Closing down a private limited company is a tedious but necessary procedure. There are several ways to wind up a private limited company in India such as selling the company, mandatory closing up, closing the company voluntarily, and closing the defunct company. Without doing so, you would need to annually meet the requirements of the Registrar of Companies (which means spending money on audits and compliances).
The more significant reason you would want to do this, of course, is because it releases the assets and investments made by you. The procedure for liquidation of a company can be initiated voluntarily by the shareholders or forced by a tribunal or a court.
We will first discuss the voluntary closing up of a company and, later, forced closure.
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Voluntary Closure of a Business
When a Company Can Be Closed by Shareholders?
To begin the procedure for closing up a company, the shareholders must:
- Pass a special resolution in a board meeting
- In a general meeting, pass a resolution requiring that a company be wound up on account of the expiry of a duration specified in the Articles of Association (AoA) or the meeting of a condition specified in the AoA requiring it to be wound up.
Procedure for Insolvency
- The majority of directors (or both, in case there are only two directors) should convene a board meeting at which the directors should declare that the company has no debts or that its debts can be repaid from the proceeds of the Insolvency of a Private Limited Company. Finally, a date, time, and agenda should be fixed for a general board meeting five weeks from the board meeting, and issue notice for this meeting, giving suitable explanations
- On the day of the general board meeting, pass an ordinary resolution with the ordinary majority or a special resolution with a 3/4th majority. Immediately, the directors must meet with the creditors of the company. If 2/3rds, in value terms, of creditors, agree to the closing up of the company, it may be wound up voluntarily. If not, a tribunal will have to wind up the company after company incorporation has been done!
- Within 10 days of passing the resolution, the registrar of companies should know to appoint a liquidator. The powers of the directors would devolve upon this person and he would be primarily responsible for accumulating all the assets of the company and paying off its debts. The members would get the extra surplus
- Within 14 days of the passing of the resolution, the official gazette will get a resolution and an advertisement in the district where the registered office is present
- Within 30 days of the resolution’s passing, a statement of accounts has to be prepared, stating that there are no assets and liabilities except share capital and profit and loss debit balance. All the directors need to execute an affidavit and indemnity. If there is an unsecured loan, a waiver letter should be submitted
- Call for the general board meeting, at which a special resolution will be passed for the disposal of accounts
- Within two weeks, file the accounts and special resolution with the Registrar. If the Registrar is satisfied, it will pass an order stating that the company is wound up within 60 days.
Insolvency of a Private Limited Company by a Tribunal
The Companies Act, 2013 contains several new rules for the closure of a company, updating those contained in the Companies Act, 1956. One of the significant rule is that the Act specifies that a company can be wound up by a tribunal for any one or more of the following reasons:
- If the company is unable to repay its debts/loans.
- If the set-up (company) has a resolution put up that it can be dissolved or wound up through a tribunal under certain conditions
- Additionally, if the company has not filed returns or submitted financial statements for five consecutive years
- If the company has acted against the integrity and sovereignty of the country and has interfered with the relationship between neighboring or foreign countries and India
- If the tribunal has decided (by means of any finds or by Chapter XIX) that it is only correct to liquidate the operations of the company
- Further, if the company or its members after making private limited company registration have been involved in any fraudulent transactions and if it has been getting financial gain through illegal transactions or the company has been earning profits through fraudulent means
- In any of the above cases, a tribunal is formed, and a resolution is taken to wind up the operations of the company under study. Such tribunal decisions are deemed final, and after hearing the order, Form 11 is issued for winding up.
Documentation Required for Insolvency of a Private Limited Company
- Obtain consent from all creditors of the company
- Prepare and notarise an indemnity bond signed by the company’s directors
- A certified report of all assets and liabilities of the Company, verified by a Chartered Accountant
- Affidavit from the company’s directors
- Secure a duly signed, certified true copy (CTC) of the special resolution, signed by the directors of the company
- Ensure that all directors of the company possess digital signature
- Provide copies of PAN and Aadhar Cards for all director
- Collect consent letters from all directors
- A statement related to pending litigation of the Company
- Obtain a No Objection Certificate (NOC) from the Income Tax Department
Insolvency of a Private Limited Company by Court or Tribunal
- The court or tribunal will set the procedure rolling by sending a notice to an official liquidator. This person will be in charge of the company and carry out the process of liquidation of the company
- The court will also prepare the winding-up order, which shall be served on all creditors and contributors, asking them to step forward. The order is to be served even upon those who’ve filed the petition for liquidation
- The liquidator, appointed by the central government, shall examine the books of the company, the cash in hand, bank balance, liabilities, creditors, loans, etc
- The official liquidator must, in the next six months, furnish to the court a preliminary report on the accounts, liabilities, debtors, and cash and negotiable securities available. The liquidator will also state if an inquiry into the company is required
- If no inquiry is made, the liquidator must see that the available money is fairly divided between all creditors until exhausted. The liquidator will present to the court a complete account of how the money, assets, and operations were divided
- After inspection of the account, the court pronounces the dissolution of the company.
Selling the company is the same as voluntarily closing the company, but the stakes are shifted to another individual. The company is mandatorily closed when it is involved in some unlawful activities.
Voluntary winding up of company , they need to follow specific compulsory procedures before closing down the company. A defunct company can be closed and must submit the STK-2 form in advance. The company’s acts make it easier to wind up the company.
Frequently Asked Questions
What happens if a Private Limited company goes into insolvency?
When a company enters Insolvency, it typically halts trading immediately upon or shortly after the liquidator's appointment. The liquidator's goal is to secure the best outcome for the company's creditors, which may not necessarily involve retaining employees in their current positions.
How do you calculate insolvency of a private limited company?
If your total liabilities are greater than your total assets, the IRS will deem you insolvent. Put simply, insolvency occurs when liabilities exceed assets. You can determine if you're insolvent by comparing the disparity between your total assets and liabilities when your debt was forgiven.
What is an example of a private limited company insolvency?
Insolvency occurs when a debtor is unable to fulfill their financial obligations, such as paying debts. For example, a struggling company might reach insolvency if it can't repay creditors on schedule, often resulting in bankruptcy proceedings.
Who pays for insolvency?
In cases of insolvent liquidation, the liquidation costs are covered through the sale of the company's assets. An insolvency practitioner (IP) oversees this procedure, transforming assets into funds. These funds are initially allocated to settle the liquidation expenses, such as the IP's fees and other related costs.
Why do companies go into insolvency?
Companies may face insolvency due to mismanagement, excessive debt, economic downturns, or market competition. Poor financial planning, cash flow problems, and declining revenues can lead to inability to meet financial obligations. Legal issues, such as lawsuits or regulatory penalties, can also contribute to insolvency, forcing companies into bankruptcy.
What are the conditions for insolvency?
Insolvency occurs when an individual or company faces financial distress and is incapable of settling their debts. It manifests when liabilities surpass the company's value or when a debtor cannot meet their owed obligations.
How much does it cost to dissolve a private limited company?
The cost to dissolve a private limited company varies depending on factors like outstanding debts, assets, and legal requirements. Typically, expenses include fees for filing dissolution paperwork, settling outstanding debts, notifying creditors, and professional assistance if needed. Overall, it can range from a few hundred to several thousand dollars, depending on the complexity of the process.