How to Close a Business
Closing a business is tougher than starting a business. The process of closing a business in India is referred to as Winding Up. At the commencement of Winding Up process, the business ceases to carry out any sort of business activity and the management of the company is transferred from the Director to the freshly appointed ‘liquidator’. Liquidator performs all the necessary tasks to wind up a company like realizing its assets, paying off the debts and distributing the surplus left among the people who are entitled to have it. Dissolution is the last stage of winding up and after this, the company ceases to exist. During the winding-up process the company remains a legal entity with rights, duties, and obligations but after dissolution, the company’s name is struck off the Register of Companies by the Registrar.
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Modes of Winding Up
Section 270 of the Companies Act, 2013 lays down the modes of winding up and prescribes two methods of closing a company. A company can be wound up either voluntarily or by the National Company Law Tribunal. The term winding up includes winding under the Companies Act and liquidation under the Insolvency Code.
Winding up by the Tribunal
The Tribunal is empowered to wind up a company if a petition is put forth before it as per Section 272 of the Companies Act. Section 271(1) of the same Act contains the grounds based on which a company may be wound up and these grounds inter alia include winding up if it is unable to pay debts, has passed special resolution for winding up the company and has acted contrary to the interests of the sovereignty, integrity and security of India. With the coming of the Insolvency and Bankruptcy Code, typically, a company which is unable to pay its debts, resorts to insolvency resolution under the Code. This has made the provisions pertaining to winding up on account of inability to pay debts under the Companies Act, defunct.
The petition can be filed by the company, trade creditors, contributors, the government or the registrar of the company and if must be accompanied by the Statement of Affairs prepared by the auditor. Part I of Chapter XX of the Companies Act contains the law governing winding up by tribunal. After petition if the Tribunal is satisfied that there is an apparent case for winding up then it shall direct the company to file objections within 30 days of such order. A liquidator is appointed who supervises the whole process of winding up and then submits a report to the tribunal within sixty days from the order. When the business activity of the company ceases completely then the liquidator files an application before the Tribunal and if the Tribunal is of the opinion that it is reasonable to wind-up the company then it may pass the order of dissolution, the copy of which shall be forwarded to the Registrar by the liquidator within 30 days from the date of order.
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Voluntary Winding Up
The other mode of winding up a company is voluntary without any intervention of the Company Law Tribunal. Section 304 of the Companies Act lays down the condition in which a company can be wound up voluntarily and they are, firstly, if a resolution is passed in the general meeting to wind-up due to expiry of the period mentioned in Articles of Association or any other reason mentioned in the Articles. Section 59 of the Insolvency and Bankruptcy Code contains the procedure for winding up voluntarily and another law that is relevant in this regard is the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Process) Regulation, 2016. The first step of this process requires the Director of the company to declare winding up of the company at the general meeting following which a special resolution approving the same has to be passed. Then a meeting with creditors is to be conducted and consent of 2/3rd of the creditors is to be obtained. After the publication of the resolution, a liquidator is appointed and after the activities of the company are absolutely wound up then the liquidator prepares an application of winding up and sends it to NCLT for dissolving such company.
The process of winding up is a complicated one and is laden with a number of technicalities. With the introduction of Insolvency and Bankruptcy Code, the law in this regard has become even more complex. It is advised to engage an Insolvency Expert to do the winding-up proceedings.