CLOSURE OF PRIVATE LIMITED COMPANY

CLOSURE OF PRIVATE LIMITED COMPANY

During last more than one decade now, after Government of India’s initiative for free flow of FDI in India, a number of foreign national(s)/foreign entities established Private Limited Companies in India after having Indian National as nominee director without participation in equity share capital of the company or with a meager some of capital contribution. Unfortunately, several such companies after incorporation could not start any business activity due to various reasons which resulted in corporate collapses.  The management of such companies are under belief that since the company either has not started any business activities in India or it has incurred huge losses in the year of inception itself, it need not to make any compliance.  In such situation the promoter even without closing the company, they discontinued the business and leave the company in India as if an orphan child at the mercy of so-callednominee director, who invariably is representative of the professional who was engaged in establishment of the company.    
A company, being an artificial juridical person, does not die a natural death. It is created by law, carries on its affairs according to law throughout its life and ultimately is effaced by law.

The major reasons behind the corporate collapse are as under:-

• Wrong assessment of Indian market scenario,
• Competition from Peers,
• Lack of knowledge of the Indian Law(s) and Regulation(s),
• Lack of proper professional support/services,
• Unforeseen circumstances such as COVID 19 and relationship of India with the host countries of the promoters.

If the promoters wants to discontinue their business and abandon the company as it is, they can do so at their cost and risk. Such assumptions will not solve the problem but it will become problem inventor in due course of time. So it is always advisable to end up your company in a legal manner. We at PKP can assist such promoters, to smoothly close their company in compliance with the provision as stated in law.

A company established in India whether by the Indian Nationals or foreign nationals /foreign entities can be closed through following methods:-

• Striking Off Defunct Companies
• Voluntary Winding Up
• Winding up through Court

STRIKING OFF DEFUNCT COMPANIES

As per the Companies Act, 2013, a Defunct Company is a company which has gained the status of a Dormant Company. The government provides certain relief to such defunct or dormant company because there are no financial transactions undertaken by dormant companies. The salient features of such companies are as under:-

• No asset and no liability.
• It has not commenced any business activity since one year of its incorporation, or;
• Has not been carrying on any business activities since last two years prior to making an application.

The Companies Act, 2013 laid down the procedure for winding up a Defunct Company under section 248 of the Companies Act, 2013. A Defunct or Dormant Company can be wind up with a fast-track procedure which requires submission of the STK-2 form.

As per provision of Section 248(2), a company may apply for removal of name from register of company to the Registrar of Companies (RoC) subject to the following conditions:

• Company needs to extinguish all its liabilities
• By passing a special resolution and with consent of 75% members in terms of paid-up share capital.

The Registrar after verifying the contents of the application so filed in this regard, if satisfied will strike off the name of the company from the Register of the company being maintained by him at his office.

CONCEPT OF WINDING UP:

Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. Winding up is a legal process.
Effects of winding up:

• The administrative machinery of company gets changed as the administration is transferred in the hands of liquidator.
• Even after commencement of winding up, the property and assets of the company belong to the company until dissolution takes place.

The procedures for Winding up of companies are provided under the Companies Act, 2013 and Insolvency and Bankruptcy Code of India 2016.The Insolvency and Bankruptcy Code, 2016 is an act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

VOLUNTARY WINDING UP:

A Company’s shareholders may trigger a voluntary winding up, usually by passage of resolution. This action can be taken in both cases of either if company is insolvent or if the company is solvent.

Motive in case of Insolvent, may be to avoid bankruptcy or in some cases, personal liabilities for the company’s debt. In case of Solvent, the shareholders may feel their objectives have been met and it’s time to cease operations and distribute company assets.

Winding up a company voluntarily require long procedural compliance to be followed under applicable Indian Rules & Regulations. Eye bird view of the procedure is as under:-

• To hold Board Meeting for winding up of the company and to select liquidator.
• To hold General Body Meeting of the Shareholders to have their consent for voluntary winding up and for appointment of liquidator.
• To obtain consent of Creditors as appearing in the books of accounts not older than six months from the date of board meeting.
• To file Declaration of Solvency with the Registrar of Companies.
• To follow up with the liquidator to carry out the winding-up proceedings and preparation of final report to be submitted with RoC along with final accounts.
• To follow up liquidator to make application to the Tribunal for an order of winding up of the company.
• The Tribunal being satisfied with the winding up proceeding followed by the liquidator will pass an order of winding up within 60 days of the application.
• To file copy of order of Tribunal with RoC

COMPULSORY WINDING UP

Winding up a company by an order of National Company Law Tribunal (NCLT) (Tribunal) is known as compulsory winding up.
The following persons/stake holders can file petition for compulsory winding up before the Tribunal u/s 272 of the Companies Act, 2013.
    

• Petition by the Company 
• Petition by the Shareholders
• Petition by the RoC
• Petition by the Central Government or a State Government
• Petition by Creditors:
• Any person authorized by Central Govt.

The method to be followed for closure of the Company by the promoters may vary from facts and circumstances of such companies. It is advisable to approach specialized professional firm having good standing in the profession and rich knowledge of the subject.