Difference Between Winding Up and Striking Off a Company

Under company law in India, the legal dissolution of a company is referred to as dissolution. Dissolution refers to a procedure in which a company ceases to exist as a legal entity and is prevented from operating business operations. Dissolution may either be voluntary or statutory, depending on the circumstances of a company entering into liquidation. Voluntary dissolution occurs on the instance of shareholders and creditors when the corporation becomes a going concern, while an involuntary dissolution may result from a court’s decision or actions by regulatory authorities or failure to comply with legal provisions. Different processes of dissolution are specified under the Companies Act 2013 – the tribunal winding up, voluntary winding up and striking off. Each method is equipped with its legal procedures for the protection of the stakeholders, creditors, and employees and for the treatment of outstanding liabilities. Such procedures ensure that they are both legally and regulatorily compliant.

What is Winding Up of a Company?

Winding up refers to the procedure under the laws for dissolving and putting an end to a commercial corporation, either by a court’s decree or voluntarily. The winding-up process includes the liquidation of the corporation’s assets, the satisfaction of all its liabilities and the distribution of the residue among the owners.

Upon its final completion of this procedure, the company would cease to be an entity in existence, and its name would be stricken off the RoC list. Winding up may be voluntary by members or creditors or forced by a tribunal.

In India, this process is mainly governed by the Companies Act of 2013 and further provisions provided under the Insolvency and Bankruptcy Code of 2016 (IBC). The process is supposed to be transparent and equitable and therefore, aims at maximizing the benefits for creditors and other stakeholders.

The specific objectives of winding up are to use the assets of the company for payment against all debts and liabilities, to distribute any surplus to the right owners or shareholders and to bring an end to the existence of the company and prevent any future activities.

Winding-up processes tend to be elaborate, with the appointed liquidator in charge throughout the process. The liquidation starts with selling the company’s assets to the creditors to liquidate liabilities in matters of priority. The shareholders are paid from any remaining sums after the satisfaction of liabilities. Lastly, a report is furnished by the liquidator, which consequently results in the dissolution of the company through the deletion of its name from the corporate register.

It is an integral process in the legal dissolution of a company. It will also offer a formal procedure for dealing with finances, protection of the rights and interests of creditors, and finally ensuring that the business is closed without creating any additional liabilities and conflict.

Types of Winding Up

1. Voluntary Winding up:

It is handled by members or creditors of the company. Reasons for closure include inability to continue, insolvency or personal and professional situations and is usually broken into two categories:

• Members’ Voluntary Winding Up applies where a company is solvent and the shareholders intend to wind it up.
• Creditors’ Voluntary Winding Up, which will apply in a situation where an entity is insolvent, thereby causing it to engage creditors in the whole liquidation exercise.

2. Mandatory Winding Up:

This is compulsorily ordered by the National Company Law Tribunal (NCLT) due to some grounds, which include activities carried out against public interest, repetitive failure to adhere to the formal legal requirements or if any creditor member or even government files a case.

What is Striking Off a Company?

A company can strike off itself when the name of that company is deleted from the official register kept by the Registrar of Companies (RoC). The process is specified under Section 248 of the Companies Act 2013, and hence, the company stands dissolved and ceases to exist as a legal person. It is easier and quicker to strike off than wind up, and prefer where companies are inoperative or where liabilities are insignificant. A company struck off must not carry on any business or make any contract.

Striking Off can be effected either in one of the following manners:

1. Voluntary Striking Off: An application to the RoC is filed by the company which the shareholders will approve through a special resolution. The statement of indemnification accompanied by no objections certificates from the creditors is also a part of the process.
2. Compulsory Strike Off: This is an act on the RoC’s side towards the companies that have failed to begin an operation within a period of more than one year since incorporation time. It also relates to companies that have been idle for two years and have not filed any returns. There are times when the law has not been followed by the company. The department then puts out a notice and gives the company a chance to file before anything else is done.

A company can apply for striking off if it fulfils the following conditions:

1. No business activities: The company has not carried out any business activities for at least two consecutive financial years.
2. No liabilities: The company has no due liabilities or debts.
3. No legal proceedings: There are no pending legal procedures or regulatory actions against the company.
4. Compliance with Regulations: The company is fully compliant with all statutory filings and compliance requirements.

The strike-off of a company is a very simple and fast process to dissolve all the non-functioning or less operative entities. It gives an opportunity to all the companies to wind up their operations in law by properly settling their liabilities and the requirement of compliance. For this, there is competency, immediacy of application and legal standards.

Winding Up Vs Striking Off a Company

Winding up and striking off are two different ways of closing down a business under Indian company law, each having a different objective and procedure, complexity and consequences. Here are the key differences between the two:

1. Meaning

• Winding of companies is the process of liquidating the assets of the company, paying all the obligations and then distributing the surplus among the shareholders. The company is finally declared to be dissolved and removed from the official register.
• Striking off The process of erasing a company’s name off the records kept by the Registrar of Companies (RoC) with the aim of abolishing a company without following formal liquidation. This usually involves a quicker and less complicated process of closing inactive companies.

2. Reasons for Closure

• Winding up occurs when companies either face liabilities and insolvency issues or face working difficulties. These are most frequent when the liabilities or debts face the firm at hand or by law cannot allow it to perform its functions efficiently.
• Striking Off applies to dormant or inactive companies with no considerable liabilities or assets. This method is best for companies that have stopped operations and do not need elaborate legal processes for closure.

3. Process Complexity

• The winding-up procedure is exhausting and long winding because it appoints a liquidator to wind up the organisation, sells liquidated assets, settles the claim of the creditor and avails approvals of the tribunals. There is extensive paperwork with appropriate legality.
• In contrast, the Striking-off process is more efficient since it requires the submission of an application (Form STK-2) with attached supporting documents, such as board resolutions, affidavits and financial statements. The corporate directors oversee the process with less involvement from the tribunal.

3. Cost

• The process of winding up requires professional advice, lawyer’s services and court attendance, which makes it relatively expensive.
• Low administrative and professional charges make the process of striking off very cost-effective for small and sleeping businesses.

4. Creditors’ Settlement

• The liabilities, debts and all other obligations should be settled during the winding up process, before any leftovers are distributed among the shareholders.
• In case of strike off, a certificate from the concerned ROC stating that no liabilities exist for the corporation is obtained and NOCs are also sought from the creditors.

5. Asset Liquidation

• The liquidator is charged with the selling of the assets of the company and using the cash realized to clear debts and liabilities. Any excess cash is then shared among the shareholders.
• In striking off, usually, any unutilised assets are passed to the central government if they were not sold before.

6. Revival Option

• In winding up, Revival is difficult once a company has been wound up and usually requires approval from the tribunals only in special cases.
• Revival may be applied for within 20 years (or 5 years in case of some corporations) after being struck off by making an application to NCLT.

7. Final Outcome

• In winding up cases, a liquidation certificate is issued that declares the closing of the company.
• In cases of striking off, the name of the company is deleted from the RoC records, marking its dissolution.

Conclusion

Winding up and striking off are two methods for the dissolution of a corporation in Indian company law, each specifically suited to specific situations and purposes. Winding up is an orderly and formal process that deals with companies suffering from serious liabilities, disputes or being insolvent and helps in winding up the entity in an orderly fashion and settling all debts. On the other hand, striking off is a more relaxed and cost-effective procedure available for dormant or inactive companies, especially those that have no liabilities or pending legal cases. The right approach is determined by the financial and operational situation surrounding the business. Both procedures serve to enable a legally effective ending of a company’s life.