Running a business has a set of challenges and complications. Sometimes, these challenges get overwhelming, forcing companies to shut down a business. In this article, you will know when it’s time to shut shop
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.
Closing down a private limited company is a tedious, but necessary procedure. 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 bigger 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 Closing of a Company
When Shareholders Can Close a Company
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 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 Liquidation
- 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 winding up of the 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.
- Within 10 days of passing the resolution, the Registrar of Companies will need to be informed, 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 surplus would then be distributed among the members.
- Within 14 days from the passing of the resolution, notice of the resolution would need to be given in the Official Gazette and an advertisement in the district where the registered office is present.
- Within 30 days from the passing of the resolution, 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. An affidavit and indemnity need to be executed by all directors. 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 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.
Closure 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.
A major one 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 have been involved in any fraudulent transactions, 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.
Procedure for Liquidation 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 to it 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.
When the company is involved in some unlawful activities, then it is mandatorily closed.
When a company has to voluntarily close, they need to follow certain compulsory procedures before closing down the company. A defunct company can be closed which needs to submit the STK-2 form in advance. The company’s acts make it easier to wind up the company.
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