must resolve all statutory dues before applying to avoid future legal complications.
- Liquidation: Typically involves higher costs due to the liquidator’s appointment and associated legal and administrative expenses. Despite the higher costs, it ensures comprehensive settlement of financial obligations.
Conclusion
Striking off and liquidation represent two distinct methods for dissolving a company in India, each with specific procedures and implications. Striking off is simpler and more cost-effective for defunct companies with no significant liabilities, while liquidation is a more comprehensive process for addressing all financial obligations before dissolution.
It is essential for directors and stakeholders to understand these differences to make informed decisions when closing a company. Seeking legal and financial advice can be invaluable in navigating the complexities of either process.
FAQs
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.
