Closing a company can be a challenging decision driven by various factors such as financial difficulties, lack of business, or strategic changes. In India, the process of closure of company, also known as winding up, involves legal procedures to ensure that all assets are liquidated, liabilities settled, and the company’s legal existence terminated. This guide provides an overview of the types, processes, and legal requirements for closing a company in India.
Types of Company Closure
1.Voluntary Closure:
-Initiated by the company’s members or creditors.
-Common reasons include business not being viable, company not operating, or mutual decision by shareholders.
2.Compulsory Closure:
-Ordered by a tribunal or court.
-Reasons include insolvency, fraud, failure to file financial statements or annual returns for a certain period, or activities against public interest.
3.Fast Track Exit (FTE):
-For companies that have not commenced business or have been inactive.
-A simpler and quicker way to close the company, provided certain conditions are met.
4.Striking Off:
-A simplified process for companies with no assets or liabilities to close.
-Conducted under Section 248 of the Companies Act, 2013.
Steps for Voluntary Closure of a Company
1.Board Resolution: The process begins with a board meeting where the directors approve the proposal to close the company. A resolution must be passed to commence voluntary liquidation and appoint a liquidator.
2.Creditors’ Meeting: If the company has debts, a meeting with creditors is mandatory. Creditors need to approve the decision to wind up the company. The approval of creditors holding at least two-thirds of the total outstanding debt is required.
3.Declaration of Solvency: A declaration stating that the company is solvent and can pay its debts within three years is signed by most directors. This declaration must be filed with the Registrar of Companies (ROC).
4.Appointment of Liquidator: A liquidator is appointed to oversee the winding-up process. The liquidator’s role includes liquidating assets, paying off liabilities, and distributing any remaining assets to shareholders.
5.Liquidation Process: The liquidator takes control of the company’s assets, settles liabilities, and distributes the remaining funds among the shareholders according to their shareholding.
6.Filing of Winding Up Order: The liquidator files the order of winding up with the ROC, along with necessary reports and statements detailing the liquidation process.
7.Final General Meeting: A final meeting of shareholders is held to conclude the winding-up process. The liquidator presents the final accounts and the winding-up report.
8.Application to ROC: After the final meeting, an application is submitted to the ROC for the dissolution of the company. Once approved, the ROC strikes the company off the register, and the company ceases to exist.
Steps for Compulsory Closure of a Company
1.Petition Filing: A compulsory winding-up petition can be filed by creditors, the company, or the Company Registration. The petition is submitted to the National Company Law Tribunal (NCLT).
2.Tribunal’s Order: The NCLT evaluates the petition, considering factors such as the company’s financial status, reasons for closure, and adherence to statutory obligations. If satisfied, the NCLT orders the winding up of the company.
3.Appointment of Official Liquidator: The tribunal appoints an official liquidator to manage the winding-up process. The liquidator assumes control of the company’s assets, pays off debts, and distributes any remaining funds to shareholders.
4.Public Announcement: The liquidation order is publicly announced in official gazettes and newspapers to inform creditors and other stakeholders.
5.Settlement of Claims: The liquidator verifies and settles claims from creditors and other stakeholders. Assets are sold to pay off liabilities.
6.Final Report: Once all claims are settled, the liquidator submits a final report to the NCLT detailing the winding-up process, asset liquidation, and debt settlement.
7.Dissolution Order: Based on the liquidator’s final report, the NCLT issues an order dissolving the company. This order has been filed with the ROC, marking the official closure of the company.
Fast Track Exit (FTE) Mode
1.Eligibility: Companies that have not commenced business or are inactive and have no liabilities can opt for FTE. A company must have no assets or liabilities to qualify.
2.Application Process: The company files an application with the ROC using Form STK-2, along with required documents like board resolution, indemnity bond, and statement of accounts showing no assets or liabilities.
3.Public Notice: The ROC issues a public notice inviting objections from stakeholders. If no objections are received within 30 days, the company is struck off the register.
4.Final Notice: The ROC issues a final notice of striking off, and the company ceases to exist.
Striking Off by ROC
1.Initiation by ROC: The ROC can initiate striking off if the company has not commenced business within a year of incorporation or has not been carrying on any business for two consecutive financial years.
2.Notice to Company: The ROC sends a notice to the company and its directors, informing them of the intention to strike off the company.
3.Response from Company: The company can respond by providing valid reasons for its existence or applying for voluntary closure.
4.Striking Off: If the company fails to respond or does not provide a satisfactory response, the ROC strikes the company off the register.
Key Considerations for Closure
-Settlement of Liabilities: Ensure all debts and liabilities are settled before initiating the closure process.
-Legal Obligations: Comply with all legal requirements, including filing necessary documents with the ROC and paying outstanding fees or penalties.
-Clear Communication: Inform employees, creditors, and other stakeholders about the closure to manage expectations and legal responsibilities.
-Professional Guidance: Engage legal and financial professionals to complex winding-up procedures effectively.
Conclusion
Closing a company is a significant decision that involves a structured legal process to ensure all financial and legal obligations are met. Whether the closure is voluntary, compulsory, or through fast-track exit, the steps and requirements are crucial for a smooth and compliant wind-up. By following the correct procedures and seeking professional guidance, companies can close their operations while protecting the interests of stakeholders and ensuring compliance with Indian laws.
