Businesses can collapse like a house of cards, so it is better to close down the Company under critical conditions. The procedure for closing a Company is a complex yet indispensable task. It is even more difficult to wind up a Private Limited Company. Section 270 of Companies Act, 2013 lay out the provisions to wind up a Company either voluntary or by Tribunal. This document covers all the factors to be kept in mind while winding up a Private Limited Company and entails complete information about both the methods of closing.
What is Closing a private limited Company?
A private limited company is treated as a business entity dealt completely by private ownership. For the registration of a Private limited company it is mandatory to have four roles defined sorted namely 2 Directors and 2 Shareholders. It is not necessary to have four different people to be part of the establishment; a person can act as both the shareholder and one of the directors. Company registration is done under statute and only under law closing a private limited company can be done.
Reasons for the closure of a Private Limited Company
A Private Limited Company is an artificial judicial entity that needs to meet various compliances like regular filing of Income Tax & Annual Return, appointing Auditor and more. In case of non-compliance, the Company has to bear some penalties or disqualification of the Directors. It is prudent to wind up the business under such circumstances.
An array of reasons can lead to the closure of a Private Limited Company apart from bankruptcy. The causes can range from internal to external factors. If the Company does not shut down properly, then it shall have to spend a hefty amount on standard Audit filings and pending compliances on an annual basis to persist as a legal entity. Therefore, the procedure of winding up a Private Limited Company must be executed in a legitimate way.
Documents required for Closing a Private Limited Company
- Incorporation Documents
Company’s MoA – AoA, Certificate of Incorporation, PAN card and other registration certificates
- Accounting Information
The financial statement of the Company for the most recent year, prepared prior to 30 days of filing the application
- Details of Activity
Details whether the company has been operative for any period. If yes, since when the operations are discontinued
- Legal Liabilities
A statement regarding pending litigations, if any involving the company
- NOC from Creditors
The company must provide NOC for closure from creditors, if any
- NOC from Regulatory Bodies
NoC for closure to be obtained from Income Tax Department, SEBI, RBI, etc. if relevant
Ways of Winding up a Private Limited Company
The ways in which a private company can be shut down are as follows:
- Declaring the company as Defunct Company by the Tribunal : A defunct company is nothing but a company that is failing to provide compliance to the activities to match the legal levels also the company that is not producing returns and other filings as such to stay legal on the yearly basis. The defunct company can be free from all the legal ties it has, but it differs as the Tribunal is given on the basis of its failure to do any transactions financially and so on.
- Winding up Voluntarily : This type is a situation where the members inside the company decide to wind up all the operations and legal partnership ties the company would have externally. Here the main factor is the passing of special resolution in the board.
- Selling a Private Limited Company : Selling off a Private Limited Company is like providing a voluntary closure, but the thing that differs here is that the control and the total members of the current ownership team are severed off from all the ties with the company and the company given to a new interested buyer and all the properties and legal ties the company has would be transferred to the person who is buying the company.
Conditions for winding up a Private Limited Company by Tribunal
Companies Act, 2013 has listed the following scenario under which the Tribunal can cease the operations of a Private Limited Company:
- If a Company is unable to pay its debts;
- In case, the Company has passed a special resolution that it will be wound up by the Tribunal;
- If the Company has acted against the interest of the security of State, integrity and sovereignty of India. Also, if it is the matter of contravening public order, morality or decency;
- On the condition that the Tribunal has ordered to wind up the Company under Chapter XIX;
- In case, the Company hasn’t filed the Annual Returns or financial statements with the Registrar for the previous five consecutive financial years;
- If the Tribunal believes that the affair of a Company has been conducted in a fraudulent/unlawful way;
- If the Tribunal has the opinion that it is justified and equitable to wind up the Private Limited Company.
Procedure of closing a Private Limited Company by Tribunal
Here are the steps involved in winding up a Company by Tribunal:
Step 1: The creditor needs to file a petition to the Tribunal and affix the Company’s Statement of Affairs along with that.
Step 2: On receiving the Application for winding and petition, the Tribunal shall either accept or reject it. Thereby, pass an order within 90 days from the date of petition’s receipt.
Step 3: If a person files the petition other than the Company, then the Tribunal can dismiss the Application.
Step 4: After an extensive assessment, if the Tribunal thinks that the Company should go for winding up, it shall pass an order to the Company to file the objection with Statement of Affairs within 30 days.
Step 5: The Tribunal shall appoint a Liquidator to carry out the winding process. The Liquidator shall take his course of action; thus, examines the books of accounts, review the sale of assets and performs other essential functions. He or she will further prepare a Draft Report for the approval of the winding-up committee;
Step 6: Once the committee approves the Draft Report, the Liquidator shall submit its Final Report to the Tribunal to pass an order of winding-up.
Step 7: The Liquidator shall forward a copy of the order to the Registrar of Companies within 30 days. In case he/she fails to do so, it will lead to a penalty.
Step 8: After complete satisfaction, the ROC shall approve the winding up of the Private Limited Company. Thereon, the Registrar will strike the Company’s name from the Register of Companies and sends a notice in the Official Gazette of India for publication.
Conditions for voluntary Winding-up
The shareholders of a Private Limited Company can choose to wind up the business if:
- The Company has passed a special resolution for winding up in a Board Meeting;
- Or, if the Company’s duration specified in the Article of Association (AoA) expires.
Process of voluntary closure of a Public Limited Company
The voluntary procedure is a simpler mode of winding up the Company. Follow the steps given below if you also want to close your company voluntarily:
- Pass a special resolution either in the Board Meeting for a voluntary decision or in the General Meeting for the events prescribed in AOA.
- Provide a Company’s declaration of solvency for the payment of unpaid debts. Thereby, submit the declaration to ROC along with the Auditor’s report and registered value’s report (in case of evaluation of Company’ assets).
- Appoint a Liquidator to undertake the winding-up process that shall start from the date of passing the resolution.
- The Liquidator shall draft a Report of winding up and summon a General Meeting to settle down the final winding up of accounts. If the majority of members show their consent, a resolution shall be passed.
- A Liquidator shall then send a copy of statements to the Registrar of Companies and apply to the Tribunal with the Final Report.
- The Tribunal shall pass the order of winding up after assessment. Thereby, the Liquidator will send a copy of the order to ROC within 30 days else it will have to bear a penalty.
- Once the ROC gets fully satisfied, it shall approve the winding up of your Private Limited Company and strike of its name from the Register. Also, the ROC will send the notice for publication in the Official Gazette of India.
Conclusion
If the company owners or directors decide to discontinue or wind up the business, they may consider for the options of the closure. Most feasible or easiest way to close a company is striking off its name from Register of Companies. This is preferable when a company is inoperative for a certain period. Other options include a winding-up petition, however that involves more time, investment and compliance.
On approval of the strike off, the company’s name is removed from the register and thus, it is not existent in the eyes of laws. The company must fulfill all the compliance before proceeding for the strike-off application. The application is accompanied by various documents and requires assistance from the professional.
