Updated : April 15, 2024Cost of Closing an Inactive Private Limited Company in India
Overview : Similar to company incorporation, a company closure process is also important to stay away from fines and legal risks of non-filing annual compliances. Undergoing the company closure process is also mandatory for companies that couldn’t start their operations in the initial years of their incorporation. Taking professional guidance for your company closure can help fulfill your documentation requirements and eventually file a closure application. In this blog, learn about different aspects of closing an inactive pvt ltd company in India including its process, company closure documents, fees, etc.
An Overview
In this startup culture, starting a business or startup often sounds appealing, especially for youth. But do you know, starting and managing a company is not as easy as it seems! It has many drawbacks and challenges. Due to the startup revolution In India, many startups begin on a daily basis. However, most of them fail to sustain even after one or two years. There may be various reasons behind the wrapping up or closure of a business. Similar to company registration, it’s also important to file for its closure or wrapping up, especially when it is not operating anymore. In this blog, get to know about key aspects of an inactive company closure including process, required documents, advantages, fee, etc.
What is an inactive or defunct company?
Defunct companies are those companies that have no assets and liability and haven’t begun their operations within the first year of their establishment. The promoters of such companies should apply to the Registrar of Companies (RoC) to acquire Dormant status in order to keep the company alive so that its operation can be started in the future. However, if there is no intention to keep the company alive in the future, they should follow the company closure process to remove its name from the list of Companies mentioned on the portal of the Ministry of Corporate Affairs (MCA).
Now, you will be thinking why you should apply for closure of the company when it’s already inactive! The reason is even if any company has stopped its operations completely or hasn’t started operations right from its incorporation, it can’t be exempted from the required compliance filings. Failing to file the company name removal from the Registrar of Companies within a specified time can lead to several penalties and legal actions may also be taken against company promoters/directors.
As a defunct company, companies that can apply for striking off their names from the Registrar of Companies are as follows;
- Companies that have not begun any operations within one year of incorporation.
- Within two years of its incorporation, companies couldn’t commence its operations or business.
- Subscription money is not paid within 180 days of the incorporation date by the companies that have subscribed to a memorandum.
Reasons behind applying for Company Closure
By applying for an inactive private limited company closure, one can keep many legal risks and penalties at bay. It will also set the company free from compliance requirements that it may need to fulfill if not applied for company closure within the specified period. The major reasons behind the company closure are;
1. Avoiding Risk of getting disqualified
Though a company is a separate entity, it acts through natural persons mainly directors. Such persons are responsible for making decisions or strategies for the company's growth on behalf of the company. Additionally, they are also responsible for taking care of all compliance of the company. In case of not filing annual returns and other compliances, the directors are found responsible as well. Consequently, a director may get disqualified for the next 5 (five) years under Section 164 of the Companies Act, 2013. If a person is marked disqualified by MCA, he is no longer eligible to be appointed as a director in any company.
2. Avoiding Compliance & Filing Responsibilities
A private limited company must adhere to all compliances for each financial year, whether it is in operating mode or not. The compliances include documentation, meetings, and filling; which is a burden on the company. Therefore, it's better to get company names struck off from the companies list of the RoC that fulfill the compliance each year, even when the company is inactive.
3. Avoiding Fines & Penalties for Non-Compliance or Late Filing
Due to the non-filing of the annual returns and other essential compliances, a company will face prosecution as well as fines under the Companies Act 2013. The Government of India follows strict policy against companies that are registered on the MCA portal but do not file annual returns. Due to the wholly digitized process of filing returns and fulfilling company compliances, there is no way out to escape from the law in case of any non-compliance.
In case of non-filing of income tax return, the company can be punished with a fine of Rs 25,000 at least and may go up to Rs 5,00,000. Each director may have to face a punishment fine of Rs 10,000 which can go up to Rs 1,00,000 as well. In order to avoid such risks and fines, it’s always better to wind up the company if it is not in operating mode.
Documents required for Closure of Private Limited Company
Several documents are required while applying for the closure of a private limited company in India. Arranging necessary documents can ensure efficient filing for closure of your company. The company closure documents required for closing an inactive company are listed below;
- Letter of Consent from the Creditors of the company, if any.
- Notarized indemnity bond from the Directors of the company.
- A Certified Statement made by a CA outlining the assets and liabilities of the company.
- An Affidavit from Company’s Directors.
- Digital Signatures of each director of the company.
- PAN & Aadhar Card of Each Director.
- No Objection Certificate (NOC) by the Income Tax Department
- A Statement detailing any litigation in which the company is involved.
- Duly signed Certified True Copy of a special resolution, signed by the company’s directors.
Procedure of Company Closure
The private limited company closure process is generally termed as wrapping up or striking off a company. The company closure is administered by the Section 248 of the Companies Act, 2013. Moreover, such companies should also comply with the Companies (Removal of Names of Companies) Rules, 2016.
1. Seek Consent of Members of Company
It's necessary to take consent of the shareholders for closing the company in a general meeting by passing a resolution with at least 75% voting rights. Through the same resolution, any of the directors must be authorized to start the company closure process.
2. Check Annual filing status
Before filing a company closure application, it's necessary to check the status of the financial statements and annual returns for the duration the Company was working.
3. Closure of all Bank Accounts
All company accounts must be closed before filing a company closure application and it’s also necessary to obtain a certificate of accounts closure from the banker as well. The directors must ensure that no bank account is maintained by the company, only then he can move forward and apply for the company closure.
4. Surrendering other Registrations & Licenses
Any licenses or registration obtained by the company from any government authority or department, are needed to be surrendered before filing the application of company closure to the Registrar of the Companies.
5. Indemnity Bond & Affidavit of All directors
An affidavit and Indemnity bond should be prepared before applying for winding up the company. In this affidavit, the company's directors individually declare that the information given in the form is true to the best of their knowledge. The indemnity bond outlines that if any claim arises after company closure, directors of the company will be liable to handle it in person.
6. Preparing Statement of Accounts
After closing bank accounts of the company and clearing off all the assets and liabilities, a statement of accounts should be prepared. This statement should be recent and not dated more than thirty days before the date of the company closure application. It should also be audited by a Chartered Accountant.
7. Applying for Striking off Company name
The application for striking off the company name from the Registrar of Companies, should be submitted through Form STK-2. This form must contain digital signatures of the company directors and also an affidavit, indemnity bond, and statement of account.
This step-by-step process of company closure is applicable in the case of ‘Voluntary Closure’ of a company. There is another type called ‘Compulsory Closure of the company’.
If a company registered under the Companies Act 2013 is found doing serious frauds or such unsocial activities, it might be ordered to close it compulsorily. A tribunal or court will order such companies to close it by issuing an order depending on the company's directors' special resolution proposed in a board meeting. In such cases, the company will have to follow below steps;
- to file a petition for the tribunal and provide the company's statement of affairs.
- to appoint a liquidator for executing activities related to company closure.
- a report must be drafted by a liquidator and he/she should wait for the approval. On receiving approval, it must be submitted to the tribunal.
- The ROC verifies the report. On successful verification, it will approve the process of company closure and strike off the company name from the list of registered companies.
- Eventually, ROC will send a notification to publish the report to the official Gazette of India.
Company Closure Fee
The cost of striking off a company depends on two crucial form fees- MGT-14 and STK-2. Form MGT-14 is useful in submitting the resolution passed by the shareholders of the company for approving its closure. STK-2 is the actual application that is filed to the ROC for requesting a voluntary strike-off. Here are the fee structures of both forms:
Fees for MGT-14:
- Nominal Share Capital up to Rs.1 lakhs – Rs.200
- Nominal Share Capital up to Rs.5 lakhs – Rs.300
- Nominal Share Capital up to Rs.25 lakhs – Rs.400
- Nominal Share Capital up to Rs.1 crore- Rs.500
- Nominal Share Capital exceeding Rs.1 crore – Rs.600
- Fees for STK-2 – Rs.10,000
Besides you may also have to pay professional charges, if you seek professional assistance from legal experts.
Conclusion
Due to the evolving startup ecosystem in India, many startups are registered every month. However, due to certain factors, many businesses fail to begin their operations and remain inactive in the initial years of their establishment. Closing a company is also a mandatory compliance as it can keep you away from the legal risks and penalties of non-compliance which may include annual returns and filing, etc. Know more about the company closure process, company closure charges, and other aspects of closing an inactive private limited company through this blog post.
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