In recent years, significant changes have been made to facilitate business operations, particularly in addressing the backlog of Non-Performing Assets (NPA) cases and enabling entrepreneurs to exit businesses with greater ease. The introduction of the Insolvency & Bankruptcy Code (IBC) 2016 and amendments to the Companies Act 2013 have streamlined processes, providing a fresh start for entrepreneurs and aiding financial institutions in managing such cases. These developments have improved the ease of doing business by simplifying the procedures for companies to shut down operations and exit the market, thereby fostering re-entry opportunities.
Under Indian law, companies (or limited liability partnerships (“LLP”)) have several options for voluntarily winding down operations. These include provisions under the Companies Act, 2013, the Limited Liability Act, 2008, and the IBC, 2016. This article provides an overview of these options and the practical considerations involved in closing operations in India.
Various Options for Voluntary Closure of an Entity in India
The mode of voluntary closure depends on the size of the company and its operational status. The available legal options include:
1. Striking off a defunct company under Section 248 of the Companies Act.
2. 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.
3. Summary winding up under the supervision of the Regional Director under Section 361 of the Companies Act, read with the Winding Up Rules.
4. Voluntary Liquidation under Section 59 of the IBC, read with the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Proceedings) Regulations, 2017.
5. Voluntarily commencing corporate insolvency resolution under Section 10 of the IBC, though not covered in this article.
Similarly, LLPs can opt for striking off under the Limited Liability Partnership Act, 2008 (Section 75); voluntary winding up by the NCLT under the LLP (Winding up and Dissolution Rules) 2012; or voluntary liquidation under the IBC.
Procedure for Available Options
(a) Striking Off
A company can be closed under the Companies Act 2013 by filing an application with the Registrar of Companies (ROC) if it has been inoperative for a certain period. Section 248 to 252 of the Companies Act 2013, along with Companies (Removal of Names of Companies from the Registrar of Companies) Rules, 2016, outline the requirements.
Grounds for Striking Off:
– Failure to commence business within one year of incorporation.
– No business activity for two preceding financial years without applying for dormant status.
– Subscribers have not paid the subscription within 180 days of incorporation.
– No business operations as revealed by physical verification.
Procedural Requirements:
1. Hold a board meeting to approve filing for removal of name and fix a date for a general meeting.
2. Pass a special resolution at the general meeting.
3. File the special resolution in form MGT-14 within 30 days.
4. File an application in Form STK-2 with required documents.
5. The ROC will publish a notice and seek objections from regulatory authorities.
6. If no objections are received, the ROC will strike off the name and dissolve the company.
Key Points:
– All liabilities must be extinguished.
– Overdue returns must be filed before applying.
– Certain activities and changes within the last three months can disqualify the application.
(b) Summary Winding Up
This process, introduced by the Winding Up Rules and Section 361 of the Companies Act, allows small companies to wind down expeditiously without NCLT intervention. Companies must meet specific thresholds related to assets, deposits, loans, turnover, and paid-up capital.
Procedure:
1. File a petition with the Regional Director.
2. The Regional Director appoints a liquidator.
3. The liquidator disposes of assets and submits a report within 60 days.
4. The Regional Director can then order dissolution.
(c) Winding Up by the NCLT
Section 271 of the Companies Act allows for winding up by the NCLT under specific circumstances, such as fraud, failure to pay debt, acting against national interests, or failure to file financial statements for five consecutive years.
Procedure:
1. File a petition with the NCLT.
2. If admitted, a liquidator is appointed.
3. The liquidator constitutes a winding-up committee and submits a report.
4. The NCLT oversees the liquidation process and eventually orders the dissolution.
(d) Voluntary Liquidation under the IBC
Section 59 of the IBC allows a solvent company to wind up its operations voluntarily. The process involves a director’s declaration of solvency, a special resolution, notification to the Registrar and IBBI, and appointment of a liquidator. The liquidation must be completed within 270 days or 90 days in certain cases.
Procedure:
1. Prepare a valuation report and statement of assets and liabilities.
2. Issue a declaration of solvency.
3. Pass a special resolution and appoint a liquidator.
4. Notify the Registrar and IBBI.
5. Complete the liquidation process and submit a final report to the NCLT for dissolution.
Closing Comments
Various modes exist to voluntarily wind down operations in India, each with specific requirements and processes. Companies must consider factors such as size, operational scale, timelines, regulatory intervention, control over the process, and cost when choosing the appropriate method. Ensuring compliance with legal provisions is crucial for a smooth closure.
