When a private limited company reaches the point of cessation in its operations, the shareholders often opt to bring it to a close. The process of closing such a company in India is relatively straightforward, involving a few key steps. An important priority to consider when closing a private limited company in India is the company’s outstanding debts and liabilities. Once these financial obligations are squared away, any remaining assets can be distributed among the shareholders. In this blog, we shall see the dimensions and methods of closing a private limited company in India.
Understanding Private Limited Company Registration in India
A private limited company registration stands as a distinct business entity in India. According to Companies Act of 2013, private limited companies are obligated to file annual returns with the ROC. Additionally, they are required to maintain financial records and prepare audited financial statements.
During winding up, the company’s assets are liquidated to settle its debts. The proceeds from this sale are distributed among the creditors in accordance with their respective claims. Any remaining assets after the debt settlement phase are then distributed among the shareholders based on their individual shareholding percentages.
Methods of Closing a Private Limited Company in India
Selling a Private Limited Company involves a number of processes. It entails transferring the majority shareholding of the company to another entity or individual, effectively relieving the majority shareholders of their stocks and responsibilities. While technically not an actual winding up, it results in a change of ownership. The different methods of closing a private limited company in India are:
Compulsory Winding Up
Under the Companies Act in India, companies that engage in unlawful or fraudulent activities can be subject to compulsory winding up by the Tribunal. This process of closing a private limited company in India includes several steps:
1. Filing of a Petition
The petition can be filed by the company itself, trade creditors, contributors, the government, or the Registrar of Companies, using Form WIN 1 or WIN 2, accompanied by an affidavit in Form WIN 3.
2. Statement of Affairs
All documents must be audited by a practicing CA, and the statement of affairs should be in Form WIN 4, verified by an affidavit in Form WIN 5.
3. Advertisement
The petition should be advertised for at least 14 days in a daily journal, using Form 6, in both the regional language and English.
4. Tribunal Proceedings
The Tribunal will hear the petition, consider objections and replies, and may appoint a provisional liquidator (Form WIN 8). The winding-up order is issued in Form WIN 11, specifying various duties.
5. Company Liquidator
The Company Liquidator takes custody of all company assets, books, and papers. They submit a report to the Tribunal within 60 days of the winding-up order.
6. Dissolution
Once affairs are concluded, the Company Liquidator applies for dissolution. If the Tribunal deems it just and reasonable, it issues an order for dissolution, which is then notified to the Registrar of Companies.
Voluntary Winding Up
Voluntary winding up is another way of closing a private limited company in India. It involves a detailed procedure as given:
- Passing Resolutions: The company passes resolutions in a general meeting, with approval from a majority of directors, for voluntary winding up. Creditors must also approve.
- Declaration of Solvency: The company must make a Declaration of Solvency, which is accepted by trade creditors.
- Liquidator’s Report: The appointed liquidator conducts winding-up proceedings and prepares a report for approval at a general meeting. The Company Liquidator sends final accounts and resolutions to the ROC.
- Tribunal Application: The Company Liquidator applies to the Tribunal for dissolution. If satisfied with the winding up, the Tribunal issues a dissolution order within 60 days of application. A copy of the order is filed with the ROC.
- Prohibition Period: The entire process is documented and filed in the prescribed forms. After winding up, the company’s name is prohibited from use by other applicants for two years.
Defunct Company Winding Up
Another method of closing private limited companies in India is for defunct or dormant companies, which can be wound up with a simplified procedure. It works as follows:
A defunct company, in accordance with the Companies Act of 2013 is a dormant company that has not engaged in financial transactions.
- STK-2 Form: To wind up a defunct company, submit Form STK-2 to the Registrar of Companies. The form must be signed by a director authorised by the board.
- Criteria for Defunct Company: A defunct company is one with no assets, no liabilities, and no business activities within one year prior to applying for winding up under the Fast Track Exit Scheme (FTE).
The Companies (Winding up) Rules, 2020, provide the specific formats for these forms and detailed procedures for winding up.
Consequences of Closing a Private Limited Company in India
Closing a private limited company carries significant and wide-ranging consequences, like:
1. Unpaid Debts for Creditors
Creditors, including suppliers and lenders, may face challenges in recovering their outstanding debts. The sale of the company’s assets might not be sufficient to cover all the owed amounts, leaving creditors with unrecovered debts.
2. Asset Liquidation
As part of the closure process, the company’s assets are typically sold off to repay debts. This can include selling physical assets, intellectual property, or any other valuable holdings.
3. Removal from Register
Upon closure, the company’s name is typically removed from the register of companies. This signifies the formal termination of its legal existence.
Final Thoughts
Closing a Private Limited Company in India involves either voluntary or compulsory winding up, each with distinct procedures. Voluntary winding up requires shareholders to pass resolutions, settle debts, and distribute assets among themselves, while compulsory winding up is initiated by the Tribunal due to unlawful or fraudulent activities.
Defunct companies can opt for a simplified fast-track winding-up process. The consequences of closure include financial losses for shareholders, job disruptions for employees, challenges for creditors, asset liquidation, and formal removal from the company register. This highlights the importance of careful consideration and adherence to legal processes when closing a private limited company. It’s a significant decision with far-reaching consequences that must be handled carefully.
