Closure of Business Entity
Author – Mr. S. Prabhakar
- Every entrepreneur who sets up a business does so to succeed. But many times, for various reasons, either the business for which the company is set up does not take off or the company does not run as successfully as envisaged.
- Reasons for the decision to close the business entity:
Capital: The inability of the promoters running a small business successfully to manage the large requirement of capital for expansion of the business may lead to the closure of the business.
Management skills: In an expansion mode, businesses require a higher level of management skills compared to what is required while starting as a small-time entrepreneur. Every entrepreneur may not possess the management skills required in an expansion mode and may not afford to hire the best of the talent because of which many businesses may lead to close down.
Strategic mergers: While in expansion mode companies set up subsidiary and associate companies. There may be circumstances while bringing in foreign partners or making a strategic sale of the companies there may be a requirement of closing down subsidiaries and associate companies by merger or sale.
Obsoleteness: With the rapid change of technologies many entrepreneurs fail to scale up their business and the products they are making may become obsolete because of which there may be a requirement to exit the business.
Ideas: Many dotcoms and start-up companies failed not because of a lack of ideas but failure to put great ideas into a viable business proposition. The entrepreneurs may like to close down non viable ideas at a right time to avoid losses and pursue a new idea.
Fast changing business environment: Failure to anticipate or react to competition, technology, or marketplace changes can lead a business into rough weather and lead to the closure.
Succession: Lack of successors or successors not taking interest in taking the business forward may lead to a situation of the voluntary closure of business.
Genuine Business failure: A company may fail due to genuine business reasons and default in repayment of loans to banks and institutions leading to involuntary winding up initiated by the creditors.
If at any point in time if the entrepreneur does not wish to continue to do business, then voluntary closure of the business entity is an option to be considered to
• Save cost of maintenance of books and records and do the requisite compliances
• Avoid the risk of non compliances
• Save penalties and prosecutions for non compliance
• Utilise resources and efforts to an alternative business idea
There are circumstances under which business may be closed on a non voluntary basis.
In this article, we will examine the various ways of closing down company form of businesses.
Ways of closing the company
• Striking off the name of the company
• Winding-up of the company
Voluntary winding-up
Winding-up through the court process
• Closing through Corporate Insolvency Process
I. Striking off the Name of the Company
Striking off means removing the name of the company from the Register of Companies (RoC) maintained by the jurisdictional Registrar of Companies (RoC) and the company will no longer be in existence and perform any operations. It is an alternative to winding up the company.
There are two modes of striking off the name of the company.
i. Strike off by the Registrar of Companies under Section 248 (1) of the Companies Act, 2013 on the application of the company – an involuntary act.
ii. Strike off by the company on its own volition under Section 248 (2) of the Companies Act, 2013 – a voluntary act.
i. Strike off by the Registrar of Companies (RoC)
Grounds under which Registrar of Companies (RoC) can initiate strike off the name of a company
• When the company has not commenced its business within 1 year of its incorporation.
• When the company has not pursued any business for the preceding 2 financial years and the company has not sought the status of being a dormant company under Section 455 of the Companies Act, 2013.
ii. Voluntary strike off on the application of the Company
At any point of time in the life of the company, if the company does not want to carry on operations of the company, they can proceed to get the name of the company struck off under Section 148(2).
A company can make an application to strike off the name when
• When the company has not commenced its business within 1 year of its incorporation.
• When the company has not pursued any business for the preceding 2 financial years and the company has not sought the status of being a dormant company under Section 455 of the Companies Act, 2013.
• The Subscribers to the Memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of the company.
Before moving an application, the Company should extinguish all its liabilities, if any as on date.
Approval by Shareholders.
• Approval for striking off the name of the company shall be obtained from shareholders by passing a special resolution by members holding 75% of the share capital.
• If the company is regulated by any other Authority like RBI consent of such authority should also be sought to strike off the name of the company.
II. Winding-up of the Company
Winding-up is the process of liquidating of Company’s assets to pay the debts incurred. Debts, expenses, and costs are paid off first and the balance is distributed among the stakeholders. After the liquidation of the company, it is dissolved and the company ceases to exist.
i. Voluntary Winding-up
As per Section 59 of the Insolvency and Bankruptcy Code (IBC), a company that has not committed any default and intends to liquidate itself voluntarily can initiate liquidation proceedings.
Preconditions to be fulfilled – Section 59 (3)
a) a declaration from the majority of the directors of the company verified by an affidavit stating that—
(i) they have made a full inquiry into the affairs of the company and they have formed an opinion that either the company has no debt or that it will be able to pay its debts in full from the proceeds of assets to be sold in the voluntary liquidation; and
(ii) the company is not being liquidated to defraud any person;
ii. Liquidation under IBP Code
Initiation of liquidation. – Section 33 of IBC
1. Where the Adjudicating Authority, —
(a) before the expiry of the insolvency resolution process period or the maximum period permitted for completion of the corporate insolvency resolution process does not receive a resolution plan or
(b) rejects the resolution plan for the non-compliance with the requirements, it shall pass an order requiring the corporate debtor to be liquidated.
2. If at any time during the corporate insolvency resolution process but before confirmation of the resolution plan, the Committee of Creditors decides, by a majority vote of not less than 66% of the voting share, to liquidate the corporate debtor, the Adjudicating Authority shall pass a liquidation order.
3. If the Adjudicating Authority determines that the corporate debtor has contravened the provisions of the resolution plan, it shall pass a liquidation order.
Dissolution of corporate debtor (Section 54)
1. Where the assets of the corporate debtor have been completely liquidated, the liquidator shall make an application to the Adjudicating Authority for the dissolution of such corporate debtor.
2. The Adjudicating Authority shall order that the corporate debtor shall be dissolved from the date of that order and the corporate debtor shall be dissolved accordingly.
SimplyBiz Private Limited provides managed services in the field of Advisory, Transactions, Business Setup, Compliance, Accounting, and Taxation. SimplyBiz has its Head office in Hyderabad and offices in Bangalore, Chennai, and National Capital Region.
SimplyBiz can assist you in planning and obtaining all regulatory approvals in respect of the closure of a business entity.
*The Author S. Prabhakar, is a Company Secretary, Chartered Secretary from UK, Lawyer and Registered Insolvency Professional and Sr. Consultant with SimplyBiz.
For enquiries, please contact Mr. P Surya Prakash, FCS, Lead – Regulatory & Listing at sp@simplybiz.in
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