Process of Winding Up of a Company

While growing up, we all read this poem by Alfred Tennyson, “For men may come and men may go, / But I go on forever”. Here the poet describes the passing of a Brook / Stream. This poem was often used by books on Business Organizational Studies to harp on how Companies are supposed to go on forever. Even though the concept was to explain the distinction between Management and Company, many people took it for its literal meaning. Here the poem goes: “For men may come and men may go, But a Company goes on forever”

So, while doing all our studies, we never put any effort or emphasis on winding up process of Companies, because the Companies were supposed to go on forever. But this is not the truth many companies do get wound up.

Reasons for Winding Up Of Company

The winding up maybe for various reasons, which may be enumerated below:

1. The Purpose for which the company was formed is over, this is true mainly in case of SPVs
2. The company is no more sustainable
3. The different Promoters of the Company are not able to work cohesively together again and decide to wind up the Company
4. Sometimes the company may not have complied with different returns and filings for a long time, in which case it shall make more sense to wind up rather than continue. This will though depend on the health of the Balance Sheet of the Company. To understand the waterfall mechanism more clearly, please connect to our Expert by Clicking here.
5. Creditors may move for winding up of a Company when its dues are not met
6. The Company has been unable to meet its Debt obligation, and is considered as a liability to public interest. The process may get started by the Company itself or its members or its creditors.
7. Regulatory Authorities (NCLT), is vested with powers to order for closure of a Company

The first 4 are part of what is termed as Voluntary winding up by the Members; the 5th is an example of Voluntary Winding up by Creditors 6th is an Example of Compulsory Winding up whereas the last one represents Winding up by Tribunal.  

It is often said it is easier to get Married, but very difficult to get Divorced in India. The same is the story with Companies. Easier to Start, but difficult to close or shut down or as is said technically to Wind up. Various provisions have been inserted within the Companies act for the process of winding up of a Company. The provisions have been inserted keeping in mind that various stakeholders need to be protected, which includes workers and creditors.

There are various Steps which needs to be followed to Wind up a Company, for an EXPERT Advice, Click here and connect to our Experts.

Voluntary Winding Up of Company:

Steps involved in the winding up of the company.

STEP 1: Create Note

The Note internal note should cover the following aspects on why the winding up is being initiated

• Elaborate the reason for which the Company was formed
• Elaborate whether winding up is due to fulfillment of certain objectives or due to sustainability issues
• If the Winding up petition has been filed by other than members the note should specifically mention the entities involved and the reasons thereof
• The note should also clearly outline whether any steps can be taken to salvage the winding up process, and if the same should be opted for

 STEP 2: Board Resolution

Board meeting should be called for initiating the Process and a proper Board Resolution should be adopted. For help on Building the Board resolution, please Click here to use our Document Builder services.

STEP 3: Conducting an EGM                                   

Notice should be circulated with proper statement explaining the reasons for winding up of the Company. This can then be passed through within the general Meeting.

STEP 4: Meeting of Creditors of the Company

Creditors of the company will need to be informed that the Company is winding up and proper notice should be circulated to them for calling a meeting. If more than 66.67% of Creditors agree on winding up (if 66.67% comes in fraction, then the number should be rounded off to the higher integer), then the company can proceed with winding up. Remember, the Liquidator takes all the steps to verify the claims of all the Creditors of the Company and then send them the notices and circulars regarding the same. Here the Company sends notices to all the Creditors, Secured as well as Unsecured and in totality it shall need to be cleared by the percentage mentioned above.

Step 5: Liquidator

A liquidator is appointed by the Company; the job of the Liquidator is to see for the smooth winding up of the Company. Liquidator then prepares a statement of account of the company. This statement and details leading to the statement including all accounts will need to get audited.

Step 6: General Meeting

General Meeting is then called, whereby special resolution is to be adopted for the following:

• Adopting the accounts as on date  
• Adopting the Financial Statement including Balance Sheet
• Disposal of the books

Step 7: ROC Filing

Company will need to file an application within 14 days of the meeting, the application should be accompanied with the accounts of the company and requesting the Tribunal for the dissolution of the winding up of the company.

Step 8: Final approvals

Tribunal shall have the final authority of then passing the order for the dissolution of the company. This order will need to be passed within the time frame as notified by the department. Currently this is Sixty days. On receiving the approval from the Tribuanal, the liquidator then will need to file the necessary approvals and accompanying documents with the ROC.

Step 9: Gazette

It is important that the Registrar takes steps to make sure that the winding up notice is circulated in the gazette of India. This job is done by the Ministry of Company Affairs or ROC. The applicant though must keep checking the gazette to ensure that the same has been published.

Compulsory Winding Up Of Company

Compulsory winding up follows a different path and as such its steps are also different. Reasons for compulsory winding up can be different and some of such reasons are

• Tribunal has taken a view to wind up the Company
• If the Company is involved in fraudulent acts or misconduct
• If the Company is unable to repay its debts
• If the company is involved in unlawful act
• If the management is involved in unlawful act
• If the company has not filed its financial statements with the ministry of company affairs through ROC for 5 years consecutively.

Steps for Compulsory Winding Up Of Company

STEP 1: Create Note

The internal note should cover the following aspects on why the winding up is being initiated

• Elaborate the reason for which the Company was formed
• Elaborate whether winding up is due to fulfilment of certain objectives or due to sustainability issues
• If the Winding up petition has been filed by other than members the note should specifically mention the entities involved and the reasons thereof
• The note should also clearly outline whether any steps can be taken to salvage the winding up process, and if the same should be opted for

STEP 2: Filing of Petition

The Company will need to file a petition for Voluntary winding up with to the Tribunal. This petition should include a Statement on the current status of the affairs of the Company. For more information on how to prepare the statement, Click here to connect to our expert.

Step 3: Tribunal

The tribunal has been vested with the powers to decide on acceptance of the petition or to reject it. For the application received from people other than the company, the Tribunal will allow a time of Thirty Days to company to file for it’s reply or objections.

Step 4: Liquidator

A liquidator is appointed for monitoring the entire process of winding up of a Company. The liquidator also prepares a report for winding up. The report needs approval from the Tribunal.

Step 5: ROC

It is mandatory for the liquidator to submit the report to the ROC. ROC then verifies and scrutinizes the details of the Report. ROC may ask the liquidator to make changes if it deems so fit. Upon full satisfaction of ROC, it passes and approves the winding up of the Company. Remember, the approval of the ROC is mandatory and is conclusion towards winding up of the Company

Step 6: Gazette

It is important that the winding up notice is circulated in the gazette of India. This job is doe by the Ministry of Company Affairs or ROC. The applicant though must keep checking the gazette to ensure that the same has been published.

Waterfall Mechanism for Distribution of Money

Remember the most important part of the Winding up is distribution of the money after paying off all the Creditors of the Company. Even the Creditors are paid as per the Waterfall mechanism as described by various codes of the IBC, and it typically follows this pattern:

Firstly, Secured Creditors and Workmen (for last 24 months of wages) are paid off. The creditors maybe paid off as per the security they held or as per seniority.  

Secondly, Unsecured Creditors are paid off

Thirdly, Preference Shareholders are paid off

Fourthly, if any assets remain, the Equity shareholders are paid off in the ratio in which they hold the shares.

More details needs to be worked out to follow the waterfall mechanism and still there is ambiguity about the process, though clarity is expected in the future.  

Grounds for Voluntary strike off by a Company

Can a Company that has been incorporated, be dis-incorporated?

Yes you heard it right. I just coined a word- ‘dis-incorporated’. It means to undo an incorporation of a legal entity. Nothing is permanent. Nothing that we have created is infinite. Thus, when we say we have created a company with perpetuity, it may be so. ’May’ being the operative word. The humans creating the Company have the option to discontinue it. To wound up a running company or to strike off the name of a company which has no operations. 

Difference between Strike-off and Winding up

Case 1:

Imagine you have a Company that has no operations, no revenue, any asset that you have can be easily liquidated or set off against a debt, liability that can be set off or paid off, thus ultimately you have a balance sheet that is showing only Share capital on the liabilities side and maybe cash/ bank balance on the asset side. This kind of a balance sheet is called a NIL balance sheet. 

Case 2:

Now you have a Company that is holding a lot of assets (like Intellectual property, land, building, plant, machinery, debtors etc.) and has liabilities (like loans from banks, creditors etc.) and the shareholders want to voluntarily close the company. Thus, the balance sheet is not NIL but has many assets and liabilities. 

Result Case 1:

In the first case, the balance sheet being clean- i.e. a NIL balance sheet, the regulatory authority understands that the Company has no assets or liabilities except for the owner’s fund and the balancing cash/ bank balance. Thus, the company has no outsider having any claims on the Company and the insiders i.e. the shareholders have claim to the cash/ bank balance that is leftover. Thus, it is a simple study in mathematics. It is very easy to wind up such a company as all its operations are already stopped- wound up. The only thing remaining to be done is to remove or strike off the name of such a company from the register of companies and remove its ‘legal entity’ status granted because of the entry in this register. 

The Companies Act, 2013 u/s 248, has allowed such a company to make an application to the central government to get the name of the company struck off from the register of companies.

Result Case 2:

In this case, the balance sheet of the Company is complicated and has many debtors and creditors, assets etc to be first paid and liquidated. Thus, the process to wind up such a company is long and convoluted. It is governed by section 270 so it will have many steps before it achieves a Nil  balance sheet position. After all these steps, can the name of the Company be struck off from the register of companies.

Section 56 of the IBC (Insolvency and Bankruptcy Code, 2016 deals with voluntary winding up of the Company. The process is long whereby the shareholders agree to wind up the company and then apply to the NCLT under the provisions of IBC. The NCLT appoints a Liquidator who is a Insolvency professional. The Liquidator reduces the assets and liabilities of the Company to the basic denomination of ‘cash’ and creates a balance sheet whereby the company is left with no assets and liabilities. The Liquidator then submits a report to NCLT and states that the company has wound up its matters and can now be dissolved. The NCLT passes the order and directs the ROC to strike off the name of the Company from the register of companies..  

Voluntary Strike off by a Company

The old Companies Act of 1956 under section 560, gave power only to the Registrar of Companies to initiate proceedings for striking the name of a defunct company from the Register of Companies. 

Thereafter the Ministry of Corporate Affairs under section 560 of the Companies Act, 1956, vide General Circular No.36/2011 dated 7-June-2011 issued the Guidelines for Fast Track Exit mode allowing companies to file voluntary applications.

Any company that is not having any operations, and wanting to get its name struck off the Register of Companies under Section 560 of the Companies Act, 1956, could now make an application in Form FTE along with a filing fee of Rs.5,000/-

When the Companies Act, 2013 (the Act), became operational, the above provisions were incorporated under section 248 allowing any Company to voluntarily file for striking off its name, from the register of companies, if it is inoperational. The Registrar too has the power to strike off names of such Companies that fit the provisions of the section. The process of such application has been covered under the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016.

Removal of Name of Company from Register of Companies

Thus, removal of name of Company can be done:

• By the Registrar of Companies (ROC) or
• Voluntary application by the Company itself

Application Form is required to be filed by the OPC

STK-2 is the name of the form that has to be filed when a Company wants to apply for voluntary strike off of its name from the Register of Companies. This form has been migrated to the Ministry of Corporate Affairs (MCA) Version 3 (V3). 

Thus, in many instances the form has come for resubmission even though all documents had been attached earlier. The STK in the nomenclature of the form resembles the abbreviation of the word ‘strike’.

Applicable section and Rules:

This application is pursuant to Section 248(2) of the Companies Act, 2013 read with Rule 4(1) of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016

Where to File Application Form Stk-2

The Central Government has created the office of Centre for Processing Accelerated Corporate Exit (C-PACE) and appointed a Registrar. This Registrar has the authority to process and dispose off applications submitted u/s 248(2) in Form No. STK-2 and handle all matters related thereto, with territorial jurisdiction across India.

Reasons for Making An Application In Stk-2 For Voluntary Closure Of The Company

This is the most important aspect for making an application under section 248(2) of the Act. If a Company does not fall under any of the 3 conditions that are outlined in 248(1), then the OPC (Company) cannot apply for a voluntary strike off process. Section 248(2) of the Companies Act,2013 states that a  Company that wants to apply for voluntary strike off of its name from the Register of Companies can make the application in Form STK-2 on all or any of the grounds specified in sub-section 248 (1)

These grounds are: 

1. The Company has failed to commence its business within one year of its incorporation. The ‘one year’ referred to in this clause is not to be construed as a financial year or calendar year, but 365 days from its date of incorporation. For example: if the date of incorporation is 14th April, 2022, then the one year will be completed on 13th April 2023.
2. The  Company is not carrying on any business or operation for a period of two immediately preceding financial  years and has not made any application within such period for obtaining the status of a dormant  Company under section 455; 

These 2 conditions have to be satisfied together. The Company should not be carrying on any business i.e. not even have income from other sources. Also, the Company should not be earning any revenue from operations. Further, even if there is no income, the Company should not be engaging in any kind of business activity or operation. Thus, if the Company has been inactive, it should also be such that it has not filed for a dormant Company status. Remember, the 2 year period of no operations- of being inactive has to be shown. The OPC should check all its earlier filings of AOC-4 to make sure that in the preceding 2 years, they have shown NIL revenue from operations.

1. The Subscription money that the subscribers to the Memorandum of Association had agreed to bring into the  Company, has not been paid and the Declaration in Form INC.20A, stating that the subscription money has been received, to be filed within 180 days of incorporation of the  Company, has not been filed by the  Company under section 10A(1) of the Act; 

Section 10A(1) of the Companies Act, 2013, has become effective from 2-November-2018. As per this section, any Company that has a share capital must complete the following conditions before commencing its business or exercising its borrowing powers:

• Within 180 days(one hundred and eighty) from the date of incorporation, the  Company must file in E-Form INC-20A, a declaration, duly verified by a Director of the  Company, with the Registrar of Companies (ROC). This declaration states and confirms that the subscriber to the Memorandum of Association of the Company, has paid the value of the shares he/she had committed to subscribe to.
• The Company must also file in E-form INC.20A, a verification of its registered office under section 12(2) of the Companies act, 2013, alongwith with photographs of the outside view of the registered office/ building and that of a director sitting in the office.

If, within the stipulated one hundred and eighty days of incorporation, no such declaration is filed with the Registrar as per clause (a) of sub-section (1), then the Company can apply in STK-2 for removal of its name from the register of companies.

Due to many reasons, a Company is unable to bring in the subscription money. For ex: A company was incorporated as its wholly owned subsidiary company in India, where the ultimate beneficiary was an Iranian national. But even after 6 months, none of the Indian banks were willing to open the bank account of the Company in India. Thus, the subscription money could not be brought into the country as there was no bank account. The holding company finally had to file for strike off of the name from the register of companies.

When can a Company not apply for Strike Off Voluntarily

• If a Company is incorporated under the provisions of Section 8 of the Companies Act, 2013, i.e. it is a company incorporated not for profit purposes, then it cannot go in for strike off of its name voluntarily. For incorporating a Section 8, please click here 
• If a Company has in the previous three months (from date of application) done any of the following:

(a) altered its name

(b) shifted its registered office from one State to another;

(c)   has generated any sort of income/ loss due to its operations (i.e. for the object that it was incorporated)

(d) has engaged in any other activity except - Necessary for making this application; to conclude company affairs; to meet legal requirements like statutory filings under GST or Cos Act etc.

(d) an application IN NCLT / RD is pending for merger/ amalgamation/arrangement/ demerger 

(e) application for winding up/ liquidation/ voluntary winding up under Companies Act or IBC is underway.

• If any annual filing ie of annual report or annual return is pending till the years that the Company had generated revenue from operations. This means that if in the last 2 years the Company had no revenue from operations, and it has not filed its annual report and annual return, it can still file STK-2 without filing these returns.