Are you planning to shut down your company? Is your company not carrying any business since the day of its incorporation? Now the big question is, what is the proper way to close the company? Which way to go?
In India, there are two main ways to close your company: Strike Off and Winding Up. Both will lead to the end of the company, but the processes are different in terms of procedure, cost, time, and when they can be used. Choosing the right method is essential to legally close your company.
In this blog, we will understand each process in detail, compare them, and guide you on how to decide which option is right for your company.
What is Strike Off?
Striking off of a company means removing the name of the company from the register of companies, which is maintained by the Registrar of Companies (ROC). Once a company’s name is struck off from the register, the company is dissolved in the eyes of the law and ceases to exist. The process is only valid for the inactive companies that are not carrying on any business. The process of striking off a company is governed by Section 248 of the Companies Act, 2013, along with the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016.
Who can apply?
A company can apply for strike off if:
- It has not commenced business within one year of incorporation, or
- It has not carried on any business or operation for the last two financial years and has not applied for dormant status.
- The application for striking off the company’s name is filed in Form STK-2 with the ROC.
Restrictions
A company cannot apply for strike off if it has:
- Ongoing investigation or inspection,
- Pending prosecution,
- Ongoing compounding or settlement proceedings,
- Secured loans outstanding,
- Regulatory obligations like filing annual returns.
Consequences
Once struck off:
- The company ceases to exist legally.
- Its directors are free from future compliance.
- However, the liability of directors and members for past acts remains.
- ROC can restore the company within 20 years if it was struck off wrongfully.
Winding Up of a Company
Winding up of a company is a legal process in which the assets of the company are sold, liabilities are cleared, and any surplus is distributed among members. The company is legally dissolved by the National Company Law Tribunal or voluntarily by the members or creditors of the company. The process of winding up of the company is governed by Sections 270 to 365 of the Companies Act, 2013 and Insolvency and Bankruptcy Code (IBC), 2016.
Types of Winding Up
You can wind up a company in the following ways:
1. Compulsory Winding Up:
This happens when the National Company Law Tribunal (NCLT) passes an order to close the company. The Tribunal may order compulsory winding up if:
- The company has been involved in fraudulent or unlawful activities,
- There is a serious default in statutory filings, or
- The company is unable to pay its debts.
2. Voluntary Winding Up:
This process is started by the members (shareholders) or creditors of the company themselves. It is usually chosen when:
- The company is solvent (can pay its debts), and
- The members no longer wish to continue the business.
In this case, after debts are cleared, the remaining assets are distributed among shareholders, and the company is dissolved in an orderly manner.
3. Winding Up under the Insolvency and Bankruptcy Code (IBC), 2016:
If a company is insolvent and cannot pay its debts, the creditors can file an application before NCLT to begin the Corporate Insolvency Resolution Process (CIRP). Under this process:
- A resolution professional is appointed,
- Efforts are made to revive the company through a resolution plan,
- If no revival is possible, the company goes into liquidation, and its assets are sold to pay creditors.
Process
- A petition is filed with the NCLT, or an application is filed for voluntary winding up.
- A liquidator is appointed by the tribunal to take control of assets.
- Assets are sold, debts are paid, and legal disputes are settled.
- Final accounts are approved, and the dissolution order is passed.
Consequences
Once a company is wound up:
- The company’s legal existence comes to an end.
- Creditors are repaid to the extent possible.
- Directors lose control from the date of the appointment of the liquidator.
- In case of fraud or wrongful trading, directors may face penalties.
Strike Off Vs Winding Up
| Strike Off | Winding Up | |
| Governing Law | It is governed by Section 248 of the Companies Act, 2013 and the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016. | It is governed by Sections 270 to 365 of the Companies Act, 2013 and also under the Insolvency and Bankruptcy Code (IBC), 2016, for insolvent companies. |
| Nature of Process | The Registrar of Companies (ROC) removes the company’s name from its register. | It is a judicial process in which the National Company Law Tribunal (NCLT) is the adjudicating authority, and a liquidator is appointed to sell the assets of the company to settle its debts and liabilities. |
| When is the process opted for? | Inactive or non-operational companies that have no business, assets, or debts. | Companies with assets, liabilities, creditors, or disputes that need to be settled before closure. |
| Who can initiate the process? | The company files the Form STK-2 or by the ROC on its own if the company fails to carry on business. | It can be initiated by the company, creditors, NCLT, or its members. |
| Authority/Body Overseeing | Supervised by the Registrar of Companies (ROC). | Managed by the NCLT and an appointed liquidator. |
| Treatment of Liabilities | Past liabilities of directors and members continue even after being struck off. | Liabilities are settled during the process itself, and assets are liquidated and creditors are paid to the extent possible. |
| Future Restoration | It can be restored within 20 years by ROC or NCLT on filing the application by the affected party – creditors, directors | Not possible unless ordered by a higher court under exceptional circumstances. |
| Impact on Directors | Directors are relieved from future compliance after the company is struck off, but it remains responsible for past liabilities. | Directors lose control from the date of appointment of the liquidator; their role ends with the functioning of the company. |
What is the right exit strategy for your company and why?
The decision depends on the condition of your company. Let us look at different situations:
- Company never started business: If your company was incorporated but never commenced operations, a Strike Off is the simplest and best way to exit.
- Dormant or inactive company: If the company has not done business for years and has no assets or liabilities, again, a strike-off is ideal.
- Company with assets and liabilities: If the company owns property, has creditors, or disputes to settle, Winding Up is mandatory. Strike off is not possible in such cases.
- Insolvent company: If the company is unable to pay debts, creditors can approach NCLT for resolution under the IBC, 2016. If no resolution plan works, the company goes into liquidation.
