For whatever reasons, if you have decided to close your company in India, it is very important that you decide the right format of doing it and understand the cost implication. We will restrict our discussions here to a company which is solvent (can pay it’s debts).
There are two modes to close down your company, one is Strike off (Section 248 of the Companies Act, 2013) and the other is Voluntary winding up (under IBC-Insolvency and Bankruptcy Code, 2016). This write up will help you to understand the basic difference between Strike off and Voluntary winding up and therefore, will help you decide the correct mode to dissolve your company.
The most important factor in the decision making process will be whether or not the company has outstanding debts and has assets that need distribution.
Let’s examine both the processes one by one.
Strike off is a cost effective method of dealing with closure of companies but is only for companies with no assets or liabilities (including contingent liabilities).
The following companies are eligible for opting for strike off:
A company which is not carrying on any business or operation for a period of 2 immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company.
Before making an application for strike off, Company needs to ensure that it has:
Voluntary Winding up / Members winding up:
Moreover, while you are waiting for two years to become eligible for strike off, during this waiting period and during the period thereafter, the Directors and Company remain exposed to liabilities/ demands.
The striking off process requires the company to make an application in form STK-2 to the MCA. The form must be accompanied with a statement of accounts showing nil assets and liabilities, Shareholder’s approval, Affidavits and Indemnities by the directors. Government fees of INR 5,000/- is payable. NOC is not required from Income Tax / GST / other Govt. authorities. All directors need to confirm that there are no dues pending against Company with any such authorities.
Make sure that the company does not maintain any bank account as on the date of filing application and also does not have any assets and liabilities. (For more details, please visit Strike-off )
Voluntary winding up:
You may choose members’ voluntary liquidation if your company is ‘solvent’ (can pay its debts and the estimated liquidation costs). Majority of directors have to make a ‘Declaration of solvency’, stating that the directors have assessed the company’s solvency and believe that it can pay its debts. This Declaration is to be supported by a statement of the company’s estimated assets and liabilities. ,em>(Insolvent companies are covered under separate chapters of the IBC Code, 2016).
The liquidator is an insolvency professional, who runs the liquidation process upon his appointment. As part of process, he will settle any legal disputes, outstanding contracts, sells off the company’s assets and use proceeds to pay creditors, meet deadlines for paperwork and keep authorities informed, pay liquidation costs and the final tax / GST liabilities, surrender various Government registrations, obtain NOC from Income Tax Department, keep creditors informed on their claims and also keep the company informed regularly.
Effect of appointing a liquidator
When a liquidator is appointed, directors ceases to have control of the company but can oversee liquidation through reports submitted by Liquidator. All the assets including bank account are utilised by the liquidator for the purpose of beneficial liquidation and distribution of proceeds to all stakeholders.