Company Wind Up Process

  1. Company Wind Up Explained – Steps Included
    1. Why do companies wind up?

Running a business is a demanding and yet fulfilling endeavour. However, there may come a point when continuing business operations serves no practical purpose. When a business’s marginal profits go below zero it is wise to shut business operations down. Whatever the reason behind it, if a company can barely earn enough to cover its costs and there is no point in keeping it alive, it is better to opt for a company shutdown.

As the English author Aubrey De Graaf said, “Don’t cling to a mistake simply because you spent a long time making it.” Not every passion project can afford to turn into a sink project. Remember, when it comes to business capital, there are no bottomless wells.

  • Types of a company wind up
    • Company Striking off – Defunct Declaration by Registrar of Companies

If a company is inactive for 2+ years, or if it failed to successfully become operational within 1 year of its incorporation, it makes sense not to move further. Since you have already incorporated a company at this point, naturally by registering under and complying to Companies Act, you now need to “strike off” your company’s name and mark it defunct.

A simple procedure for this is to apply with Form STK-2 U/s 248 of the Companies Act.  Now, your company is a dormant company. The government of India provides some relief measures to such dormant companies since there are practically no financial transactions (let alone profitable ones) being undertaken by such companies.

  • Voluntary Company Wind Up

If a handful of the shareholders approve (typically 3 or 4), a company can submit an application to the National Company Law Tribunal to voluntarily wind up. When a voluntary company wind up is initiated, the company needs to be formally dissolved.

For this purpose, an Insolvency Resolution Professional is engaged. He / she handles properly dissolving the company’s assets and settling all lawful claims. It is on this person’s recommendation that the NCLT agrees to pass the order for winding up the company.

  • Compulsory Wind Up by NCLT

If one or more fund providers of a company, the Registrar of Companies itself, or the Central Government make an application to the NCLT to wind up a company, the company has to compulsorily shut down operations. Here too, an insolvency professional is appointed to properly liquidate the company’s assets and pay all outstanding company liabilities. After the IRP’s process is completed, the NCLT issues an order to wind up.

  • Steps to follow for a company shutdown
    • For striking off a company
  1. A shareholder vote in which at least 75% of the shareholders are for striking off the company through the ROC. Only then, can a company fill out Form STK-2.
  2. Bring all outstanding government dues, taxes, employee provident funds, and employee insurance coverages to closure.
  3. Close your company’s bank accounts. Also acquire an official Bank Closure Letter from the bank along with a complete bank statement. You will need to file these documents along with the STK-2 form.
  4. Ensure all assets are properly liquidated and liabilities paid. You need to file a statement of these too along with the STK2-2 form, upon attestation from a CA. 
  5. Close all pending litigation against the company with the state and central government, including outstanding tax liabilities.
  6. Get a CA to attest to a statement showing NIL assets, which should remain active for no more than 30 days of initiating the striking off.
  7. Ensure all the DIR-3 KYC details for the DIN status of all directors are in place. For a Director Identification Number to remain active, the DIR-3 KYC form have to be submitted every year otherwise the company incurs a fine for keeping the DIN status active. Make sure you aren’t in violation of this practice.
  8. Since you will file the application for striking off the company with a digital certificate, check that the DSC is valid for all partners.
  9. Now, for marking your company as defunct, you will need to fill Form Stk-2 and tick the most appropriate of the 3 scenarios for being considered dormant.
  10. For voluntary wind up
  1. Your company passes a resolution in a general meeting for winding up the company. There should be a majority vote for this resolution.
  2. Get the consent of the Trade Creditors and capital providers. In turn, they need to clarify that they don’t have any obligations if the company winds up.
  3. Now, you make a Declaration of Solvency which must be accepted by the Trade Creditors. You have to show your company’s credibility in this declaration.
  4. A liquidator will be appointed to carry out the winding up procedure and report on the assets, properties, liabilities etc. This report will be collated and presented in a general meeting, and the approval therewith will take the resolution for dissolution forward. A copy of the final accounts will be sent to the ROC.
  5. The liquidator appeals to the NCLT for an order of dissolution. Once the NCLT is satisfied with the wind up, the Tribunal passes an order of dissolution within 60 day of the application. A copy of the final order is filed with the ROC. 
  6. For compulsory company wind up
  1. A petition is filed by the company, or the Trade Creditors, or contributors, or the State / Central Government, or the ROC itself.
  2. A practicing CA should opine on the Financial Statement of the company.
  3. The proceedings have to be advertised in a daily journal in a regional language for at least 14 days, under Form 6.
  4. A liquidator is appointed by the Tribunal who submits the complete audited books of accounts up to the date of order.
  5. The company will surrender their assets and the related documents to the liquidator. The liquidator also gathers all properties and effects with actionable claims along with books and papers of the company.
  6. The liquidator has to submit a report to the NCLT within 60 days of the winding up order.
  7. After the affairs of the company have been completely wound up, the liquidator applies with the Tribunal to pass the final dissolution of the company. If the Tribunal is satisfied with the wind-up proceedings and finds the application reasonable, it makes an order to dissolve the company.
  8. The liquidator sends a copy of this order to the ROC, under 30 days of passing.
  9. Don’t let winding up wind you up

Winding up a company can be a draining experience if not handled properly. You are already disheartened that you need to wind up, and on top of that, there are all these regulatory steps that need to be followed to the T.

However, winding up should be treated as a last resort. First, you need to analyse if there are steps you can take to analyse and revive your business. Is there a change in strategy which can help you bounce back? Or a shift in the way you are utilizing your human resources? At such times, a business consultant can help with their acumen and their external view.

With 15+ years of experience in the Indian markets, setting up businesses and making them compliant, we have gained learned expertise in company law and legislature. If you need any assistance with business growth, drop us a message.