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Winding Up of a Company In India

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What Is Liquidation of a Company? – Overview

  • Liquidation, expressed simply, is the process through which a business ends its operations. The business may opt to shut down for a number of reasons, such as an unwillingness to carry on with business as usual, insolvency, and so on. Liquidation of a company refers to the process of selling a corporation’s assets to pay obligations and settle liabilities.
  • In the event that a business is liquidated owing to bankruptcy, the liquidator may sell the company’s assets to satisfy all outstanding debts. Any money left over after paying the creditors is distributed to the company’s shareholders. Liquidation of a company is a complicated process.

Benefits of Company Liquidation of Company

  • Free from debts after liquidation: Directors and all other company personnel are released from all obligations to and pressure from creditors once the process of liquidation is complete.
  • Avoiding legal action against the company: Directors will disregard legal action taken by the court or tribunal if the resolution is approved willingly, giving them a chance to focus on other commercial prospects.
  • Comparingly low cost charged for liquidation: The charges or expenses related to the process of liquidationare fairly small because there will be fees related to the sale of assets.
  • All lease agreements will be cancelled: Any lease that a corporation or other entity has signed for a set period of time will be terminated, together with all of its terms and conditions, during the process of liquidation. If a fine is due, it will be subtracted from the proceeds of the asset sale.
  • Advantages for creditors: After a protracted legal struggle, creditors will benefit from the process of liquidation because they will be eligible for a default payment with relation to the proposition of credits supplied by all creditors.

How to Close a Company in India

Winding Up

The process of winding up has to be initiated voluntarily by holding a meeting of all parties and adopting a specific resolution, or it can be prompted by a court or tribunal order.

  • The MCA created the ‘Strike Off’ mechanism to provide inactive businesses the chance to have their names removed from the Register of Companies
  • The Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016, which set forth the procedures for winding up or closing a private limited company in accordance with the Companies Act of 2013, were published by the MCA on 27 December 2016
  • The Ministry of Corporate Affairs has implemented Sections 248–252 of the 2013 Act by releasing the STK 2 form.
Fast Track Exit

This technique was introduced through the Companies Act of 2013’s under Section 248 and was reactivated on 5 April 2017, has become the most used. Fast Track exit can be done in two ways:
1. Suo Moto by Registrar
2. The registrar has the authority to remove the Company’s name on its own if:

  • The company failed to start any business within a year of incorporation, and it hasn’t sought the status of a dormant company. Company despite not conducting any business or engaging in any activity for the previous two fiscal years.

 

Documents Required for Liquidation of a Company in India

  • PAN card for the business
  • Closing statement for the business’s bank account
  • A notarised indemnification bond that the directors must execute
  • Most recent financial statement for the business
  • Accounts that include all of the company’s assets and obligations that have been reviewed by a Chartered Accountant (CA)
  • Proof that at least 3/4 of the board members have approved the resolution
  • Application to change the company’s name.

Top Reasons for Compulsory Winding up of a Company

A legal organisation created in accordance with the Companies Act is a private limited company. Therefore, throughout its life cycle, a corporation must keep its regular compliances.

For a company that is not functioning and wants to avoid compliance obligations, the process of liquidation is used. Some of the reasons why companies may winding up is discussed below.

  • The company adopts a special resolution directing the tribunal to wind up the business
  • failure on the part of the company to file a required report with the registrar’s office
  • failure of the company to launch its operations within a year of incorporation
  • A public company’s or a private company’s number of employees has fallen below 7 or 2, respectively
  • The business cannot afford to pay its debts
  • The court’s decision to dissolve the company is just and equitable
  • The business is unable to submit its balance sheet or annual report for five consecutive fiscal years
  • The corporation violated the nation’s integrity and sovereignty.

An application for the closure of a firm must be submitted to the ministry of corporate finances within three to six months. This entire process can be done online.

If a firm doesn’t submit its compliances on time, it will be fined and penalised, and its directors will be barred from founding new companies. It is better to dissolve an inactive corporation in order to avoid future penalties or liabilities.

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Frequently Asked Questions (FAQs)

When a company enters liquidation, employees’ wages and other statutory entitlements may be prioritised and paid from the available funds before other creditors are settled. However, this may not cover the outstanding amount, especially if the company is heavily indebted. The specific procedures and laws surrounding employee payments during liquidation can vary depending on the country’s legal system.
Winding up by the court refers to liquidating a company through a court order. This occurs when a company cannot pay its debts, and creditors petition the court to force the company into liquidation. The court appoints a liquidator who takes control of the company’s assets and distributes them among the creditors as per the applicable laws.
The process of liquidation can be initiated by the company itself through a special resolution, creditors if the company is insolvent, or the tribunal if it discovers fraud or misconduct.
Yes, during liquidation, employees’ rights are protected. They are considered preferential creditors and their unpaid wages or salaries are paid out from the company’s assets before other unsecured creditors.
Business liquidation services are professional services that help businesses sell off their assets and wind down their operations when they are no longer viable or when their owners decide to close them down. These services involve identifying and valuing the assets of the business, developing a plan for selling those assets, and distributing the proceeds of the sales to creditors and other stakeholders.
Although liquidation is frequently the best option, directors also have other options. Consider these three options if liquidation doesn’t suit your company’s demands, for instance, if you have neither big debts or assets. Administration, Company Voluntary Arrangement, and Company Strike-Off.
Yes, a tribunal or a court may order the mandatory winding up of a business.
All of a company’s assets would be sold in order to pay off all debts and liabilities if it were to be liquidated due to bankruptcy.
Liquidation is the process of turning assets into cash. For instance, a person might sell their house, car, or another item and get money in return. Liquidation describes this. The liquidity of an asset is a major consideration when valuing it. For instance, a house is not a very liquid asset because selling one requires time-consuming steps such as preparing it for sale, determining its value, advertising it, and locating a buyer. In contrast, stocks are more liquid because they may be quickly sold and the proceeds paid as cash.

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