The company comes into existence through a prescribed legal process of company registraion as provided under the Companies Act. Hence the same incorporated Private Limited Company or the OPC can be closed only by following the methods prescribed under the Companies Act 2013. Striking-off a company simply implies that the name of the company added in the Register of Companies during its incorporation, is being struck off by the ROC due to its prolonged inactivity or inability to commence its business operations. Unlike a wound up company, a struck-off company can be restored back upon recovering its financial health.
What is the Winding Up of a Company?
The term “winding up”, as outlined in Section 2(94A) of the Companies Act, 2013, refers to the formal process of closing a company through the mechanisms provided by the Companies Act or by undergoing liquidation under the Insolvency and Bankruptcy Code, 2016. This process involves ceasing regular business activities, liquidating assets, and settling debts ultimately leading to the company’s dissolution. Despite this, during the winding-up phase and until dissolution, the company maintains its legal entity status, allowing it to partake in legal actions within a Tribunal. The objective of winding up is to ensure an orderly closure and distribution of the company’s assets.
Modes of Winding Up Under the Companies Act
Compulsory Winding Up – By the Court
A court order initiates this mode. It usually occurs when the company cannot pay its debts, breaches legal requirements, or when it is just and equitable to wind up. The court appoints an official liquidator to manage the process, which includes selling assets, paying creditors, and distributing any surplus among the shareholders.
Voluntary Winding Up
This occurs when the members or creditors of the company decide to wind up the company’s affairs. It can be initiated by a resolution of the members (shareholders) if the company is solvent and can pay its debts or by the creditors if it is insolvent. The company appoints a liquidator to conduct the winding-up process without court intervention.
Subject to the Supervision of the Court
In this mode, the winding-up process starts voluntarily, but the court oversees the process. The court may decide to intervene and supervise the winding-up process to protect the interests of various stakeholders, ensuring that the process is conducted fairly and transparently.
Voluntary Winding Up of a Company
Winding up a company voluntarily require long procedural compliance to follow. There are certain mandatory requirements that have to be completed to close down a company voluntarily. A company can be wound up voluntarily in the situations mentioned below:
- The company passes a resolution in its general meeting upon the expiry of the duration for which it is formed, or upon the occurrence of any event in respect of which the articles provide for its dissolution.
- The company passes a special resolution (with approval of at least 3/4th of the shareholders) for a voluntary winding up of the company. The voluntary winding-up commences from the date of passing of the resolutions mentioned above. The company should also appoint a Company liquidator in the same meeting. Such an appointment should also be confirmed by a majority of the creditors (in terms of value) of the company.
Voluntary winding up involves the following steps:
- The company passes a resolution in their general meeting as mentioned above. However, the majority of directors must agree for winding up.
- The consent of the Trade Creditors is also required to wind up the company. Trade Creditors has to give their approval that they don’t have any obligation if the company gets wound up.
- The Company has to make a Declaration of Solvency and the same must be accepted by the trade creditors of the company. The Company must show the Company’s credibility in the Declaration of Solvency.
- The liquidator so appointed will carry out the winding-up proceedings and prepare a report of the winding-up on the assets, properties, debts and so on. The report shall be laid before the general meeting of the company for approval and passing a resolution for dissolution of the company. The Company liquidator shall send a copy of the final accounts of the company and resolutions to the ROC
- The Company liquidator shall also make an application to the Tribunal for an order of dissolution of the company. Upon being satisfied with the winding up, the Tribunal shall pass an order of dissolution within 60 days of the application. A copy of the final order should be filed with the ROC.
All the above-mentioned procedures shall be presented and filed in a prescribed form and even after the company gets wound up then also company’s name shall be prohibited for 2 years to be taken by any other applicant.
The format for various forms and detailed procedure for winding up is prescribed in Companies (Winding up) Rules, 2020.
Proceedings of the Tribunal
The Tribunal will hear the petition on the date fixed for hearing, accept objections and replies from the petitioner and respondent. The Tribunal may appoint a provisional liquidator. The order appointing provisional liquidator shall be made in Form WIN 8. The order of winding up shall be made in Form WIN 11. The order of winding up shall prescribe:
- The duty of such persons to submit the complete audited books of accounts up to the date of the order.
- Provide the date, time and place for the Company Liquidator.
- Surrender the assets and the documents of the assets to the Company liquidator. Upon a winding-up order, the Company liquidator shall take into custody all properties and effects, actionable claims and the books and papers of the company.
- The Company liquidator shall submit a report to the Tribunal within 60 days of the date of the winding-up order.
- After the affairs of the company have been completely wound up, the Company Liquidator shall make an application to the Tribunal for dissolution of the company. If the tribunal finds it just and reasonable in the circumstances of the case that an order for the dissolution of the company should be made, make an order that the company be dissolved from the date of the order. The company shall be dissolved accordingly.
- The Company liquidator shall within 30 days of the date of the order, forward a copy of the order to the registrar.
If the tribunal finds the accounts are in order and all the required compliance have been satisfied, the tribunal would pass the order for dissolving the company within a period of 60 days of receiving the application. After the order has been passed by the tribunal, the registrar will then issue a notice to the Official Gazette stating that such company is dissolved
Defunct Company Winding Up
As per the Companies Act, 2013, a Defunct Company is a company that has gained the status of a Dormant Company. The government provides certain relief to such defunct or dormant company because there are no financial transactions undertaken by dormant companies.
The Companies Act, 2013 laid down the procedure for winding up a Defunct Company. A Defunct or Dormant Company can be wind up with a fast-track procedure that requires submission of the STK-2 form. Hence, Form STK-2 is required in order to wind up a Defunct Company and there is no additional procedure for that. The form STK-2 needs to be filled with the Registrar of Companies and the same needs to be duly signed by the director of the company authorized by its board to do so.
For the purpose of this scheme, a defunct company refers to a company that has:
- No asset and no liability, and
- Which has not commenced any business activity after its incorporation or
- Has not been carrying on any business activities since last one year prior to making an application under FTE (Fast Track Exit Scheme).
Compulsory Winding Up of Company
- Unpaid Debts: The company fails to settle its debts, prompting creditors to seek legal redress through winding up.
- Special Resolution: The company’s members pass a special resolution acknowledging the need to dissolve the company due to insurmountable challenges or other reasons.
- Unlawful Acts: The company or its management engages in illegal activities, compromising its integrity and legal standing.
- Fraud and Misconduct: Involvement in fraudulent practices or serious misconduct tarnishes the company’s reputation and operational legality.
- Non-compliance with ROC Filings: Failure to file annual returns or financial statements with the Registrar of Companies (ROC) for five consecutive years signals operational dysfunction and possible abandonment.
- Tribunal’s Discretion: The tribunal, upon reviewing the company’s situation, may determine that winding up is in the best interest of the public, creditors, and other stakeholders.
Procedure for Compulsory Winding Up
- Filing a Petition: The process begins with filing a petition to the tribunal, accompanied by a detailed statement of the company’s affairs, requesting the winding up.
- Tribunal’s Review: The tribunal reviews the petition. If the petition is filed by someone other than the company, the tribunal may require the company to submit its objections and statement of affairs within 30 days.
- Appointment of a Liquidator: The tribunal appoints a liquidator to oversee and manage the winding-up process, ensuring the company’s assets are fairly distributed to its creditors and shareholders.
- Preparation and Approval of Reports: The liquidator prepares a preliminary report, which, upon approval, is finalized and submitted to the tribunal to sanction the winding-up order.
- Submission to the Registrar of Companies (ROC): The liquidator must submit a copy of the winding-up order to the ROC within 30 days. Failure to do so results in penalties.
- Final Approval by ROC: Upon satisfactory review, the ROC officially dissolves the company by removing its name from the register.
- Publication in the Official Gazette: The ROC publishes a notice in India to announce the company’s dissolution formally.
FAQs
Difference between Striking off and Winding Up?
Striking off
Striking off is a simpler and quicker process that can be used when a company is inactive or dormant. This process involves removing the name of the company from the Register of Companies maintained by the Registrar of Companies (ROC). A company may apply for striking off voluntarily or the ROC may initiate the process if it has reasonable cause to believe that the company is not carrying on any business or operation. Striking off is generally a more cost-effective and faster process than winding up.
Winding up
Winding up, on the other hand, is a more complex and formal process that involves the liquidation of a company’s assets and the distribution of its liabilities among its creditors and shareholders. Winding up can be initiated voluntarily by the members or creditors of the company, or by an order of the National Company Law Tribunal (NCLT) in case of default or non-compliance with the provisions of the Companies Act. Winding up is a more formal and time-consuming process than striking off and involves more legal formalities.
Legal Provisions in the Companies Act, 2013 for Company Closure?
Section 248 empowers the Registrar of Companies to strike off the name of a company in certain situations. These powers of the ROC can be invoked by the ROC itself or willingly by the company. The conditions for striking-off a Private Limited Company are mentioned in the table below. A company can be struck-off if any one of these conditions are satisfied.
| Section | Legal Provisions |
|---|---|
| 248 (1) a | When company failed to commence its business operation with one year of its incorporation |
| 248 (1) c | A company has not carried out any business operation for two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company u/s 455. |
| 248 (1) d | The subscribers to the MOA have not paid the capital amount which they were supposed to pay at the time of incorporation of a company within one hundred and eighty days from the date of its incorporation |
| 248 (1) e | The company is not carrying out any business activity, as revealed by the physical verification of the Registered Office of the company by the ROC |