Closure of Company - Various Options

Introduction

There are tremendous changes in the system for doing business with ease during the last few years. Where financial stakeholders found it difficult to clear backlog of NPA cases, entrepreneurs also got it tough to come out of the business in loss and trauma. Now with the invent of Insolvency & Bankruptcy Code 2016 and changes in Companies Act 2013, it has been made somewhat easy to deal with such cases. Entrepreneurs now get lease of fresh life to exit from previous mistakes done and start new business with more success rate as per their vast experience. Financial institutions also feel better to cope with such cases under new provisions. So, ease of doing business also makes it possible the ease with which companies can shut operations and exit the marketplace in a country and re-enter the market.

Under Indian law, companies (or limited liability partnerships ("LLP") have various options to wind down operations voluntarily, either under the Companies Act, 2013 ("Companies Act"), (or the Limited Liability Act, 2008, for an LLP) or the Insolvency and Bankruptcy Code, 2016 ("IBC").

This article aims to give bird view of the various options through which a company may be able to close/wind up its operations in India, along with the practical considerations that may be applicable while exercising these options.

VARIOUS COURSE OF ACTION for voluntary closure of an entity in India

The mode that may be adopted for voluntary closure of a company mainly depends on the size of the company and whether it is a going concern or not. Summarily, the options that are available under the law include:

(a) Striking off of a defunct company under Section 248 of the Companies Act;

(b) Winding up under the supervision of the National Company Law Tribunal ("NCLT") under Section 271(a) of the Companies Act, read with the Companies (Winding Up) Rules, 2020 ("Winding Up Rules");

(c) Summary winding up under the supervision of the Regional Director under Section 361 of the Companies Act, read with the Winding up Rules; and

(d) Voluntary Liquidation under Section 59 of the IBC, read with the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Proceedings)Regulations,2017("VoluntaryLiquidation Regulations").

(e) The IBC also provides for voluntarily commencing corporate insolvency resolution by the corporate person, which has committed a default (as defined under the IBC) under Section 10 thereof, though not covered in this article.

Similarly, a Limited Liability Partnership may also opt for striking off under the Limited Liability Partnership Act, 2008 ("LLP Act") (Section 75 of the LLP Act); or voluntary winding up by the NCLT under the LLP (Winding up and Dissolution Rules) 2012; or voluntary liquidation under IBC.

Procedure under the available options

(a) Striking off

Company can be closed by the prescribed Rules and Regulations mentioned under Companies Act 2013 because Company is a created under Companies Act 2013. The owners and directors of the Company can decide various options to close the business of its Company but in this era of Ease of doing business, as introduced by the Government, the easiest way to close the Company is by filing an application to Registrar of Companies (ROC) when a company is inoperative for a certain period of time. Section 248 to 252 of the Companies Act 2013 read with Companies (Removal of Names of Companies from the Registrar of Companies) Rules, 2016 deals with the procedural requirements in order to remove the name of the Company from the Registrar of Companies (ROC).

GROUNDS ON WHICH A COMPANY CAN STRIKE OFF THE NAME BY ROC

Section 248 (1) of the Companies Act 2013 and rules made thereunder states various grounds on which the business of the Company can be strike off by the Registrar of Companies, as discussed below:

1. A company has failed to commence its business within one year of its incorporation.
2. A company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made an application within such period for obtaining the status of a Dormant Company under section 455 of the Act.
3. The subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company and a declaration to this effect has not been filed within 180 days of its incorporation under subsection (1) of section 10A of the Act.
4. The company is not carrying on any business or operations, as revealed after the physical verification carried out under sub-section (9) of section 12.

PROCEDURAL REQUIREMENTS FOR REMOVING THE NAME OF THE COMPANY:

1. Company will hold a board meeting for

• to consider and approve filing of application for removal of name.
• To authorise any director to file an application to ROC for removal of name and to obtain consent of minimum 75% of the members of the Company.
• To fix the date, day, place and time for the general meeting of the Company for passing a Special resolution.
• To approve the draft notice of the general meeting along with the explanatory statement. To authorise any officer to issue notice of the general meeting.

2. Company will hold a general meeting to pass the special resolution for removal of name of the Company from the ROC.

3. Company will file a copy of special resolution in form MGT-14 within 30 days of passing the resolution.

4. Company will file an application to ROC for removal of name of company in Form STK-2 along with the required following documents:

• Indemnity bond duly notarised by every director in Form STK-3. A statement of accounts in Form STK-8 containing the assets and liabilities of the Company made up to a day not more than 30 days before the date of the application and duly certified by CA.
• An affidavit in Form STK-4 by every director of the Company.
• A statement regarding pending litigations, if any, involving the Company.

5. ROC shall on receipt of an application:

• Place notice on the official website of MCA in Form STK-6.
• Publish in official gazette. Publish in English language in a leading English newspaper and at least once in a vernacular language where the registered office of the Company is situated.

6. ROC shall simultaneously intimate the concerned regulatory authorities regulating the Company, i.e., Income tax authority, central excise and GST Authorities about the proposed action of closure of the company in order to seek their objections, if any, to be furnished within 30 days of issue of letter of intimation and if no objection/response is received by ROC, it shall be presumed to propose the action of striking off the Company.

7. After compliance of all the process, ROC shall strike off the name and dissolve the company by sending notice in the official gazette in Form STK-7.

KEY POINTS TO CONSIDER

Before making an application for removal of the name of a company, following points are to be considered:

1. A company needs to extinguish all its liabilities in order to close the Company.

2. Application for removal of a company cannot be made by a company, if it has not filed overdue returns in Form AOC-4/ AOC-4 XBRL and Form MGT-7 up to the end of the financial year in which the company ceased to carry on its operations.

3. Application for removal of the Company cannot be made if, at any time in the previous 3 months, the Company:

• Has changed its name or its registered office from one state to another;
• Has made a disposal for value of property or rights held by it, immediately before Cesar of trade or otherwise carrying on of business, for the purpose of disposal for gain in the normal course of trading or otherwise carrying on of business;
• Has engaged in any other activity except the one which is necessary or expedient for the purpose of making an application under that section, or deciding whether to do so or concluding the affairs of the company, or complying with any statutory requirement;
• Has made an application to the Tribunal for the sanctioning of a Compromise or Arrangement and the matter has not been finally concluded;
• or is being wound up under Chapter XX, whether voluntarily or by the Tribunal or under the IBC, 2016.

(b) Summary winding up

A more recent addition to the Companies Act, a summary procedure for liquidation by the Regional Director of the Ministry of Corporate Affairs has been introduced by virtue of the Winding Up Rules, read along with Section 361 of the Companies Act.

Intended as a streamlined mechanism to help small companies wind-down expeditiously, this process does not require the intervention of the NCLT at all, instead envisages applying for winding-up before the concerned Regional Director of the Ministry of Corporate Affairs, who is in charge of the region where the Company is located, subject to the company meeting certain specified threshold. The concerned Regional Director, based on a petition filed by the company which meets the specified thresholds, appoints a liquidator for liquidating the assets of the company. After completing the liquidation process, the Regional Director is empowered to pass the final order of dissolution.

For a company intending to adopt the summary winding up process, it must meet the thresholds prescribed under the Companies Act and the Winding Up Rules, viz:

(a) the company should have assets of book value not exceeding one crore rupees; and

(b) Based on the latest audited balance sheet:

(i) The company which has taken deposits does not have total outstanding deposits exceeding twenty-five lakh rupees; or

(ii) The Company does not have total outstanding loan (including secured loan) exceeding fifty lakh rupees; or

(iii) The Company has a turnover up to fifty crore rupees; or

(iv) The Company has paid up capital not exceeding one crore rupees.

If the aforementioned thresholds are met, the company can file a petition in the prescribed form before the Regional Director, along with a statement of affairs. The Regional Director is required to assess whether the thresholds for commencing summary liquidation have been met, following which an order may be passed appointing the official liquidator of the company.

It is prescribed that the official liquidator disposes of the assets of the company within 60 days as prescribed under the Winding Up Rules and submit a final report to the Regional Director, who upon receipt of such report can order that the company be dissolved.

In theory, the summary winding up process is more streamlined, with timelines being prescribed for liquidation and more importantly it does not involve the requirement of adjudication by the NCLT. However, its applicability is restricted to entities that have smaller scales of operations, and there is presently little data available in the public domain on its practical efficacy.

(c) Winding up by the NCLT

The winding up provision under the present Companies Act is a vestige of the erstwhile Companies Act, 1956, which provided for winding up by the High Court, including for failure to pay any debt. With the introduction of the Companies Act and more importantly the IBC, the scope of winding up under Section 271 of the Companies Act has become narrower. Under the present scheme, the NCLT has the jurisdiction to entertain a petition presented either by the company, any contributory of the company, the Registrar; or any other person authorised by the Central Government or State Government. A company may opt to wind up under the supervision of the NCLT by passing a special resolution to this effect or when the Registrar or the Central Government is of the opinion that the affairs of the company have been conducted in a fraudulent manner or if the company was formed for fraudulent and unlawful purpose. This was recently seen in Devas Multimedia Private Ltd V. Antrix Corporation Ltd. ("Devas Multimedia Case"), where the Hon'ble Supreme Court upheld an order of winding up passed by the NCLT under Section 271(c) of the Companies Act. Further, Section 271 allows for winding up of a company that has acted against the interest of the sovereignty and integrity of India; or if the Company has made a default in filing its financial statements for five consecutive years; or if the NCLT is of the opinion that it is just and equitable that the Company be wound up.

If the winding up petition is admitted by the NCLT, a liquidator would then be appointed by an order of the NCLT who shall constitute a winding up committee and submit a report within 60 days of the order of the NCLT after which the NCLT may fix a time within which the liquidation shall be completed or order the sale of the company as a going concern. After the affairs of the company are wound up, an application would be made to the NCLT for the dissolution of the company.

While the process as laid out under the Winding Up Rules is detailed and relatively well established owing to past precedents, the exercise of option Section 271 of the Companies Act as it presently stands, can be restricted to a few specific circumstances and can be considered as a more time consuming process, which requires the intervention of the NCLT at every stage of the process. Various other stakeholders will also be involved in this process - the Company Liquidator, the Winding up Committee, and the Registrar.

(d) Voluntary liquidation under the IBC

Voluntary liquidation is a process wherein a solvent company, i.e., a company with sufficient assets to cover its debts, chooses to wind up its operations and distribute its assets among its stakeholders in a systematic manner. The primary objective of voluntary liquidation is to ensure that the assets of the company are distributed fairly among its creditors and shareholders, while also promoting a swift and efficient exit from the business. Section 59 of the Insolvency and Bankruptcy Code, 2016 (Code) provides that a corporate person who intends to liquidate itself voluntarily and has not committed any default may initiate voluntary liquidation proceedings under the provisions of Chapter V of the Code. The IBBI (Voluntary Liquidation Process) Regulations, 2017 govern the process of Voluntary Liquidation in India.

The enactment of the IBC in 2016 introduced a separate voluntary liquidation process, which is more commonly adopted for winding down a corporate person (which includes both a company and an LLP) these days. Prior to the IBC, a company could initiate voluntary liquidation under Section 304 of the Companies Act, which was subsequently omitted by the IBC. The process of Voluntary Liquidation has become more streamlined under Section 59 of the IBC, read along with Voluntary Liquidation Regulations, since it does not envisage the intervention of the NCLT for commencing voluntary liquidation process.

In terms of process, prior to initiating voluntary liquidation, the company is required to prepare a valuation report and a statement of assets and liabilities of the company as on the liquidation commencement date (i.e. the date from when the company has no liabilities, employees and assets, except cash and bank balance required to make payments if any claim is filed and to cover the liquidation expenses). Thereafter, the company may initiate the process by passing a director's declaration, stating that the company is not in debt and is not being liquidated to defraud any person.After issuing the declaration of solvency, the company is required to pass a sp­ecial resolution appointing a liquidator, following which the company shall cease all business operations except as far as required for the winding up of the business. The role of government regulators is restricted since the company is merely required to notify the Registrar and the Insolvency and Bankruptcy Board of India ("IBBI") regarding its resolution to liq­uidate the company. This ensures that there is no delay in commencing the liquidation process. Liquidation is also required to be conducted as mandated under the Voluntary Liquidation Regulations by the liquidator within 270 days (if the company has creditors who have approved the special resolution) or 90 days in certain specified cases.

The process does not involve the courts or the NCLT until the final stage, wherein after completion of the liquidation process, the liquidator submits the final report to the NCLT, along with an application for dissolution of the Company. The NCLT is therefore merely required to ascertain whether the company has fulfilled all the compliances and procedural requirements as mandated under the IBC and the Voluntary Liquidation Regulations, before passing an order of dissolution.

Closing comments

As set out above, various modes to voluntarily wind down the operations of a company exist in India. It may be noted however that while exercising any of the above options, the company would be required to ensure certain minimum compliances such as requirement of a minimum of two (for a private company) or three (for a public company) directors and the maintenance of a registered office as required under the Companies Act.

While considering the most viable method to wind down a company, it is therefore important for a company to consider various aspects such as its size (in terms of revenue and the scale of business operations), the timelines within which it wants to complete the process, the level of intervention that is required by the relevant regulators/ the NCLT, the level of control that may be exercised by the company in conducting the winding down process and the relative cost and effort required to wind down the company.

Disclaimer: The entire contents of this editorial have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, users of this information are expected to refer to the relevant existing provisions of applicable Laws. In no event I shall be liable for damages resulting from the use of the information.