Difference Between Winding Up And Striking Off a Company in India

Closing Your Indian Business: Winding Up and Striking Off

Indian business involves critical decisions between winding up or striking off. The purpose of this introduction is to shed light on the important choices entrepreneurs must make when closing their businesses in India. Exploring the legal nuances and procedural nuances of winding up, a formal closure involving the settlement of liabilities, and striking off a simpler dissolution for defunct corporations, the book explores the differences between these two processes.

In this presentation, we will discuss the process of winding up a company, also known as liquidation. This is the legal and orderly process of bringing a company’s business to an end. We will explore the different types of winding up, the steps involved, and the key players in the process.

What is Winding Up?

  • Winding up is the formal process of dissolving a company and its assets.

  • It involves settling the company's debts, realising its assets, and distributing any remaining funds to shareholders.

  • Winding up can be a voluntary or compulsory process.

Winding up is a complex legal process that should only be undertaken with the advice of professional advisors. There are two main types of winding up: voluntary and compulsory. In a voluntary winding up, the decision to wind up the company is made by the shareholders. In a compulsory winding up, the decision is made by the court.

Types of Winding Up

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  • Voluntary Winding Up:

  • Members' Voluntary Winding Up: Shareholders decide to wind up the company when it is solvent (can pay its debts).

  • Creditors' Voluntary Winding Up: Company and creditors agree to wind up the company, even if it is insolvent.

  • Compulsory Winding Up:

  • By the Court: Court orders the winding up due to a number of reasons, such as insolvency or inability to operate.

  • By Creditor: Creditor petitions the court to wind up the company if it cannot repay its debts.

  • By Registrar: Registrar can initiate winding up on various grounds.

  • Just and Equitable: Court can order winding up if it is fair and just to do so.

 The most common type of winding up is voluntary winding up. This can occur when a company has achieved its objectives, or when it is no longer commercially viable. Compulsory winding up is typically used when a company is insolvent and cannot pay its debts.

The winding-up process

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  • The winding up process typically involves the following steps:

  • Passing a resolution to wind up the company.

  • Holding meetings of shareholders and/or creditors.

  • Appointing a liquidator to oversee the winding up process.

  • Identifying and valuing the company's assets.

  • Selling or realising the company's assets.

  • Paying the company's debts.

  • Distributing any remaining funds to shareholders.

  • Dissolving the company

  •  The winding up process can be complex and time-consuming. It is important to carefully consider all of the legal and financial implications before embarking on this process.

Striking Off Your Company 

Closing a company can feel bittersweet. But before you move on, there's an important process: striking it off the official register. Here's a breakdown to help you navigate this administrative hurdle:.

  Setting the Stage            (Approx. 1 Month)

  1. Gather Your Team: Schedule a board meeting with your directors. Discuss the decision to strike off, emphasising the need for settled debts (loans, taxes) before proceeding.

  2. Action Plan: Prepare an agenda outlining two key points:

    • Proposal to Strike Off the Company

    • Appointing a Director to File the Application


  3. Time: If everyone agrees, formally document this as a "special Decision resolution for strike off.


        Securing Approval (Approx. 1 Month)

  1. Notice is Key: Send a clear notice to shareholders about a general meeting  The purpose? Proposing the company's strike off.

  2. Voting Time: During the meeting, shareholders will vote on the special resolution. At least 75% of votes must be in favour to move forward.

  E-filing the Paperwork (Approx. 3-6 Months)

  1. Timely Filing: Within 30 days of passing the resolution, file E-form MGT-14 online with the Registrar of Companies (ROC). This informs the ROC about the meeting and the resolution (Imagine a picture of a computer screen with a government e-filing portal open).

  2. Strike Off Application: Prepare E-form STK-2, the official strike off application. Attach crucial documents:

    • The special resolution for strike off

    • Proof of settled company liabilities (receipts, closure letters) - Imagine a collection of documents with titles like "Loan Payment Receipt" and "Bank Account Closure Letter."

    • A statement of your company's accounts (assets & liabilities) - Imagine a spreadsheet with financial data

  3. Patience is key. The ROC will review your application. This can take several months, and they might request additional information.

Almost There: The Final Hurdle (approximately . 2 Months)

  • Public Notice: If approved, the ROC will publish a notice in a government gazette to inform the public about the company strike off. Creditors and others might object within a specified timeframe.

            Closure Achieved

  • Official Closure: If no objections arise, the ROC removes your company's name from the register. Your company officially ceases to exist.

           Congratulations! You've successfully struck off your company!


The Key differences between Winding Up and Striking Off

The key differences between striking off and winding up a company in India are:

Criteria

Striking Off

Winding Up

Initiation

Initiated by the company voluntarily.

It can be voluntary or compulsory (court-initiated).

Financial Position

Generally suitable for solvent companies with no liabilities.

Applicable for both solvent and insolvent companies.

Liquidator Appointment

No formal liquidator was appointed.

Involves the appointment of a liquidator.

Liabilities Settlement

The company should have no outstanding liabilities.

Involves settling debts and liabilities.

Formalities and Costs

Less formalities and usually more cost-effective.

Involves formal procedures and may have higher costs.

Registrar of Companies (RoC)

Applied to the RoC for striking off the company.

RoC's involvement in the winding-up process.

Distribution of Assets

No formal process for the distribution of assets.

Assets are distributed among stakeholders.

Reasons

Typically chosen when the company has ceased operations and wants to close without undergoing the formal winding-up process.

Chosen based on financial position, insolvency, or court orders.

Difference between strike-off and winding up under the Companies Act 2013

Under the Companies Act 2013, the terms "strike off" and "winding up" refer to distinct processes for closing a company. Striking off involves removing a company's name from the Register of Companies, typically due to non-compliance. It is a regulatory action initiated by the government. On the other hand, winding up is a voluntary or compulsory process leading to the liquidation of assets, settling liabilities, and ultimately dissolving the company. While striking off is an administrative action, winding up is a comprehensive legal process involving the realization and distribution of assets among creditors and shareholders.

Choosing the Right Option

Selecting between Winding Up or Striking Off depends on your company's circumstances. If your company is insolvent or inactive, winding up is necessary. If your company meets striking-off criteria, it's a simpler, cost-effective choice. Remember that striking off doesn't mean dissolving, and revival is possible. A dissolved company can't be revived.

Conclusion

Understanding the nuances between "strike off" and "winding up" under the Companies Act 2013 is crucial for companies contemplating closure. While striking off involves a government-initiated removal from the Register of Companies for non-compliance, winding up is a comprehensive legal process leading to the dissolution of the company. The former is an administrative action, while the latter involves the liquidation of assets and settling of liabilities. Businesses must carefully assess their situation and adhere to the appropriate process, ensuring compliance with legal requirements and facilitating a smooth and lawful closure when needed.