Windup Private
How to wind up a private limited company?
Winding up of a private limited company can be done in 2 different ways.
- Selling company shares: By selling the majority company shares to another person or entity, the shareholders will avoid the burden of debts. Hence, voting powers, rights, and responsibilities will be laid on the acquired person or the entity.
- Voluntary wind up: Voluntary wind up can be commenced either by special resolution or a resolution taken during a general body meeting. By violating any of the terms and conditions of the memorandum of association (MOA), the winding can be executed. Similarly, due to insufficient financial funds or inability to clear the debts, a company can be winded up.
A voluntary wind up can be of two types:-
Members Voluntary Winding Up
If a company remains solvent (able to pay the debts) at the time of closure and its directors make a voluntary declaration for the same, it is termed as the Members’ Voluntary Winding Up. Such a declaration should have the following characteristics-
- It must be substantiated by an affidavit
- It must be made within 5 weeks preceding the date of the resolution passed by the company to wind up. It must be submitted to the registrar before the due date.
- A copy of the latest and audited profit & loss statement of the company ( as on a practicable date before the declaration of solvency) should accompany the declaration.
- The latest company balance sheet and a statement of assets & liabilities should be enclosed with the declaration. The following steps are necessary to carry out the process of Members’ Voluntary Winding Up-
- Solvency declaration by the directors, as mentioned above
- The statutory declaration to the Registrar
- Appointment of liquidator
- Collection of the assets belonging to the company, payment of its liabilities and distribution of the balance of the proceeds among the contributors.
Creditor voluntary winding up
If the solvency declaration is not made by the directors and submitted to the registrar, the company is presumed to be insolvent. In such a case, the creditors must meet (usually after the company general meeting) to pass the resolution for winding up and liquidation of the company.
The following steps are necessary to carry out the process of Creditors’ Voluntary Winding Up-
- The general meeting of the company passes a resolution to wind up the company operations.
- A meeting of the creditors must take place
- The members and creditors must appoint a liquidator or a group of liquidators
- They must set up a committee of inspection as well
- The process of winding upstarts as per provisions of law
Procedure
Procedure for voluntary wind up
- With respect to the Companies Act, 2013, the resolution of the board meeting is essential to start the winding up process.
- In a special resolution, a majority of 3/4th of the company shareholders should register their vote on the side of winding up the company.
- Similarly, the company’s creditors should approve the resolution made for winding up, without complications.
- The “Declaration of Solvency” should enclose outstanding debts along with the auditor report, regarding total assets of the company and it should be forwarded to the RoC (Registrar of Companies).
- Now the official liquidator will be appointed to perform the winding up process from the date of passing the resolution.
- After the resolution has been passed, the liquidator should open a bank account within a period of one month.
- In any scheduled bank, the liquidator should open a bank account in the name with, the prefix “ the name of the company” followed by “voluntary liquidation”.
- The liquidator will collect all the reliable documents and prepare a report consisting of final accounts and present this in a general meeting for approval. Here, the majority of members should pass this resolution.
- After compiling all the necessary documents, the final report will be sent to the tribunal for reference.
- After examining the credibility of the report, the tribunal will pass a decree for the dissolution of the company.
- A copy of that decree will be forwarded to RoC by the liquidator within 30 days of the order dated.
- Now the RoC will mandate the winding up of the company, and remove the name of that company from the registry.
- Simultaneously, the RoC will publish this order in the official gazette of india.
Compulsory wind up: Any company registered in India can be compulsorily winded up by theaction of the tribunal or court, if the respective company has indulged in any fraudulent/ unlawful activities. The petition can be filed by
- The company itself
- The Registrar of companies (RoC)
- The creditors of the company
- The central/state governments
- The contributors
Procedure for compulsory Windup
- The petition to the tribunal should be filed along with the statement of affairs, of the disputed company.
- After scrutinizing the credibility of the petition filed, the tribunal may accept or reject the aforesaid petition
- Here, the liquidator will be appointed by the tribunal itself.
- The liquidator will execute all assets of the company, examine the book of accounts, and compile into a draft/report.
- These reports are to be forwarded to the tribunal after the winding up committee had accepted the same.
Our Procedure
Our Procedure for Winding Up A Private Limited Company
Declaration To ROC
The statement of accounts must be submitted within a month before the submission of the application to wind up the company. This is a declaration to the Registrar of Companies that the contents of the application are only to be considered, and that the company has no other assets or liabilities.
Submit Document
Within a month of submitting the statement of accounts, the application must be submitted along with the documents mentioned above. Our representatives will guide you through the entire procedure.
Final Closure
It takes at least two to three months to complete the closure of your company, but it could take much longer, depending on the findings of the liquidator appointed.
FAQs
1. Why is liquidation important?
Liquidation is important for the following reasons-
- Once the liquidation process is over, the directors and other company officials are free from all creditor liabilities.
- If the company directors pass a voluntary declaration, the company can avoid legal actions from a tribunal or a court.
- The cost involved in the liquidation process is comparatively lower than other modes of closure
- The creditors are benefited as they will be eligible for default payment from the sale of assets
2. What causes a company to go into liquidation?
Some of the most prominent causes for a company to go into liquidation are-
- Insolvency
- Bankruptcy
- Unwillingness to continue with business operations
3. What is the liquidation strategy?
The liquidation strategy refers to liquidating the assets of a company before winding up operations. By initiating the liquidation process, the company may sell its assets to meet obligations and repay liabilities. As a part of the liquidation strategy, a liquidator is appointed to oversee the process of selling the company assets. The remaining balance, if any, after repayment to the creditors, gets distributed among the shareholders of the company
4. What does liquidation mean for employees?
The liquidation marks the end of business operations by a company and this may lead to the unavoidable loss of jobs for the employees. However, the company administration may look to restructure the organization and save some (or all) of the jobs in the process. But, the employees will have the right to claim dues owed to them by the company.
5. Do employees get paid when the company goes into liquidation?
If the employer goes into liquidation, there will be no business continuity and the employees will be without a job. However, the employees will have the right to claim dues (salary, allowances, etc) owed to them by the company. If there are no funds with the insolvent company to pay the employees, they can approach the National Insurance Fund (NIF) for payments due.
6. How long does liquidation of a company take?
In general, the liquidation process of a company in India can take up to 2 years to complete, since the date of application, in case of compulsory liquidation. It may take less time for a voluntary liquidation process to complete. The duration may vary from company to company, depending on the complexity of the process involved.
7. What happens after the liquidation of a company?
After a company is liquidated, the liquidator can sell its assets to repay all pending liabilities. The remaining balance, if any, after repayment to the creditors, gets distributed among the shareholders of the company.
8. Can I be a director of a company after liquidation?
Yes, you can remain a director of the company after liquidation, but, you will not have any more control over its business affairs. You can set up and be the director of a new company. But, the new company cannot have the same/similar name to the liquidated company.
9. Can a company continue to trade when in liquidation?
No. A company should not do trading activities while undergoing liquidation. This is because the directors do not have any more control over their business affairs.
If the liquidator comes to know about any trading activity being undertaken by the directors, he can initiate prosecution against the directors. Exceptions:
- The liquidator can allow trading if such an activity is for repaying the creditors
- He will allow trading if it is for collecting the debts accrued by the business
10. Can I liquidate my own company?
No. You cannot liquidate your own company. Only the shareholders of a company can put it into voluntary liquidation. Then, a licensed insolvency practitioner will be appointed as a liquidator and only he can start the liquidation process.
11. Are directors personally liable for company debts?
Usually, directors are not personally liable for company debts. Therefore, if the company fails to pay off its debts and the creditors move court, the company assets are put to risk only and not the personal assets of the directors.
12. Can liquidation reverse?
Yes. One can reverse a Members’ Voluntary Liquidation (MVL). But, it’s not easy for the directors to do so, just by changing their minds. They can only do it by making an application to the concerned High Court and requesting an annulment of the said liquidation. The application has to be made within 6 years of the liquidation.
13. How do I claim money from a company in liquidation?
By initiating the liquidation process, the company assets are sold off by the liquidator to meet obligations and repay creditors. If you are a secured creditor, you will be at the top of the ‘payment hierarchy’ and will get the first preference while distributing the proceeds of the sale. On the other hand, if you are an unsecured creditor (suppliers, employees, and banks), you will be at the bottom of the ‘payment hierarchy’. Therefore, when you claim money from a company in liquidation, your claim will be processed by the liquidator according to your position in the ‘payment hierarchy’.
14. Can a director resign when a company is in liquidation?
Yes, he can. But, a director is not advised to resign from a company when it is under the process of liquidation. This is more so for a director if he has provided a declaration for solvency. However, if he resigns in an unavoidable situation, he doesn’t need to file the DIR-12 Form as the status of the company is ‘under liquidation’.