Entrepreneurship

Winding up of a Company – Modes & Procedure for company closure in India

winding up of a company

Winding up of a company – You started it but not worked well, it’s time to windup that

Starting a company seems so easy today. There are a lot of startup norms favoring the new business ventures; some of them have already been implemented.

But the way one can start a company so easily, it is equally important that one knows the activities involved in the winding up the process as well.

Here are All things you need to know about Winding up a Company

Starting with the basics, the term ‘winding up’ is synonymous to liquidation, which means selling all assets, paying the creditors and distributing remaining assets among partners and shareholders. There are three modes for winding up of a company as per Companies Act 1956:

  • Compulsory Winding up by Court
  • Voluntary Winding Up
  • Winding Up Subject to Supervision of the Court

Winding up of a Company by an order of the court is called the compulsory winding up. A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.

Also Read:  Registration process of a company in India.

Windings up with the intervention of the court are ordered where the voluntary winding up has already commenced. As a matter of fact, it is the voluntary winding up but under the supervision of the court.

A court may approve a resolution passed by the Company for voluntary winding up but the winding up should continue under the supervision of the court. With the Companies Act 2013, now just first two modes are in play.

Through this write-up, we’ll be dealing with the general process of winding up as directed by the court or taken up voluntarily.

According to Companies Act 2013, the Court may order the winding up if —

  • It is unable to pay its debts.
  • The company has by special resolution resolved that the company be wound up by the Tribunal.
  • It has acted against the interest of the sovereignty and integrity of India, the security of the State, friendly relations with foreign states, public order, decency or morality.
  • The Tribunal has ordered the winding up of the company under Chapter XIX.
  • If the company has not filed financial statements or annual returns for the preceding five consecutive financial years.
  • If the Tribunal is of the opinion that it is just and equitable that be company should be wound up.
  • If the affairs of the company have been conducted in a fraudulent manner or the company was formed for fraudulent and unlawful purposes or the persons concerned in the formation or management of its affairs have been guilty of fraud or misconduct.

In Starters’ CFO terms, the two most common situations leading to the winding up are:

  1. If the company fails to commence business
  2. If the company has not done business for two immediately preceding Financial Years.

Hence, if you are a start – up, either do compliances properly or wind up your new venture.

Annual Compliances

According to the two situations above, if the company fails to commence business, it is better that it winds up.

But if there is some amount of revenue from past period (Last Financial Year), then we need to wait for 2 years and follow all compliances and related procedures for the time span of two years.

Afterward, you can go for winding up your company.

Annual compliances that need to be done for two years before shutdown are:

Annual Audit: It is an analysis of the financial statements and other records of the company annually, thus serving as a a key safeguard for your money and a planning tool for the year ahead. The audit may check the accuracy of records, compliance with accounting methods, and the soundness of financial practices, including internal controls.

Filing Income Tax Returns: ITR is a statement of your earnings from various sources of income, tax liability thereon, details of tax paid and any refunds that have to be given by the government. Non-filing of Income Tax Return attracts interest, penalty, prosecution and scrutiny from the Income Tax Department.

Filing ROC Return: Every company having or not having share capital needs to file annual returns with the registrar of companies containing details of registered office, members, debenture holders, shares and debentures, directors and managing directors. Failing to do this compliance attracts penalty and makes the company liable to pay additional fees till the default continues.

With these three simple compliances for two years, one can easily shutdown their business.

Documents required for Winding up

The three most important documents required are:

Bank Account Closure Letter: The very first step is closing of the bank account after which bank issues a ‘bank account closure letter’. This letter is one of the most important documents required for winding up of a company

Statement of Affairs: The second significant document if Statement of Affairs that needs to be prepared by the firm planning to wind up showing that it has paid all its liabilities.

PAN, AADHAR & Digital Signature: PAN and AADHAR of directors need to be presented along with their digital signature for completing the process of winding up

The government fee for winding up of a company is ₹5000 and with these easy proceedings and documents, one can easily shut down their business by filing all the necessary forms. Usually, it takes 3 to four months for the wind up process to be completed.

Also Read: Small business idea with low investment in India

Why is winding up required?

Although there can be many reasons behind winding up of a company but in certain cases, it becomes critical to go for the shutdown of your business.

If your company is not doing well, or you are not doing compliances regularly then there is an urgent need to wind up your venture.

In case you do not wind up, Ministry of Corporate Affairs can start sending you notices for the same with strict actions thereafter. Directors of the firm can be disqualified for next 5 years to be appointed as Directors in any other firm.