Options to Wind Up a Private Limited Company in India
There are three main ways for how to close a PVT LTD Company in India, which are as follows:
Defunct Company Winding Up
A defunct company is classified as a dormant company under the Companies Act 2013, and it offered some exemptions due to its lack of financial activity. The Companies Act 2023 provided a procedure for winding up such companies, primarily involving the submission of Form STK-2. This form, duly signed by a board-authorized director, is a sole requirement for closing a defunct company. A company qualifies as "defunct" if it meets all of the following criteria: it has no assets or liabilities; it has not commenced business activity since incorporation; or it has not conducted any business for at least one year prior to applying for the Fast Track Exit (FTE) scheme.
Voluntary Winding Up
Voluntarily winding up a company involves a lengthy, mandated process. This can occur when the company's lifespan expires, a predetermined event occurs (as outlined in its articles of association), or shareholders pass a special resolution (requiring at least a 75% majority) for voluntary winding up. The process, which begins upon passing the relevant resolution, includes appointing a company liquidator (confirmed by a majority of creditors by value) and involves several key steps:
- The company's general meeting passes the resolution, with a majority of directors agreeing to the winding up.
- Trade creditors consent, confirming they have no outstanding claims.
- The company submits a Declaration of Solvency, demonstrating its financial viability, which must be accepted by trade creditors.
- The appointed liquidator manages the winding-up, preparing a report on assets, liabilities, and other relevant information. This report is presented to a general meeting for approval and a dissolution resolution. A copy of the final accounts and explanations is sent to the Registrar of Companies (ROC).
- The liquidator applies to the Tribunal for a dissolution order. If satisfied, the Tribunal typically issues the order within 60 days, a copy of which is filed with the ROC.
All procedures and forms are prescribed in the Companies (Winding up) Rules, 2020. Even after dissolution, the company's name is restricted from reuse for two years.
Compulsory Winding up of a Private Company
Companies registered under the Companies Act that engage in unlawful or fraudulent activities can be compulsorily wound up by the Tribunal. This process involves several steps:
- Petition Filing: A winding-up petition (Form WIN 1 or WIN 2, in triplicate, with an affidavit in Form WIN 3) can be filed by the company itself; its creditors; contributors; any combination of the preceding; the Central or State Government; or the Registrar of Companies. Accompanying documents must be audited by a practicing CA with an unqualified opinion, and the statement of affairs (Form WIN 4, in duplicate, with an affidavit in Form WIN 5) must be included.
- Advertisement: The petition must be advertised in a daily journal (both English and the regional language) for at least 14 days (Form 6).
- Tribunal Proceedings: The Tribunal hears the petition, considering objections and responses. It may appoint a provisional liquidator (Form WIN 8). The winding-up order (Form WIN 11) will specify the submission of audited accounts, the date, time, and place for the Company Liquidator, and the surrender of assets and documents. Upon the order, the liquidator takes custody of all company property, claims, and records. The liquidator must submit a report to the Tribunal within 60 days of the winding-up order.
- Dissolution: Once the company's affairs are fully wound up, the liquidator applies to the Tribunal for dissolution. If approved, the Tribunal orders the company's dissolution, effective from the order date. A copy of the order is sent to the Registrar within 30 days. The Tribunal typically issues the dissolution order within 60 days of receiving the application, provided the accounts are in order, and all compliance requirements are met. The Registrar then publishes a notice in the Official Gazette, declaring the company dissolved.
Liabilities of Directors during Private Company Closure
Directors bear significant responsibilities and potential liabilities during company closure. Generally, directors of private limited companies are responsible for statutory compliance, including filing returns and financial statements, and can be held personally liable for unpaid taxes or dues.
During closure, directors must ensure adherence to all applicable laws and regulations, including fair and equitable distribution of assets and payment of all creditors. Specific liabilities vary depending on the closure scenario:
- Fast Track Exit: Directors can be held personally liable for false information in the application or for any outstanding taxes or statutory dues.
- Voluntary Winding Up: Personal liability can arise from fraudulent activities or mismanagement during the process or failure to settle all debts before distributing remaining assets to shareholders.
- Compulsory Winding Up: Directors may be held personally liable for misconduct, fraud, or mismanagement contributing to the company's insolvency, as well as any unpaid taxes or statutory dues.
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