Introduction
The procedure for closing an entity in India is defined by the Companies Act, 2013, and administered by the Ministry of Corporate Affairs (MCA). A business may be shut down for numerous reasons including a lack of activity, a history of financial difficulties, a need to restructure or change directions, or when a company needs to exit from its prior operations. Closing out the business does not equate to dissolving that corporation legally, therefore legal closure of the corporation is required so that the corporation will not incur penalties, failure to comply with laws and continue to be subject to statutory obligations.
The status of a corporation once it has closed through the appropriate legal means will be updated in the MCA databases. The updated information will show whether the corporation has been Struck Off, is currently undergoing Liquidation or has been Dissolved. To avoid any potential legal issues, or financial loss to an individual director or shareholder, it is imperative that individuals know how to correctly conduct the closure process and ensure that the records of the MCA have been updated appropriately.
Legal Ways to Close a Company in India
A company in India can be legally closed through three primary methods depending on its financial and operational status.
(1) Loneliest way: closure for companies that have never been active (Section 248 Companies Act, 2013),
(2) if company is solvent with shareholders wanting it to formally close, put Voluntary Liquidation (Insolvency & Bankruptcy Code 2016),
(3) Company is insolvent with creditors, this will lead to Compulsory Liquidation via National Company Law Tribunal (NCLT).
Each route involves different legal processes that also determine how Master Data (MCA) will be updated, based on the related determination.
Most Common Method: Closing a Company Through Strike Off
Companies that do not have an active business and/or low liability may consider deregistration of their name from the Register of Companies through the process of Strike Off.
They must apply to the Registrar of Companies for deregistration as per the process of Strike Off.
Before deregistration, a company must have completed all required filings (annual returns and financial statements), have no outstanding liabilities or business at the time of application, and have no pending litigation.
When applying for Strike Off, a company should take the following actions to close its bank accounts, clear its outstanding debt obligations, cancel its GST registration (if applicable), and file tax returns.
Filing Process for Strike Off (Form STK-2)
A company must file Form STK-2 with the Ministry of Corporate Affairs via their portal with the applicable filed documents and the government fee.
To file for Strike Off, the Board of Directors must pass a resolution confirming that the company is to be closed,d and shareholders must provide consent to do so through a special resolution.
Once that process is complete, the company should prepare a Statement of Accounts prepared by a Chartered Accountant certifying that the company has no assets or liabilities, together with affidavits and indemnity bonds from the directors stating that there are no outstanding obligations against the company.
After the submission to the ROC, the ROC reviews the application, and if approved, I will advertise its approval through a public notice to allow the opportunity for any objections. If there are no objections, the company will be removed (struck off) from the Register, and the Ministry of Corporate Affairs will make the update to indicate as such.
Closing a Company Through Voluntary Liquidation
If a corporation has assets, liabilities or if shareholders have formally requested the dissolution, it may wish to pursue a voluntary liquidation.
To conduct this process, the corporation appoints an individual or firm as liquidator; then, upon completion of the claims process, all remaining assets are distributed to shareholders, and all final reports are submitted to the appropriate authorities for their records. After completing these steps, the corporation will be legally dissolved, and the MCA will update its Master Data file to indicate the corporation's dissolution.
This option tends to take longer and to be a more costly alternative than using just the RoC’s Strike-Off; however, it provides full legal closure.
How MCA Master Data Is Updated After Company Closure?
A corporation's status in the MCA will change when it receives approval for a Strike-Off or has completed the liquidation process.
In either case, the corporation's status will indicate one of the following:
Struck-Off (if it was struck off under Section 248);
Dissolved (if it was liquidated);
Under Liquidation (if the liquidation process is still underway).
Once this status has been updated, it confirms that the corporation no longer exists as a legal entity and is no longer obligated to submit compliance documentation.
Documents Required to Close a Company
Typically, there will be various key documents that must be submitted to the RoC to obtain a Strike-Off or have a Liquidation completed. These documents may include the incorporation certificate for the corporation; financial statements and documentation confirming the closing of its bank account; affidavits and indemnity bonds from all directors; a statement of accounts (indicating the corporation's assets, liabilities, etc.); board and shareholder resolutions; and any required regulatory clearances.
Accuracy is critical when completing the strike-off process; therefore, incorrect or incomplete filings may cause rejection by the RoC or may generate objections from other regulatory agencies.
Timeline for Company Closure
Strike Off generally takes between three (3) and six (6) [3(three) – 6(six) months, subject to ROC verification and any objection periods. Liquidation takes approximately six months (6 months) – one (1) full year, plus, depending upon the complexity of the Company and Creditor settlement processes.
Delays can often arise out of incorrectly completed filed documentation or due to outstanding liabilities.
Post-Closure Responsibilities of Directors
The obligations of the Directors of a Company to answer for the information contained in all the disclosures made to the ROC remain after the company has ceased operations. If, after closure, any fraudulent activity or hidden liability is discovered, legal action can be taken against the Director or Directors.
It is, therefore, imperative that a Company maintain a high level of transparency and compliance during the closure process.
Consequences of Not Closing a Company Properly
If a Company has ceased operations, but has not completed the legal closure of the Company, penalties continue to accrue owing to the non-filing of annual returns, financial statements, and other statutory obligations. Directors of the Company can be disqualified, fined, and issued with legal notices.
A proper closure through the updating of the MCA Master Data ensures that risk is avoided and provides for a clean exit from business operations legally.
Conclusion
The closure of a Company in India requires considerable reasoned legal planning and strict adherence to the MCA closure procedures. The formal closure of Strike Off Liquidation also signifies that the Company is no longer considered "active", and the Company has been accurately recorded in the MCA Master Data. Ensuring that the closure process is correctly followed will aid in avoiding penalties for the Director, protect the Directors of the Company from legal issues, and provide for an orderly and compliant exit from the Company’s business operations.
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