A step-by-step guide on legally shutting down your private limited company in India
Running a private limited business comes with its own unique challenges. Sometimes, things simply do not work out or you may want to move on to other ventures. In such cases, legally closing down your company is important to avoid future liabilities.
This definitive guide covers all you need to know about closing a private limited company in 2023 in compliance with the latest Indian regulations:
Table of Contents
- Introduction
- 4 Ways to Close Your Private Limited Company
- Sell the Company
- Compulsory Winding Up
- Voluntary Winding Up
- Defunct Company Winding Up
- Documents Required
- Timeline and Costs
- FAQs
- Expert Assistance from Filingwala
Introduction
Deciding to close your private limited company can be difficult but is often necessary. According to industry experts, over 20% of new companies fail in their first year while over 50% close down within their first five years of operations.
Reasons for shutting down vary – lack of profits/capital, promoter disputes, regulatory issues, etc. The process can seem intimidating but following the proper step-by-step procedure makes it hassle-free.
We will explore the 4 main routes laid out under the Companies Act 2013 to legally close your private limited business. This includes:
- Selling the Company
- Compulsory Winding Up
- Voluntary Winding Up
- Defunct Company Winding Up
Pro tip: Work with a professional consultant to ensure smooth closure while avoiding future liabilities.
4 Ways to Close Your Private Limited Company
1. Sell the Company
Selling your private limited company by transferring majority shareholding is the simplest approach. It does not require actual court monitored winding up but does legally transfer liabilities.
Process
- Find potential buyers for majority or complete company shares
- Negotiate share transfer agreement with buyer
- Pass special resolution in board meeting approving sale
- File MGT-14 form with RoC within 30 days
- Submit share transfer deed, directors’ consent, updated AoA/MoA
- Transfer digital signatures, company credentials etc.
Selling allows promoters to exit the business while new owners take over its assets/liabilities in fast one-stop process. This route is best when your company has good financials, clientele, growth potential but you as promoters want to move on.
2. Compulsory Winding Up
Compulsory winding up is initiated by a tribunal order under Section 271 of Companies Act 2013. It is done if the company has acted unlawful, fraudulent, or violated compliance norms.
The detailed court monitored procedure involves:
- Petition Filing: By company, creditors, contributories, registrar or government in NCLT
- Affidavits Submission: Statement of affairs, auditor certification
- NCLT Hearing: Accepting objections, appointing liquidator
- Liquidator Custody: Taking custody of assets, books of accounts
- Dissolution Order: Passed within 60 days of application
Compulsory winding up ensures assets are properly valued before dispersing while clearing outstanding debts in order of priority. It requires detailed compliance and can take 6-12 months based on case complexity.
3. Voluntary Winding Up
As the name suggests, voluntary winding up is initiated by the company itself through a special shareholder resolution. It is done when the business has run its term or promoters voluntary want to close operations.
The key steps are:
- Board Resolution: 75% director majority consent
- Shareholder Resolution: 75% shareholder majority consent
- Liquidator Appointment: Confirmation by creditors
- Declaration of Solvency: Directors declare company’s ability to clear debts
- Winding Up Report: Details assets, liabilities, creditors etc.
- Dissolution Order: Passing within 60 days of application
Voluntary winding ensures transparency by quantifying assets/liabilities with the dissolution order validating clearance of all outstanding debtor claims. The process takes 4-8 months on average.
4. Defunct Company Winding Up
Defunct companies are those that have not conducted any business for over an year or never commenced operations after incorporation.
Such companies can simply submit a STK-2 form with below information to ROC to fast track dissolution:
- No pending litigation or outstanding statutory dues
- No existing assets or liabilities
- Not carrying on any business since incorporation
- Never commenced operations after incorporation
This simplified fast track exit route allows quick closure with minimal compliance burden. The STK-2 form based winding up takes just 1-2 months.
Key Comparison of Winding Up Procedures
| Basis | Compulsory | Voluntary | Defunct Company |
|---|---|---|---|
| Initiated By | NCLT, Creditors etc. | Company Directors | Company Directors |
| Order | Tribunal Order | Tribunal Order | Direct Submission |
| Timeline | 6-12 months | 3-8 months | 1-2 months |
| Cost | High | Medium | Low |
| Control | Low | High | Full |
| Suitable For | Mismanaged Firms | Completed Term Firms | Never Active Firms |
Documents Required
While exact documents vary based on specific closure route, some common ones needed are:
- Updated Memorandum & Articles of Association
- List of Assets & Liabilities
- Audited Financial Statements
- Copy of Shareholder Resolutions
- Director Declarations & Affidavits
- Liquidation /Insolvency Forms
- Bank Statements
- TDS Certificates
- GST Returns
- Income Tax Returns
Maintaining proper books of accounts and updated records right from inception simplifies the closure process later on.
Timeline and Costs
The time taken for private limited company closure varies from 1-12 months depending on route taken. Approximate timeline and lawyers+government fees for each are:
| Route | Timeline | Cost |
|---|---|---|
| Sell Company | 1-2 months | Rs. 15,000+ |
| Compulsory | 6-12 months | Rs. 50,000+ |
| Voluntary | 4-8 months | Rs. 30,000+ |
| Defunct | 1-2 months | Rs. 10,000+ |
The cost is inclusive of professional fees and various government/regulatory charges for filing dissolution application, issuing public notices, affidavit preparation etc. Defunct company STK-2 form offers the fastest and most affordable exit route.
FAQs
Q1. Can you reverse private limited company closure?
No, once dissolution is complete and certified by RoC you cannot legally resurrect the company. Assets get transferred or liquidated.
Q2. What happens to company assets/liabilities after closure?
All assets get accurately valued and distributed priority wise to clear debts, taxes, employee dues followed by payments to owners/shareholders.
Q3. Is director approval required for shutting down?
Yes, 75% of directors need to consent to voluntary closure. For compulsory winding majority decision is not required.
Q4. Can closure application get rejected by ROC/NCLT?
Yes, if mandatory affidavits, directors consent, creditor notices, valuations etc. are inaccurate or inadequate the dissolution order may get rejected resulting in delays.
Expert Assistance from Filingwala
Closing a private limited company involves many intricate compliance, valuation and legal aspects. Doing it yourself can lead to complex delays and failures.
This is where working with a professional consultant like Filingwala simplifies the entire process. Their team of CA, CS and lawyers help with:
- Choosing the optimal closure route
- Preparing all affidavits/forms
- Issuing creditor notices
- Drafting board/shareholder resolutions
- Executing asset valuations/transfers
- Responding to objections if raised
- Facilitating smooth order procurement
Right guidance ensures you avoid any violations or future liabilities when shutting down companies even with complex management and ownership structures.
So relax while the experts at Filingwala quickly and affordably manage your private limited company closure! Reach out for a free consultation now!
