Nowadays winding-up of a private limited company, starting a company and running it, comes with new challenges and hurdles. It is said that “Winding up a business is a thousand times tedious task than starting one”. Shutting down a company involves a lot of documentation, combined with many closing operations accompanied by laying off employees and paying off creditors. Closing down a Private Limited Company is a laborious job as it takes up around twelve months, but it is a necessary procedure to supplant. By following this procedure the company annually needs to meet the requirements of the Registrar of Companies (“ROC”) spending money and audit compliances.
In simple language, Winding up of a company is the legal process in which the life of the company comes to an end. As the management of the Company and Board of Directors of the Company, sell off its assets and the money realized is used in clearing off the debts of the company, and the surplus amount is distributed among the members of the company in their respective rights. Winding-up of a company differs from the insolvency of an individual as the company cannot be insolvent under insolvency laws. And the company is not immediately dissolved after the commencement of winding-up as its corporate status and powers continue.
Under Section 270 of the Companies Act, 2013 the procedure of winding-up the Company can be initiated when a liquidator is appointed by the ROC who manages all the assets and debts of the company.
The Winding-up of the Company does not affect in ending of the “legal existence” of the company. As the Winding-up process is initiated against the company, it continues to exist as a “legal corporate entity”. The legal existence of the company will come to an end when the Court orders the dissolution of the Company. The effect of such an order of dissolution is that the affairs of the Company come to a standstill and no business can be conducted in its name and its name is struck off the Register of Companies, bringing an end to the “legal corporate entity”.
In following ways the Closing Down of a Private Limited Company can be initiated:-
- Voluntary Winding-up by the Shareholders of the Company.
- Forced by the Tribunal or a Court.
Voluntary Winding-up can be done by the Shareholders of the Company in the following steps:-
- Pass a special resolution in a Board of Directors
- At a General Meeting (“GM”) pass a resolution requiring that a company be wound up on consideration of the termination of duration or a meeting of a requirement in an Articles of Association (“AoA”).
- Declare Debts at Board Meeting-: The majority of Directors or both when they are 2 directors should convey a Board meeting to declare that there are no debts and if there are debts, it will be paid from the proceeds of the Winding-up.
- A date, time, and agenda should be predetermined for a General Board Meeting, five weeks from the Board meeting and issue notices
- Pass Resolution and Meeting with Creditors-: On the day, the General Meeting has passed an ordinary resolution with an ordinary majority or a special resolution with a 3/4th majority. Immediately, the directors should meet with creditors of the company, if 2/3rd in value terms of the creditors agree with the winding-up of the company, the company will be wound up voluntarily if not a tribunal will then wind up the company.
- Appointment of Liquidator-: Within 10 days of Passing the Resolution the ROC should be informed to appoint a liquidator, the powers of directors will dissolve upon this person and he will be primarily responsible for accumulating all the assets and paying off its debts, the surplus will then be dispersed among the shareholders
- Notice given to Official Gazette-: Fourteen days from the passing of resolutions, a notice of the resolution is to be given in the Official Gazette and advertisement where the registered office is present
- Preparation of Statement of Accounts-: In 30 days of passing of resolution a statement of accounts has to be prepared stating that there are no assets and liabilities except Share Capital and Profit and Loss Debit balance. All directors should execute an affidavit and indemnity
- Passing of Special Resolution-: In case, there are unsecured loans the waiver letter should be submitted. Call for General Board Meeting for which Special Resolution will be passed for disposal of accounts.
- Approval from Registrar within 60 days-: Within, 2 weeks file the accounts and special resolution with the Registrar, if the Registrar is satisfied, he will pass an order for winding-up of the company within 60 days.
Reasons for Voluntary Winding-up of a Company
- Closure of Business – If the Shareholders and Board of Directors of the company have decided to close the business down. Once the organization has paid any outstanding debts and completed any pending operations, the organization ceases to exist.
- Loss of Money from Company – If the companies outflow of the case is more than the inflow of the cash. And if the company experiences either a revenue loss or negative cash flow that also affects the net income of the end year.
- Passing away of the Promoters– In the company, if the promoter of the company is losing commitment or in through the business operations, it results in loss of investor confidence in circumstances where the performance of the company suffers and the share price declines.
- Bankruptcy–: When an organization is unable to honor its financial obligations or is insufficient to pay its creditors. And if any company has more outstanding debts than assets.
Following people under section 272 of the Companies Act, 2013 have the authority to file a compulsory winding-up procedure under this Act
- The Company as a petitioner (272(a) – The company can present as a petitioner if a special resolution has been passed to that effect
- Contributors as Petitioners (272(b)] – A contributory can be a petitioner if he is a holder of paid-up shares for at least 6 months during the 18 months immediately after the previous commencement of the winding-up process.
- Registrar (272(d) – The registrar can present as a petitioner in the following cases:-
- Company staging against the security of the country
- Where the affairs of the company are regulated fraudulently
- Non-filing of financial statements and annual returns of the company
CLOSURE BY TRIBUNAL OR COURT
The Companies Act, 2013 contains several new provisions for winding-up of a company Company can be wound up by a tribunal for these reasons:-
- Inability to repay debts-: If the company is unable to repay loans or debts
- Failure to file returns-: If a company has not filed its returns or submitted its financial statement for five consecutive years
- By a Resolution can be dissolved-: If the company has a resolution that it can dissolve by the tribunal under certain circumstances
- Acted against Nation’s interest-: If the company has acted against the integrity and sovereignty of the country.
- Interference between Relations-: Have interfered in the relations between India and a foreign country
- Under Chapter 19-: If the tribunal has decided by any means or through Chapter 19 that it is only correct to wind up the operations of the company.
- Unscrupulous activities of the Company or any members-: If the company called in any fraudulent transactions or gain financially through illegal transactions Or if any person from the management connected with the formation of the company found guilty of fraud, or any kind of misconduct.
In any of these cases, a tribunal is formed and an order is passed to wind up the company this order is deemed final and form 11 for the winding-up of the company.
The procedure of Winding-up of a Private Limited Company is an ambiguous process and appears with countless complexities and technicalities, as it takes a lot of time to shut down an entity. But if the Private Limited Company does not shut down under the following procedures and related reasons listed above will invite penalties Earlier, the winding-up process was governed by the Companies Act, 2013. However, with the enactment of the Insolvency and Bankruptcy Code, 2016, it has become more difficult to apply these provisions simultaneously and to decide the precedence. The process of compulsory winding up under the Company Act, 2013 a favorable framework for companies for winding up.