Modes Of Closure/Winding Up of a Company under the Indian Legal System

Modes Of Closure/Winding Up of a Company under the Indian Legal System

INTRODUCTION

A company may be required to be wound up for various reasons including closure of business, operational losses etc. In this article, we have provided various options available with the Company for closure/winding up and the liabilities of a director upon such closure/winding up of a company.

VARIOUS MODES OF CLOSURE OF A COMPANY

Removal of the name of the company from the Register of Companies:

Section 248 of the Companies Act, 2013 read with Companies (Removal of Name of Companies from the Register of Companies) Rules, 2016 lays down the procedure and instances where the name of a company can be struck off from the Register of Companies. This can be done in 2 ways:

  • By the Registrar on suo-motu basis in case where (i) a company has failed to commence its business within one year of its incorporation; or; (ii) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company; or;
  • By a company upon filing an application with the Registrar on all or any of the grounds mentioned in clause (a) here inabove.

If a company chooses option (b), it has to comply with the following:

  1. The company shall pass a special resolution or obtain consent of seventy-five per cent of the members in terms of paid-up share capital.
  1. The company shall then file an application in Form STK2 to the Registrar for removing the name of the company from the register of companies.
  1. The application in Form STK2 shall be accompanied by:
  • indemnity bond duly notarised by every director in Form STK3 confirming that the company does not have any assets or liabilities on the date of application and undertaking to indemnify for all lawful claims, losses against the Company in future after striking off;  
  • a statement of accounts containing assets and liabilities of the company made up to a day, not more than  thirty days before the date of application and certified by a Chartered Accountant;
  • An affidavit in Form STK 4 by every director of the company;
  • a copy of the special resolution; and
  • a statement regarding pending litigations, if any, involving the company.
  1. The Registrar shall, on receipt of such application, issue a public notice in the prescribed Form STK 6 and shall place it on MCA website, company’s website, publish in newspapers and also issue in the Official Gazette for the information of the general public, grating 30 days time for submission of any objection against the company.
  1. The Registrar of Companies shall, simultaneously intimate the concerned regulatory authorities regulating the company, viz,  the income-tax  authorities, central excise authorities and service-tax authorities  having jurisdiction over the company.
  1. Upon expiry of the time mentioned in the notice, if no objection is received, the Registrar may, unless cause to the contrary is shown by the company, strike off the name from the register of companies, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved.

Winding up of the company under the Companies Act, 2013 by the Tribunal:

Section 271 of the Companies Act, 2013 lays down the various instances under which a company may be would up by the Tribunal which are as follows: (a) Passing of a special resolution, to that effect by a company that it may be wound up by the Tribunal; (b) if the company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality; (c) conducting affairs in a fraudulent manner by a company; (d) if the company has made a default in filing with the Registrar its financial statements or annual returns for immediately preceding five consecutive financial years; or (e) if the Tribunal is of the opinion that it is just and equitable that the company should be wound up.

The Tribunal upon receipt of the petition, inter alia, appoints a provisional liquidator of the company till the making of a winding up order; or
issues an order for the winding up of the company. For the purposes of winding up of a company by the Tribunal, the Tribunal at the time of the passing of the order of winding up, shall appoint an official liquidator or a liquidator from amongst the insolvency professionals registered under the Insolvency and Bankruptcy Code, 2016 as the company liquidator, who shall then oversee the entire process of the winding up of a company.

Liquidation of company under the Insolvency and Bankruptcy Code, 2016 (“Code”)

The Code provides for two options (a) Liquidation process in case a company has made default in payment of debts; and (b) Voluntary liquidation of a company when there is no default in payment of debts.

Liquidation process in case of the company has made default in payment of debts:

Where a corporate debtor has committed a default, a creditor or a corporate applicant itself may file an application for initiating corporate insolvency resolution process. The corporate insolvency resolution process shall be completed within a period of one hundred and eighty days from the date of admission of the application to initiate such process. This may however be extended for once for a maximum of ninety days. A public announcement shall be made pertaining to the resolution process for submission of claims. The appointment of resolution professionals shall be made and the management of the affairs of the company shall be vested with them thereafter. A resolution plan shall have to be submitted and if the resolution plan is not submitted within the prescribed timeline or is rejected by the Tribunal, it can pass an order for liquidation of the company and follow such procedure as has been laid down in the Code and as may be necessary to give effect to the same.

Voluntary Liquidation of a company

 With effect from April 01, 2017, voluntary winding up a company shall be governed by the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process), Regulations, 2017.

A company shall be required to pass a special resolution for its voluntary winding up, appointment of liquidator etc. Also, if a company owes any debt to any person, creditors representing two-thirds in value of the debt shall also be required to approve the resolution. The liquidation proceedings shall be deemed to have been commenced from the date of passing of the resolution by the company. The company shall from the liquidation commencement date cease to carry on its business. The liquidator shall make a public announcement inviting submission of claims against the company. Within 45 days of the commencement of the winding up proceedings the liquidator shall submit its preliminary report detailing inter alia, the estimates of its assets and liabilities as on the liquidation commencement date based on the books of the company. The liquidator shall take steps for realization of the assets and distributing the proceeds thereof and shall endeavor to complete the liquidation process of the company within a period of twelve months from its commencement. Upon completion of the liquidation process, the liquidator shall prepare the final report and send it to Registrar and the Board and shall make an application to the Tribunal for dissolution of the company.

Tabular analysis of the aforesaid options laying down pros and cons:

 

Options Time (approx) Costs
Removal of Name      60 days  

ROC fees to be paid for complying with the procedure of strike off.

 

Winding-up under Companies Act, 2013   240-300 days a. Professional and statutory fess for complying with the procedure.

b. Tax liability is dependent on how assets and liabilities are treated in the books of accounts.

 

Winding-up under the Code  270 to 365 days Professional and statutory fess for complying with the procedure.

 

THE LIABILITIES OF A DIRECTOR UPON CLOSURE/WINDING UP

 Statutory Liability:

 A director of a company has certain fiduciary duties and Section 166 of the Companies Act, 2013 lays down the duties of a director which inter alia provides that a director shall act in good faith and exercise his duties with reasonable care, skill and diligence. He shall not carry out any activity which may provide undue gain and advantage to him or his relatives.

It is further laid down in Section 250 of the Companies Act, 2013 that once a company is dissolved under the strike off procedure it shall cease to operate as a company except for the purpose of realising the amount due to the company and for the payment or discharge of the liabilities or obligations of the company. Therefore the liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved, shall continue and may be enforced as if the company had not been dissolved.

Further Section 339 of the Companies Act, 2013, inter alia, lays down that if in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the Tribunal may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Tribunal may direct.

Therefore, if the business is carried on for fraudulent purposes or a fraud is found out, then the director who is responsible for carrying on the business shall be held personally liable.

Income Tax Liability:

Section 179 of the Income Tax Act 1961 provides that when any private company is wound up and the tax assessed cannot be recovered, then every person who was a director of the private company during the relevant previous year shall be jointly and severely liable for the payment of such tax. It is for the directors to then prove that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on their part in relation to the affairs of the company.

Contractual Liability:

A director may be considered as an agent of the company who enters into a contract on behalf of a company. Therefore, the ordinary principle of agency shall be applicable and a director generally cannot be held personally liable on a contract unless expressly provided for or where he has provided personal guarantee for performance of a contract. Also, apart form this when any beach of contract takes place, a director should be able to prove that he has acted honesty and diligently in discharge of his duties and has not committed any fraud or breach of trust.

Authors:

Mr. Prashant Kumar Jain, Partner, Samisti Legal LLP.

Ms. Anita Dugar, Senior Associate, Samisti Legal LLP.

Disclaimer: The content of this article is intended to provide a general guide on the subject matter. Specialist advice should be sought about your specific circumstances. For any queries, the authors can be reached at:-  prashant@samistilegal.in and anitadugar@samistilegal.in.

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  • closure of company, liability of director upon closure of company, modes of closure of company, Removal of the name of the company from the Register of Companies: Section 248 of the Companies Act, Section 271 of the Companies Act, Winding up as per Insolvency and Bankruptcy Code

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