Imagine this! You’ve poured your heart and soul into building a company, but things didn’t work out for some reason. Your company either failed to kickstart operations in the first place, or is facing huge losses in the market. Would you still want to run a company which is costing more than it’s worth to you? Believably not! You would immediately want to close it-off, and based on the status of your company, there are two ways you can do so – Striking-off and Winding Up. Let’s understand what these two processes entail.
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Striking off is a process that simply removes your company’s name from the Register of Incorporated Companies that the ROC (Registrar of Companies) maintains. It’s a simpler approach, perfect for companies with less complex financial statuses, perhaps ones which have no revenues, assets or liabilities. On the other hand, winding up is legally a more complex approach and takes things a notch further by liquidating your company’s assets, settling debts, and distributing the remaining funds to stakeholders before closing it up. It’s typically applied to companies with complicated financial statuses like ones which are facing consistent losses, accumulated immense debts and liabilities, and are about to go bankrupt or turn into a defaulter. We will look into both these processes and understand their exact differences in this blog.
What is Striking off a Company?
Well Striking-off, as the name suggests is the process by which the name of your company gets struck-off or removed from the register containing the names of incorporated companies in India. The effect is that it loses its “incorporated” status and hence carries no further legal existence to conduct any operations or activities in its name. The process is mentioned in Section 248 of the Companies Act and can only be undertaken if the company meets the following criteria:
- Inactivity: The company should have been inactive for a continuous period of at least two years from the date of application for striking off or for a period of one year from the date of incorporation. Inactivity implies the absence of any business transactions, operations, or significant accounting entries during this period.
- No Capital Deposited: A company is also eligible for being struck-off if its shareholders have not deposited any capital for 6 months from the date of company incorporation.
- Current Bank Account Closed: The company must not have any bank balance or outstanding liabilities. All dues, including statutory liabilities, such as tax obligations and outstanding loans, should be settled before the period of inactivity. Finally, after clearing the dues, the bank account must be closed off.
- No Legal Proceedings: The company should not be involved in any legal proceedings, such as pending disputes or litigations. It should not be subject to any investigation or prosecution by regulatory authorities.
- No Property or Assets: The company should not possess any immovable property or assets in its name. If there are any assets, they should be disposed of and the proceeds distributed before the period of inactivity.
As far as the process of striking off is concerned, it involves several key steps. Firstly, a consent from at least 75% of the company’s shareholders is obtained in writing or a special resolution. Registrations, licenses and identity documents of the company, if active and valid, are surrendered and the company’s bank account is closed. Financial statements showing nil assets and liabilities are prepared by a practicing Chartered Accountant (CA). All directors sign an indemnity bond, affidavit, and pass a board resolution to strike off the company. Next, an application in Form STK-2 is filed to the ROC and if approved, your company is struck-off.
What is Winding Up a Company?
Winding up, also known as liquidation, is the legal process of bringing a company’s existence to an end. It involves the selling off of the company’s assets, settling its liabilities, distributing the remaining funds, if any, to the stakeholders, and finally closing off the company forever. Winding up can be initiated voluntarily by the company or compulsorily by an order from the court.
There are two types of winding up:
- Voluntary Winding Up: This occurs when the company passes a resolution to wind up voluntarily. This can happen under two circumstances.
- Members’ Voluntary Winding Up: Applicable when the company is solvent and can pay its debts in full within a period of twelve months from the commencement of winding up. The decision to wind up must be approved by a special resolution passed by the shareholders, and a liquidator is appointed to oversee the process.
- Creditors’ Voluntary Winding Up: Applicable when the company is insolvent and unable to pay its debts in full. In this case, a meeting of the company’s creditors is held, where they nominate a liquidator to manage the winding-up process.
- Compulsory Winding Up: This occurs when the court orders the winding up of the company. It is usually initiated by creditors, shareholders, or regulatory authorities due to the company’s inability to meet its financial obligations or other legal non-compliances. The court appoints an official liquidator to handle the process.
There is only one eligibility criteria a company must meet to get wound up, viz, it must be actively conducting its business operations. A dormant or inactive company cannot be wound up. As far as the reasons for winding up goes, they may be manifold. The common ones include insolvency, inability to pay debts, financial distress, business failure, irreconcilable disputes among shareholders, regulatory violations, and other just and equitable grounds as determined by the court.
The process of winding up a company involves appointing a liquidator to oversee the winding-up process, assessing and settling the company’s debts and obligations, selling off its assets to repay outstanding liabilities, distributing any remaining funds to shareholders after settling all debts, and finally obtaining the necessary approvals to dissolve the company.
Key Difference Between Striking Off and Winding Up a Company in India
When it comes to closing a company in India, two commonly considered options are striking off and winding up. While both methods involve the termination of a company’s existence, there are significant differences in their procedures, eligibility criteria, and legal implications. Understanding these distinctions is essential for business owners and stakeholders to make informed decisions about the most suitable course of action.
Striking Off Vs Winding Up in india :
| Parameters | Striking Off | Winding Up |
|---|---|---|
|
Definition |
The process of removing a defunct company from the register of Incorporated companies. |
The legal process of bringing a company's existence to an end. |
|
Authority |
Registrar of Companies (ROC) |
National Company Law Tribunal (NCLT) |
|
Initiated By |
Company or ROC |
Shareholders, Creditors or NCLT |
|
Company Status |
Companies must be inactive, have no assets, or liabilities. |
Companies must be active, have assets and liabilities |
|
Approval Required |
Approval from Registrar of Companies (RoC) required. |
Shareholders' or court approval required. |
|
Liquidator Appointed |
Not applicable. |
Appointed to manage the winding-up process. |
|
Settlement of Debts |
Not required as there are no liabilities. |
Mandatory |
|
Asset Distribution |
Not Required as there are no assets. |
Mandatory, if assets remain after settling the dues |
|
Timeframe |
Relatively quicker process. |
Can be a lengthy process. |
|
Legal Consequences |
Company's name struck off from the Register of Incorporated Companies |
Company is formally dissolved |
|
Complexity |
Less complex compared to winding up. |
More complex due to legal obligations and procedures. |
|
Legal Proceedings |
No court involvement required. |
Court involvement may be required in certain cases. |
|
Restoration |
Can be restored by making an application to the National Company Law Tribunal (NCLT) within a specified period. |
Cannot be Restored |
Conclusion
When faced with the decision to close a company in India, it is crucial to carefully evaluate various factors that can influence the choice between striking off and winding up. These factors play a vital role in determining the most suitable approach for bringing an end to the company’s operations. Key considerations include the company’s financial standing, liabilities, regulatory compliance, employee and creditor claims, future business prospects, tax implications, and the desired level of formality. By taking these factors into account, stakeholders can make informed decisions and navigate the complexities involved in selecting the most appropriate method for closing their company.