Articles

Closure of Companies

By May 13, 2021 No Comments

CLOSURE OF COMPANIES

Winding up of companies was under the purview of the erstwhile Companies Act, 1956 and later Companies Act, 2013, until the enactment of Insolvency & Bankruptcy Code, 2016, (IBC, 2016). The objective of IBC, 2016 is to consolidate existing insolvency laws and to amend other legislations. Winding up proceedings are governed by the provisions of Companies Act, 2013 and IBC, 2016.

Methods of closure of a company:

  1. Removal of name of the company by the Registrar suo-motu or by company voluntarily;
  2. Winding up under the Companies Act, 2013 by the Tribunal; and
  3. Liquidation of company under the Insolvency and Bankruptcy Code, 2016.

WINDING UP OF COMPANIES UNDER COMPANIES ACT, 2013:

I. Removal of name of the company under section 248 in certain circumstances:

Section 248 deals with the power of the registrar to remove the name of the Company from the register of Companies. Through this section the name is removed from the register by the registrar or voluntarily by the company based on certain circumstances.

A. By the Registrar on suo motu basis:

  1. If the Company failed to commence its business within one year of incorporation.
  2. If the Company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made an application for obtaining the status of dormant company. The registrar shall send the notice of its intention to remove the name of the company from the registrar of companies to the company and all the directors of the company and requesting them to make representations within a period of thirty days from the date of notice.
  3. If the subscription amount is not paid by the subscribers to the memorandum of association and a declaration in Form INC20A has not been filed within 180 days from the date of incorporation.
  4. If the company is not carrying out any business or operations, as revealed after the physical verification carried out by the registrar.

B. By the company voluntarily:

  1. The company may file an application in form STK-02 to Registrar of Companies for removing the name of the company on all or any of the grounds as mentioned above.
  2. The company after extinguishing all its liabilities, pass a special resolution or take consent of atleast seventy-five percent of members in terms of paid up share capital for removal of name of the Company.
  3. The Company shall accompany a no objection certificate from appropriate Regulatory Authority, if any along with the application.
  4. Further the application shall be accompanied by indemnity bond in form STK-03 duly notarized by all the directors; a statement of accounts certified by chartered accountant in Form STK-08 containing all assets and liabilities, not more than 30 days before the date of application; a affidavit in Form STK-04 by all the directors of the company and a statement regarding pending applications, if any.
  5. The registrar shall issue a public notice on receipt of an application and simultaneously intimate the concerned regulatory authorities.
  6. If no objection is received within the time specified in the notice, the registrar shall remove the name from the registrar of companies.

II. Winding up of a company by the Tribunal:

A.  The Tribunal may on the petition filed by specified persons wound up a company, if:

  1. A special resolution is passed stating that the company be wound by the tribunal.
  2. 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.
  3. If an application is made by the registrar or by any person authorized by the central government and the tribunal is of the opinion that the affairs of the company are conducted in a manner that are fraudulent or unlawful or the persons concerned in the formation or management of its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that it is proper that the company be wound up.
  4. If the Company made a default in filing its financial statements or annual returns for immediately preceding five consecutive years.
  5. It is just and equitable that the company should be wound up.

B. Following persons can make a petition to tribunal for winding up of a company:

  1. The Company only if accompanied by statement of affairs in a manner as prescribed.
  2. Any contributory or contributories, provided contributory has held shares for at least a period of six months during the eighteen months immediately before commencement of the winding up.
  3. The Registrar
  4. any person authorized by central government.

A copy of petition shall also be filed with the Registrar to submit his views to the tribunal within sixty days of receipt of petition.

C. The tribunal may on receipt of a petition for winding up pass any of the following orders within ninety days from the receipt of petition:

  1. Dismiss it, with or without costs.
  2. Make an interim order as it thinks fit.
  3. Appoint a provisional liquidator of the company till the making of a winding up order.
  4. Make an order for the winding up of the company with or without costs.
  5. Any other order as it deems fit.

LIQUIDATION UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016:

I. Voluntary Liquidation by company in case of no default:

Pursuant to section 59 of the IBC, 2016 only a corporate person can initiate a voluntary liquidation process, which has not committed any default. Default includes debts that have become due and payable. The following is the brief procedure for liquidation under IBC, 2016.

  1. Declaration in the form of affidavit from majority of directors of the company stating that company has no debt or that it will be able to pay its debts in full and is not being liquidated to defraud any person.
  2. The declaration shall be accompanied by the audited financial statements for the previous two years and a report of valuation of assets by a registered valuer.
  3. Passing of special resolution for approval of voluntary liquidation and appointment of liquidator, within four weeks of the aforesaid declaration. If a corporate person owes debts, approval of two- third majority creditors would also be required.
  4. The Registrar and the Board be notified about the special resolution passed to liquidate the company within seven days of such resolution or the subsequent approval by the creditors, as the case may be.
  5. The liquidation proceedings shall deemed to have commenced from the date of passing of the resolution.
  6. The liquidator shall make a public announcement five days from his appointment to call upon the stakeholders to submit their claims. The claim shall be submitted within 3 days from the liquidation commencement date.
  7. The liquidator to submit a preliminary report within forty five days from the liquidation commencement date.
  8. The liquidator shall verify the claims submitted within thirty days from the last date for receipt of claims and may either admit or reject the claim, in whole or in part, as the case may be.
  9. The liquidator shall open a bank account in the name of the company followed by the words ‘in voluntary liquidation’, in a scheduled bank, for the receipt of all moneys due to the company.
  10. The liquidator shall distribute the proceeds from realization within six months from the receipt of the amount to the stakeholders.
  11. The liquidator to complete the liquidation process within twelve months from the liquidation commencement date. If the liquidation process continues for more than twelve months, the liquidator shall call for a meeting of contributories within fifteen days from the end of the twelve months and shall present an Annual Status Report.
  12. On completion of the liquidation process, the liquidator shall submit the Final Report to Adjudicating Authority along with the application for dissolution. The liquidator shall simultaneously send the report to Registrar and Board.
  13. The Adjudicating Authority shall on an application filed by the liquidator pass an order that the company be dissolved from the date of that order.
  14. A copy of a dissolution order be filed with the Registrar within fourteen days from the date of such order.

II.Voluntary Liquidation by company in case of default:

Pursuant to Section 10 of IBC, 2016, where a company has committed a default, an application thereof may be filed for initiating corporate insolvency resolution process with the Adjudicating Authority. “Default” means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the company.  Debt includes a financial debt and operational debt.

“Financial Debt” means, a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes:

  1. Money borrowed against the payment of interest;
  2. Any amount raised by acceptance under any acceptance credit facility or its dematerialized equivalent;
  3. Any amount raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
  4. the amount of any liability in respect of any lease or hire purchase contract which is deemed as a finance or capital lease under the Indian Accounting Standards or such other accounting standards as may be prescribed;
  5. receivables sold or discounted other than any receivables sold on non-recourse basis;
  6. any amount raised under any other transaction, including any forward sale or purchase agreement, having the commercial effect of a borrowing;
  7. any derivative transaction entered into in connection with protection against or benefit from fluctuation in any rate or price and for calculating the value of any derivative transaction, only the market value of such transaction shall be taken into account;
  8. any counter-indemnity obligation in respect of a guarantee, indemnity, bond, documentary letter of credit or any other instrument issued by a bank or financial institution;
  9. the amount of any liability in respect of any of the guarantee or indemnity for any of the items referred to in sub-clauses (a) to (h) of this clause.

“Operational Debt” means a claim in respect of the provision of goods or services including employment or debt in respect of the repayment of the dues arising under any law for the time being in force and payable to central government or any state government or any local authority.

Procedure to be followed:

  1. The Company shall along with an application furnish its books of accounts; details of appointment of proposed interim resolution professional.
  2. A special resolution is to be passed by the shareholders approving filing of the application.
  3. The Adjudicating Authority shall within a period of fourteen days of the receipt of the application either admit the application, if it is complete or reject the application, if it is incomplete.
  4. The Adjudicating Authority shall before rejecting an application, give a notice to the applicant to rectify the defects in his application within seven days from the date of receipt of such notice.
  5. The corporate insolvency resolution process shall commence from the date of admission of the application.

Comparative Analysis:

S.No COMPANIES ACT, 2013 IBC, 2016
  Removal of name of the company Winding up by tribunal Voluntary Liquidation in case of default Voluntary Liquidation in case of no default
1. Section 248 read with Companies (Removal of name of the Companies from the Registrar of Companies) Rules, 2016 Section 270 read with Companies (Winding Up) Rules, 2020 Section 59 of IBC, 2016 Section 10 of IBC.
2. If the company is not operational or failed to start its operation can apply for removal of name of the company, without following the procedure of winding up. For the grounds as mentioned above, the specified persons can file an application with the tribunal for winding up of the company. The Company may by special resolution file an application for winding up. If the Company has committed a default, an application thereof may be filed for initiating corporate insolvency resolution process with the Adjudicating Authority.
3. Pre-requisite for filing an application under this section is that the company to extinguish all its liabilities. The tribunal, if it thinks fit may order for winding up of Company and shall appoint an official liquidator. The company can file an application with Adjudicating Authority only if there is no debt due and payable. “Default” means non-payment of debt when whole or any part or installment of the amount of debt has become due and payable and is not repaid by the company.

Conclusion:

The Companies Act, 2013 and IBC, 2016 are complementary to each other and provide a comprehensive scheme for winding up of companies. It provides a favorable framework for companies to wind up.

Author: Prashant Jain, Co-Founder & Partner, Prajakta V Ghokale, Associate and Nisha Jhawar, Associate.

Disclaimer: The content of this article is intended to provide a general guide to the subject matter and that the same shall not be treated as legal advice. For any queries, the author can be reached at prashant@samistilegal.in,prajakta@rna-cs.com,nisha@rna-cs.co.in.

Leave a Reply