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All About Closure of Companies

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Last Updated on February 28, 2024 by Kanakkupillai

Running a firm has its difficulties. A business could need to close its doors occasionally if things don’t work out and pack up things to save themselves and the shareholders. There are several reasons to shut down or wind up the business. Here are the possible closure of a private limited company in four ways. Now that your company’s name has been removed from MCA records, you may quickly close the business. You’ll finish this quickly with the aid of our specialists. If so, then this applies if your company hasn’t started doing business within a year of incorporation or it hasn’t run any operations over the previous two fiscal years.

How Can a Pvt Ltd Company Be Closed?

There are four common methods for dissolving a private Limited corporation. In this article, we’ll go over the four major options the companies and management take up, such as permanently closing your business. Therefore, we discuss the following subject and the manners utilized in this article:

  • Sell the business

A Private Limited Company being sold off is a form of voluntary winding. Selling shares is one way to sell the business, which means selling the company’s majority shareholding. Although the interests are transferred to another person or corporation and the majority shareholders are released from their obligations, technically speaking, it is not a true winding up.

  • Mandatory Closing

Any company registered in India under the Companies Act 2013 and its law that committed an illegal act, committed fraud, or even just participated in some illegal or fraudulent operations would be forced to be wound up by the Tribunal. The steps are described below:

  • The filing of a petition
  • The following individuals will submit the petition:
  • The Corporation or
  • The company’s trade creditors, alternatively
  • Every Contributor to the Company or
  • One, two, or all three of the categories as mentioned earlier, or
  • The Central Government, the State Government, or
  • Through the Registrar of Companies

The petition must be presented in three copies and on Form WIN 1 or WIN 2. A Form WIN 3 affidavit must be submitted with the petition.

At least 14 days of advertising

The petition should be advertised in a daily journal for at least 14 days, and the regional language (the region’s language) and English should be used in the advertisement. The advertisement needs to be submitted using Form 6.

Actions taken by the Tribunal

On the scheduled hearing date, the Tribunal will hear the petition and receive any objections or responses from the petitioner and respondent. The Tribunal has the authority to name a temporary liquidator. The Form WIN 8 shall be used to appoint the interim liquidator. Orders for winding up must be submitted using Form WIN 11. The following is the prescribed winding-up order:

  • The obligations of such individuals include:

Provide the date, time, and location of the Company Liquidator’s appointment and surrender the assets and the related paperwork to the Company Liquidator. The Company Liquidator shall assume custody of all assets, effects, actionable claims, books, and papers of the Company upon the issuance of a winding-up order. After the winding-up order is issued, the Company liquidator has 60 days to report to the Tribunal. The Company Liquidator must apply to the Tribunal for the company’s dissolution after all business affairs have been fully concluded. Make an order that the company be dissolved as of the date of the order if the tribunal determines that it is just and reasonable to do so, given the facts of the case. Accordingly, the company shall be disbanded.

A copy of the order must be forwarded to the registrar by the Company liquidator within 30 days of the order’s date.

The tribunal would issue the order for dissolving the firm within 60 days of receiving the application if it determines the accounts to be in order and all necessary compliance has been met. Following the tribunal’s decision, the registrar will notify the Official Gazette that the company has been dissolved.

  • Active Winding Down

The voluntary dissolution of a firm involves a lengthy compliance process. To close a business voluntarily, there are a few necessary steps that must be taken. The following circumstances qualify as voluntary dissolutions of corporations:

– The company adopts a resolution at its general meeting upon reaching the end of the period for which it was formed or upon the occurrence of any circumstance under which the articles call for the dissolution of the company or

– A special resolution authorising the company’s voluntary winding up is approved by at least 3/4 of the shareholders.

As mentioned earlier, the day on which the resolutions were passed marks the start of the voluntary winding-up. In the same meeting, the firm should also elect a liquidator. Additionally, most of the company’s creditors (measured by value) must approve the nomination.

Procedure: –

In the aforementioned general meeting, the company adopts a resolution. However, to wind up, the majority of the directors must agree.

The corporation must be wound up with the approval of the Trade Creditors as well. Trade creditors must certify that they will have no obligations should the company be dissolved.

The Company must issue a Solvency Declaration, which the Company’s trade creditors must approve. In the Declaration of Solvency, the Company must demonstrate its reliability.

The liquidator who has been appointed will oversee the winding-up procedures and compile a report on the assets, properties, obligations, and other matters.

The report will be presented to the company’s annual general meeting for approval and adoption of a resolution to dissolve the business. A copy of the firm’s final accounts and resolutions must be sent to the ROC by the company liquidator.

The Corporate Liquidator must also request a company dissolution order from the Tribunal. Within 60 days of the application, the Tribunal must issue an order of dissolution if it is satisfied with the winding up. The final order must be filed with the ROC in duplicate.

All of the steps mentioned earlier must be submitted and filed using the designated form, and even after a company is wound up, it is forbidden for two years for any other applicant to use the company name.

The Companies (Winding-up) Rules, 2020, provide the structure for various forms and the specific winding-up method.

  • Company in Dissolution: Winding Up

According to the Companies Act of 2013, a Defunct Corporation is a company that has become Dormant. Because dormant corporations don’t conduct financial activities, the government offers certain assistance to such deceased or dormant businesses.

The process for winding up a defunct company was outlined in the Companies Act of 2013. A fast-track method that necessitates the submission of the STK-2 form can be used to wind up a defunct or dormant company. There is no additional procedure for winding up a Defunct Company; Form STK-2 is necessary. The STK-2 form must be submitted to the Registrar of Companies filled out and officially signed by the firm’s director designated by its board of directors.

For this plan, a corporation is deemed to be defunct if it has:

  • neither a liability nor an asset, and
  • which has not started conducting business after being incorporated or
  • has not conducted any business activity in the past year before submitting an FTE application (Fast Track Exit Scheme).

Granting of the “Dormant” Status

This choice is appropriate if you registered a company for a future project and the company is not already in operation. Choosing the “dormant status” is also smart when an inactive firm cannot be closed because it may be holding assets like land, buildings, etc.

Let’s first define what a dormant corporation is.

  • A dormant firm is inactive, that is, one that possesses the following traits:
  • It has not been running any operations or businesses.
  • The previous two fiscal years had no substantial accounting transactions from it.
  • It has not submitted financial reports and yearly returns for the past two fiscal years.
  • A company in default that hasn’t submitted annual reports and financial statements in at least two years.

How to achieve a company’s dormant status:

To get the “Dormant” status, a form MSC-1 application must be submitted.

The directors should be given special permission to apply for dormant status by passing a special resolution. Therefore, we must submit E-form MGT-14 to the ROC to file a special resolution.

After considering the application submitted in Form MSC-1, the Registrar shall issue a certificate in Form MSC-2 approving the status of a Dormant Company.

Benefits of requesting “Dormant Status”

A defunct business faces less compliance burden, bringing down maintenance costs.

The following requirements are not required of “Dormant Companies”:

  • For their financial statements to have cash flow statements.
  • Reduced adherence to the quarterly board meeting requirement. Only two board meetings a year are necessary for these businesses.
  • These businesses do not demand that the auditors rotate.
  • Compliances that a dormant company must meet:
  • Each year, it must submit a “Return of Dormant Company” in Form MSC-3 together with the yearly fee specified in the Companies (Registration Offices and Fees) Rules, 2014, within thirty days from the closing of the financial year. This financial situation must be audited by a chartered accountant in practice.

Also, note that a firm can only go dormant for a maximum of five consecutive financial years.

If a company is inactive for more than 5 years, the Registrar starts removing the company from the Records or striking out the name of the company.

Concluding Note

Business entrepreneurs frequently have to make difficult choices. Closing down their entity and business can be among the most difficult. To assess the viability of their operations, business owners frequently analyse their organisation. During this process of review, accounting data is of utmost importance.

Accounting can be understood as a tool utilized by business and their owners or management to gauge the financial success of their enterprise and ascertain its long-term survival. Closure of an entity could occur for several definite and particular reasons. Each factor may diversely wedge the company’s operations.

Economic Conditions

A common justification for business closures is the economy. Corporation operations are immediately impacted by low national economic growth, which is frequently caused by a recession or depression. Poor economic conditions can cause more severe downturns in some company sectors. Businesses in the luxury or durable goods sectors may experience challenging circumstances and economic downturns. Items that survive longer than three years are referred to as durable products. These things typically demand significant cash outlays from corporations and people. The most popular durable products include tools, buildings, cars, and homes. Luxury goods are expensive objects that are unnecessary to maintain a living standard.

Lower profits

A common justification for business closure is an inability to make enough money. Entrepreneurs must pay for inventory, manufacturing overhead, and other costs when running a business. Low profitability can be the outcome of overspending to increase sales. Low profits prevent business owners from making enough money for themselves. Additionally, business owners might be unable to expand their operations or pay back the outside financing used to launch the company. Business owners may consider closing their company rather than enduring low and possibly negative profits.

Unavailability of resources

To make consumer goods and services, entities would need financial resources. The three main economic resources are labour, capital, and land. Land is an economic system’s representation of its natural resources. Labour is the human resource needed to transform raw materials into finished goods. Money, facilities, and other tangible assets are called capital in business. If a business owner cannot secure a certain economic resource enough, they may have to close. Low-quality economic resources may also cause business owners to shut down their operations if they cannot generate worthwhile consumer goods.

Competition is high

The amount of businesses vying for consumers in the economic market is called competition. Small enterprises may encounter challenging competition when seeking to retain a sufficient market share. If competitors constantly create more products at a lower cost to the consumer, business owners may be forced to close their doors. Market share loss can occur for business owners who cannot compete with larger rivals. Large competitors may also introduce innovative items that small businesses find difficult to match.

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