Who doesn’t want a well-flourished business? But as they say change is the law of nature and ups and downs are part of every business. Sometimes, there comes a situation when one has to take the big step and step down from being an entrepreneur and close the business. We all know that Company is treated as a separate legal entity and therefore there are well laid down provisions in the law to be followed for closing a company. In this article, our area of discussion will be closure of private limited company.
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Situations of closure of private limited companies
As per Companies Act, 2013 there are mainly two modes under which the business of companies can be wound up-
- Winding Up by Tribunal
- Voluntary Winding up
The law also lays down the reasons under which these modes can be followed and also the detailed procedures to be followed. So, without wasting time let us understand these modes one by one.
Winding up by Tribunal (Compulsory winding up)
As per the act in the following circumstances, winding up of a company can be started by a Tribunal-
- Company is unable to pay its debts
- Company itself has passed a special resolution that company should be wound up by the tribunal.
- If company has acted against sovereignty and integrity of India.
- If on the basis of report from Registrar or a person authorized by Central Government if a Tribunal has reason to believe that company has acted in fraudulent manner or was formed for some fraudulent purpose.
- If company has not filed annual returns or financial statements for past 5 consecutive financial year.
- If Tribunal feels that it is just and equitable to wind up the company.
Now you may be thinking that on whose petition the Tribunal can act upon then these are the people who can file a complaint with Tribunal-
- Company itself
- Creditors of the company
- Contributors of the company
- Any or all of the above together
- Registrar of Companies
- Central or State Government.
Procedure to be followed at the Tribunal
This was the process to be followed in case the Tribunal acts on the application of petitioners to start winding up of a company, there may also be conditions where company itself wants to wind up its operations owing to financial constraints and several other reasons. Now, we will discuss Voluntary winding up in case of closure of private companies.
Voluntary Winding Up
A company can opt for Voluntary winding up in any of the following circumstances-
- In some cases the companies are formed for certain fixed tenure that is mentioned in their articles of association. If such tenure is expired.
- In some cases the articles of association may contain an event, on occurrence/non-occurrence of which the company should be wound up. If that condition is satisfied
- In situation 1 and 2 above, the company should pass a resolution in its general meeting
- If company has passed a special resolution that company should be wound up voluntarily.
In case the company opts for a voluntary closure, law has laid down certain process that should be followed. Now, we will discuss the procedure to be followed in case of Voluntary closure of a private limited company.
**More than 3/4th of the creditors should form an opinion that whether company can take voluntary closure route or winding up by tribunal (as discussed above) on the basis of which will be more beneficial for safeguarding their rights.
^^The work of Company Liquidator is to analyze all financial aspects and arrive at a decision between board and creditors and prepare a winding up proposal or report.
It must be noted that once a resolution for winding up is passed, the company ceases its business operations, except to the extent required for winding up.
Closure of a Dormant Company
In actual terms using the word Winding up for a Dormant Company is not completely correct as there is nothing left to wind up as such in a Dormant Company. Dormant Company in literal sense is an inactive company i.e. there are no transactions and no stakeholders that can be affected by closure of such company.
It must be noted that in order to prevent its name from being struck-off by ROC, companies can apply for status of a dormant company and continue to be on ROC.
So, any company who has already attained the status of a dormant company can apply for removal of its name from ROC with form STK-2. As there are no creditors or transactions involved, the procedure as simple as filling a form and submitting it to ROC.
So now after winding up the private companies, let us wind up this article also. The closure of private companies can happen by following any of the above methods. Law not only lays down these procedures but has also defined rights and duties of all the parties involved. The main intention of the law in making all these provisions and procedures is to protect the interest of stakeholders involved and also to keep a check on fraud cases. Lawmakers have made all the provisions so as to ensure the smooth closure of the companies. So, this is how we lawfully close a private limited company in India.