Legal Steps Involved in the Closure of a Private Company

The closure of a Private Limited Company (Pvt Ltd) in India involves specific legal and procedural steps. Whether the business is shutting down due to financial troubles, business strategy shifts, or any other reason, it's essential to follow the proper guidelines to avoid legal complications. In this article, we’ll walk you through the various methods of closing a Private Limited Company and the necessary steps involved in each process.

Reasons for Closing a Private Limited Company

There can be several reasons for a Private Limited Company to shut down, including:

• Insolvency or Bankruptcy: When the company is unable to meet its financial obligations.
• Operational Losses: Continuous operational losses that make it unfeasible to continue the business.
• Non-Compliance: Failing to meet the legal and regulatory compliance, leading to a decision to wind up.
• Voluntary Exit: The directors or shareholders may decide to close the business if they no longer wish to continue the operations.

Methods of Closure

1. Striking Off by Registrar of Companies (ROC)

The Registrar of Companies (ROC) can strike off a company from its register if it fails to comply with statutory requirements, such as:

• Not commencing business within one year of incorporation.
• Inactive for two years or more.

In this case, the ROC initiates the closure, and the company is removed from the official register. This is known as compulsory strike-off.

2. Voluntary Strike Off under Section 248 of the Companies Act, 2013

This is a voluntary process where the directors of the company themselves file for closure under Section 248(2) of the Companies Act 2013. A company can apply for voluntary strike-off if:

• It has not carried on any business for two years immediately preceding the date of application.
• It has yet to carry on any business since incorporation.

Steps for Voluntary Strike Off:

1. Board Meeting: Conduct a board meeting to pass a resolution for the closure of the company.
2. Approval from Shareholders: Pass a special resolution in the general meeting, with the approval of at least 75% of the shareholders.
3. Explicit All Liabilities: Before applying, ensure that all company liabilities are cleared.
4. Application to ROC: Submit Form STK-2 to the ROC along with the necessary documents.
5. Publishing in Official Gazette: Once the application is approved, the ROC will publish the company’s name in the Official Gazette, declaring it closed.

3. Winding Up through the National Company Law Tribunal (NCLT)

Winding up through NCLT is a formal and more structured process that is typically followed in cases of insolvency, financial issues, or when creditors seek closure to recover debts.

Types of Winding Up:

• Voluntary Winding Up: When the company decides to shut down with the approval of its members.
• The tribunal orders Compulsory Winding up when a company is unable to pay its debts or meets other statutory conditions for winding up.

Steps for NCLT Winding Up:

1. Board Resolution: The board must pass a resolution to wind up the company.
2. Shareholder Approval: The shareholders need to approve the decision in a general meeting.
3. Appointment of Insolvency Professional: An insolvency professional is appointed to oversee the liquidation process.
4. Filing of Petition: The petition for winding up is submitted to NCLT.
5. Tribunal Orders Liquidation: Once approved, the tribunal orders the company’s liquidation, and an official liquidator is appointed.
6. Disposal of Assets and Settlement of Liabilities: The liquidator sells the assets and settles the liabilities before dissolving the company.

4. Fast Track Exit (FTE) Scheme

The Fast Track Exit (FTE) scheme is designed for dormant companies that are not in operation but wish to avoid undergoing the lengthy winding-up process. It’s a simplified way for a defunct company to close operations without going through NCLT.

Eligibility for FTE:

• The company has no liabilities.
• The company has not been involved in any business activity for at least one year.

Under this scheme, the company applies to the ROC, and once the ROC reviews and accepts the application, the company is struck off the register.

Key Documents Required for Closure

The following documents are typically required to close a Private Limited Company:

1. Board Resolution approving the closure of the company.
2. Shareholders Resolution (special resolution with 75% majority).
3. Indemnity Bond signed by all directors in Form STK-3.
4. Affidavit from the directors in Form STK-4.
5. Statement of Accounts is at mosts and shows no assets or liabilities.
6. A copy of the Special Resolution was filed in Form MGT-14.
7. NOC from Creditors (if applicable).
8. Tax Clearance Certificate from the income tax department.

Timeframe for Closure

The time taken to close a Private Limited Company depends on the method chosen. Voluntary strike-off can take around 3 to 6 months, while winding up through NCLT can take much longer, typically six months to a few years, depending on the complexity of the case.

Conclusion

Closing a Private Limited Company is a significant legal procedure that requires compliance with various legal steps and filings. Whether opting for voluntary strike-off, compulsory winding up, or fast-track exit, it is crucial to ensure all statutory obligations are met and liabilities settled. Consulting with legal experts or corporate advisors can help streamline the process and avoid future complications.