Compliance For Company Closure as per Companies Act, 2013

The closure of a company is a significant event that marks the end of its operations. While it may seem like a failure or a setback, closure can also signify a strategic decision made by the company’s management to focus on new opportunities or to address challenges that cannot be overcome.

Understanding the importance of company closure is crucial, as it allows stakeholders to gain insights into the decision-making process and enables them to plan their next steps accordingly. The provisions of the closure of the company are mentioned in the Companies Act, 2013 and all the provisions need to be abided by very strictly.

The process of company closure is a way to end business operations due to multiple reasons. For the purpose of closure of a company there is a necessary process of liquidation of a company which is mandatory before closure of a company.

            What does company closure mean?

Company closure refers to the process of permanently shutting down a business entity or ceasing its operations. It involves the cessation of all activities, including production, sales, and services, within the company.

During the closure of a company, it typically involves the liquidation of assets, settlement of outstanding liabilities, and the termination of contracts and employment agreements.

The closure of a company means the end of its existence as a legal entity and often has significant implications for employees, shareholders, creditors, and other stakeholders associated with the business.

Also Read -Closure of a Company as per Companies Act, 2013

Law Related to Company Closure?

The Companies Act 2013 serves as the most recent legislation regulating the establishment of companies in India. Enacted by the parliament on December 13, 2012, this act officially commenced on April 1, 2013.

The Recent amendment of Companies Act, 2013 replaced the previously enforced Companies Act of 1956, which had been in effect for over a century since 1859. The introduction of this new law has brought forth numerous alterations to the preexisting regulations that govern Indian companies.

                   Total Cost of Company Closure

The Total cost of company closure in India is given in table below:

Note: For the purpose of company closure a professional fee is charged by the company secretary, and an additional fee for Documents Processing and auditing(Notary and Stamp Paper).

Note: The aformentioned Fees is exclusive of GST.

 What is the Procedure to Close a Company?

The procedure for winding up a company or closing a company in India is as follows:

Procedure of Voluntary company closure or winding up

Steps to be followed in case of voluntary winding up a company are as follows:

• Step 1: Board Resolution must be passed by all the board members regarding voluntary winding up of the company.
• Step 2: Approval from shareholders must also be taken for the purpose of winding up of the company.
• Step 3: Trade creditors must also give their consent that they do not have any responsibility towards the liquidation of the company.
• Step 4: A document of Declaration of Solvency must also be prepared.
• Step 5: Creation of Report of Assets and liabilities of the winding company by the appointed liquidator.
• Step 6: Application of company closure to the Tribunal for liquidation of the company must be filed by the liquidator.
• Step 7: After verification of documents, the Tribunal will pass a resolution for dissolution of the company within 60 days of application.
• Step 8: Advertisement in the Newspaper and removing the name from the list of registered companies.

Procedure for Compulsory winding up a Company

The procedure for compulsory winding up a company is as follows:

• Step 1: Company must file a petition to Tribunal and present the statement of affairs of the company.
• Step 2: Company must appoint a liquidator to carry out all the company closure operations.
• Step 3: The liquidator must draft a report and wait for the approval. Once the approval is received, the report must be submitted to the Tribunal.
• Step 4: If the ROC finds the draft report satisfactory, they will approve the winding process and strike off the company name from the list of registered companies.
• Step 5: ROC will send the notice for the publication of this report to the Official Gazette of India.

What are the Documents Required for Company Closure?

The mandatory list of documents required for company closure as per the Companies Act, 2013 are:

• An Authorised Board Resolution about the closure of the company and appointment of a liquidator.
• The Articles of Association of the company, where the liquidation and winding process of the company is mentioned.
• A notice for the appointment of a liquidator of the company, which must be signed by the directors.
• A detailed list of creditors which will include their contact information and payable debt by the company.
• Final accounts statement prepared by the liquidator from the period of commencement of liquidation process till its completion.
• A statement of affairs of the company which will be prepared by the liquidator, mentioning all the assets and liabilities of the company on the date of company closure or winding up of the company.
• The declaration of solvency, signed by the directors must also be there, which can state that the company is solvent and is able to pay off its debts within a stipulated time period.

                        Modes of Company Closure

According to the Companies Act, 2013 there are two main types of processes through which the process of initiated. These are:

Voluntary Company Closure

Dissolution by Shareholders: This subheading will explore the process by which shareholders collectively decide to dissolve the company and cease its operations.

Strike-off by Registrar of Companies: Here, we will explain the circumstances in which the Registrar of Companies can strike off a company from the official register due to non-compliance or other specified reasons.

Voluntary Winding-up: This subheading will cover the voluntary winding-up process initiated by the company’s shareholders, including the appointment of a liquidator and the subsequent steps involved.

Involuntary closure by Tribunal

Compulsory Winding-up by Court: This subheading will focus on the scenarios in which a court orders the winding-up of a company due to factors such as insolvency or failure to meet financial obligations.

Dissolution by Government Authorities: Here, we will explore the instances where government authorities possess the power to dissolve a company based on specific circumstances, such as non-compliance or regulatory violations.

                            Why Close a Company?

There are multiple reasons which leads to closure of a company, and these reasons are as follows:

Financial difficulties: A company  face significant financial challenges, such as declining sales, increasing debts, or inability to secure funding. If these issues become insurmountable and there are no viable solutions, the choose to close down.

Strategic decision: Sometimes, a company decide to shut down a specific business unit or division as part of its strategic planning due to a shift in focus, a desire to consolidate resources, or to redirect investments into more promising ventures.

Market changes: Industries and markets are dynamic, and sometimes a company’s products or services become obsolete or face intense competition. If a company  adapt to changing market conditions or sustain profitability, it for closure.

Legal or regulatory challenges: Companies  face legal or regulatory issues that impede their ability to operate effectively. This  include violations, lawsuits, compliance challenges, or changes in regulations that make their business model unviable.

Owner’s retirement or personal reasons: The owner or founders of a company choose to retire or pursue other personal interests, leading to the decision to close the business. This is especially common for small or family-owned businesses.

Merger or acquisition: In some cases, a company  acquired by another entity or merged with another company. As part of the consolidation process, redundant operations closed down to streamline resources and maximize efficiency.

                          Consequences of Company Closure

There are multiple reasons which leads to closure of a company, and these reasons are as follows:

Financial Losses: Company closure  result in financial losses, especially if the company has outstanding debts or liabilities that  fully repay. The process of settling debts and obligations lead to financial strain on the company’s stakeholders.

Job Losses: Closure involves the termination of employment for company employees. This a significant impact on individuals who relied on the company for their livelihoods, causing financial hardships and uncertainty.

Business and Industry Reputation: Company closure  negatively impact the reputation of the business and its stakeholders. It raise questions about the company’s stability, reliability, or management, which  affect future business opportunities and relationships.

Emotional and Psychological Impact: Closing a company that entrepreneurs or business owners have invested significant time, effort, and emotions into emotionally challenging. It may lead to stress, disappointment, and a sense of loss.

Disruption to Supply Chains and Business Relationships: Closure  disrupt existing relationships with suppliers, clients, or partners, potentially affecting their trust and confidence in future business dealings.

Legal and Regulatory Complexities: Closing a company requires adherence to various legal and regulatory requirements. Failure to comply with these obligations  lead to legal disputes, penalties, or fines. Navigating the legal complexities of closure  time-consuming and challenging.

                                 Conclusion

The company closure is the process of winding up the operations of a company due to various reasons. The process of liquidation of a company involves appointment of a liquidator who will finally initiate and carry on the liquidation process. Closing a company is a complicated process and it requires expert consultation to close a company successfully to avoid any penalties in the future.

Consult with Monitrix for more information on liquidation and get the expert advice on your company closure to avoid any penalty.

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