/ Company Closure / Closing Private Limited Company

CLOSING PRIVATE LIMITED COMPANY 

Due to several reasons, business owners may decide to close their private limited company. There are certain steps and procedures to be followed when closing a private limited company. Business owners must abide by certain legal laws and regulations when closing a company that is registered as a private limited company.

There are three ways in which a private limited company can be closed:

  1. Mandatory Winding-up
  2. Voluntary Winding-up
  3. Granting Dormant Status
  • Mandatory Winding Up

Any company registered under Companies Act, 2013 which did an unlawful act, fraudulent act or even if the company contributed any kind of action in some fraudulent or unlawful activities then such company would be wound up mandatorily by the Tribunal.

The process of mandatory winding up-

1) The petition will be filed by the company or any contributors to the company or registrar of the companies or trade creditors of the company or central or state government.

2) All the documents supplemented by petition will be audited by a practising CA and the view given by the Auditor on the financial statement must be unqualified.

3) The Petition should be advertised in a daily newspaper at least for 14 days and the advertisement should be in English and the regional language of that area.

4) Form 11 is necessary for the order of liquidation of the company. Form 11 should include-

(i) Complete audited books of the accounts up to the date of the order need to be submitted.

(ii) Date, place and time for the company liquidator should be provided.

(iii) Assets and the documents of the assets should be surrendered.

If the tribunal finds all the accounts are in order and all the necessary compliance have been fulfilled, the tribunal would pass the order for dissolving the company within a period of 60 days of receiving the claim. After the passing of the order by the tribunal, the registrar will then issue a notice to the Official Gazette affirming that such a company is dissolved.

  • Voluntary Winding Up

Voluntarily winding up of a private limited company requires long procedural compliance to follow. There are certain compulsory requirements which have to be finished to close down a company voluntarily.

The process of voluntary winding up–

1) As per the Companies Act 2013, Board Resolution is necessary to wind up the company voluntarily. However, the majority of directors must approve for winding up.

2) Special Resolution is necessary to wind up the company where 3/4th of the total Shareholders must cast their vote in approval of winding up the company.

3) The approval of the trade creditors is also necessary to wind up the company. Trade Creditors have to give their approval that they don’t have any responsibility if the company gets wound up.

4) Declaration of Solvency has to be made by the company and the same must be accepted by the trade creditors of the company. The company’s credibility in the Declaration of Solvency needs to be shown by the company.

All the above processes shall be presented and filed in the respective form and even after the company gets wound up the company's name shall be forbidden for 2 years to be taken by any other company.

  • Defunct Company Winding Up

As per the Companies Act, 2013, a defunct Company is a company that has gained the position of a Dormant Company. The government provides some relief to such defunct or dormant companies because there are no financial transactions that are carried out by the dormant companies.

This option is suitable when you have registered a company for a future project and hence the company is not operational currently. Also, where an in-operational company cannot be closed as it might be holding assets such as land, building etc., choosing the “dormant status” is a good option.

A dormant company is a company which is inactive i.e. a company that has the following characteristics:

  • It has not been carrying on any business or operation
  • It has not made any significant accounting transaction during the last two financial years.
  • It has not filed financial statements and annual returns during the last two financial years.
  • A defaulting company that has not filed annual returns and financial statements for two years or more.

Procedure for obtaining the status of dormant company:

  1. An application must be made in form MSC-1 to get the “Dormant” status.
  2. A special resolution should be passed to authorize the directors to make an application for Dormant status. Thus, we need to file E-form MGT-14 with ROC for filing a special resolution.
  3. The Registrar shall, after considering the application filed in Form MSC-1, issue a certificate in Form MSC-2 allowing the status of a Dormant Company.

Advantages of applying for ‘Dormant Status’

There is a lesser compliance burden for a dormant company which reduces the costs of maintaining such a company.

‘Dormant Companies’ are exempted from the following compliances:

  • To include cash flow statements in their financial statements.
  • Reduced compliance for holding a board meeting in each quarter. These companies are required to hold only two board meetings during the year.
  • These companies do not require to rotate the auditors

Compliances to be met by a dormant company:

  • It shall file a “Return of Dormant Company” each year, indicating financial position which should be audited by a chartered accountant in practice in
  • Form MSC-3 along with such annual fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within a period of thirty days from the end of each financial year.

Also, note that the maximum tenure for which a company can remain dormant is 5 consecutive financial years. If a company remains dormant for more than 5 years, the Registrar commences the process of striking off the name of the company from the Records, i.e. the company will be removed.

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