Closure of Company Under Companies Act 2013

The closure of a company is Also known as Liquidation or winding up. It is a process through which the business of the company or you can say the entire existence of the company comes to an end.

Closure of the company is a Secondary step for Winding up of a company, it is preceded by the Liquidation process in which the company voluntarily appoints an official liquidator. The liquidation officer so appointed sells off the assets of the company and pays off the debts.

What Does It Mean By Company Closure?

Company closure is the culmination of a process that brings an end to the entire existence of a company, typically following liquidation. This cessation can occur through either compulsory winding up or voluntary winding up.

In the case of voluntary winding up, the company’s board appoints an official liquidator to oversee the administration during the liquidation period. The official receiver compiles a priority list of debts, orchestrates the sale of assets in the most advantageous manner to settle all company liabilities, and allocates any remaining funds to shareholders. On the other hand, compulsory closure involves the Registrar of the company serving notice to the general body, indicating an intention to shut down the company based on grounds deemed appropriate by the Registrar.

Company Closure under the Companies Act 2013

Under the Companies Act, 2013, company closure refers to the removal of a company from the register of companies after it was initially incorporated and registered under the said act. This process results in the complete cessation of the company, including its name, certificates, and registration. Following this removal, the promoter is obligated to initiate the establishment of a new company, starting afresh.

Closure under the Companies Acts,2013 is done in either of the following ways:

Suo-moto Strike off

Under the Suo-Moto strike, a company has the authority to independently initiate the process of filing an application with the registrar for its winding up, as elucidated in Section 248(2) of the Companies Act, 2013.

The procedural steps for Suo-moto striking off are as follows:

Convene a board meeting and pass a resolution determining the date, time, and venue of the extraordinary general meeting.
After the board resolution, settle any outstanding debts or liabilities.
Each director must endorse and execute an indemnity bond, duly notarized by every director using Form STK 3, along with an Affidavit in Form STK 4.
Compile a statement of accounts in Form STK-8, portraying the company’s assets and liabilities up to a day not exceeding thirty days before the application date. This statement should be certified by a Chartered Accountant.
During the extraordinary general meeting, pass a Special Resolution aimed at removing the company’s name from the register of companies.
Submit Form MGT-14 to the Registrar of Companies within 30 days from the resolution’s passage in the extraordinary general meeting.
Obtain approval from relevant authorities, especially for companies regulated by other authorities.
File Form STK-2, duly certified by a company secretary in whole-time practice or a chartered accountant, along with a government fee of ₹10,000.

Compulsory Strike-Off

In the case of compulsory strike-off, the Registrar of Companies takes the initiative to remove the company’s name from the register of companies by issuing a notice to the general body of the company. This mandatory strike-off procedure is outlined in Section 248(1) of the Companies Act, 2013.

The Registrar of Companies may decide to strike off the name of a company based on the following grounds:

The company has failed to initiate its business within one year of incorporation.
The company has not engaged in any business or operations for two consecutive financial years and has not applied for dormant status within that period.
Subscribers to the memorandum have not fulfilled their subscription obligations, and Form INC 20A has not been filed within 180 days of the company’s incorporation.
Upon physical verification, it is discovered that the company is not conducting any business or operations, as determined by the Registrar of Companies after inspecting the registered office of the company.

Benefits of company closure

It’s essential to recognize that the decision to close a company, often referred to as business closure, carries both positive and negative implications. While the choice to shutter a business is typically a challenging one, there are potential advantages to consider, including:

Cost Savings: Closing a company can yield financial benefits by reducing ongoing expenses such as rent, salaries, and other overhead costs. This, in turn, can free up capital that may be redirected towards settling debts or investing in alternative ventures.
Improved Work-Life Balance: Operating a business demands significant time and effort, often leading to a stressful and imbalanced work-life scenario. Closing the company can alleviate this burden, providing the owner(s) with an opportunity to regain a healthier work-life balance.
Opportunity for Diversification: The closure of a company opens doors to new opportunities for the owner(s) to explore different interests or ventures. This transition can result in fresh experiences, personal growth, and the pursuit of alternative paths.
Mitigation of Further Losses: In cases of financial struggle, closing the business can serve as a strategic move to avoid additional losses and accumulating debt. This protective measure helps shield the owner(s) from personal liability and potential financial adversity.

Disadvantages of Company Closure

In addition to the potential advantages, there are also various drawbacks linked to company closure. Some of these include:

Loss of Jobs: The closure of a company often translates to job losses for employees, significantly impacting their livelihoods. Moreover, it can result in the industry losing skilled workers, affecting its workforce dynamics.
Financial Losses: Closing a company can incur substantial financial losses for the owner(s). This encompasses expenses related to employee severance pay, settling debts and liabilities, and potential legal fees, contributing to a significant financial setback.
Damage to Reputation: Company closure can adversely affect the reputation of the owner(s) within the industry and with customers. This damage may impede future endeavors by making it more challenging to secure funding or embark on new business ventures.
Legal Obligations: Closing a company involves fulfilling legal obligations, such as notifying government agencies, meeting tax requirements, and providing proper notice to employees. Failure to meet these obligations can lead to legal penalties and additional financial setbacks.
Emotional Stress: Shutting down a company can be emotionally taxing for the owner(s), representing a perceived failure or the loss of a substantial long-term investment. This emotional strain may manifest in feelings of anxiety, depression, and a sense of profound loss.