Overview of Winding Up of Private Limited Company
The private Limited Company initiates the process of liquidation to close its business. There are many reasons, such as insolvency, unwillingness to perform the activities related to the business, etc., because which a private decides to wind up. Liquidation means liquidating the assets of the Company, and by it, the corporate entity sells its assets to satisfy its responsibilities and repay the liabilities. When the Company is liquidated, then it is dissolved, and it ceases to exist.
If the Company fails to fulfil its compliances, then it can be held liable for fines and penalties, or even its director can be disqualified from incorporating another entity, so it is advisable for a company to wind up the moment it becomes inactive or insolvent. Winding up of a company includes a complete shutdown of all activities and transactions related to its business and then selling off of all the assets to clear the debts of the Company. The debts are cleared, and then the assets of the Company will be shared among its shareholders.
Section 270 of the Companies Act 2013 states that a private company can go for winding up either by the National Company Tribunal (NCT) or voluntary.
Reasons for winding up of a Private Limited Company
The following can be reasons for winding up a company:
Benefits of Winding Up of Private Limited Company
The followings are benefits of the Winding up of a Private Limited Company:
- Released From Duties/Debts After Liquidation
Once the liquidation is over, the officers, including the Director of the Company, are free from all the liabilities and pressure.
- Avoiding Legal Actions against the Company
When the resolution of winding up of a private limited company is voluntarily passed by the directors of the Company, then they can avoid any legal proceeding.
- The Low Cost Required for Liquidation
The expense of a liquidation process is comparatively low because the charges are applicable to the sale of assets.
- Lease Agreements Will Be Cancelled
If the Company has entered into a lease for a time period, then at the time of liquidation of the Company, the lease will be terminated, and all the dues of such lease will be cleared from the sale of assets.
- Advantages to the Creditors
After a long struggle, the creditors will be benefited from the liquidation of the Company as they are eligible for a default payment concerning all the credits given by all the creditors.
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Documents required for winding up of the Company
The following checklist is required for winding up the Private Limited Company:
Procedure for Winding Up of the Private Limited Company
The winding-up of the Company is done by two processes:
- Voluntary Winding Up
- Compulsory Winding Up (by the NCT)
- Voluntary Winding Up of the Private Limited Company
The Voluntary Winding up can be done by passing the special resolution or a resolution in the general meeting of the Company. Voluntary Winding-up depends on the shareholders. The shareholder must pass a special resolution in the board meeting or a resolution in the general meeting that the Company should wound up on expiry of the time period stated in the AOA of the Company or occurrence of any event that has been stated in respect of which it should be dissolved.
The voluntary Winding up of a Company can be done in two ways:
- Member’s Voluntary Winding Up
The directors of the Private Limited Company make a declaration that the Company is solvent and present it on affidavit. Such declaration must be made within five weeks preceding the date of the resolution passed for winding up of the Company. The said declaration will be submitted to the Registrar of the Company with the latest profit or loss statement, latest balance sheet and statement of assets and liabilities.
Further steps for Member’s voluntary Winding up:
- Creditor’s Voluntary Winding Up
If the directors do not make a declaration of solvency, then it will be presumed that the Company has become insolvent. So, the creditors have to meet to pass the resolution of winding up the Company.
Steps to be taken for Creditor’s Voluntary Winding up:
Procedure to be followed in Voluntary Winding Up of the Private Limited Company:
- Compulsory Winding Up of the Private Limited Company
If the Company registered in India has been indulged in any fraudulent or unlawful activities, then it is compulsorily winded by the National Company Tribunal or the court. The petition for winding up in a tribunal or court can be filled by the Company itself, the Registrar of Company, the creditors of the Company, the Central Government, the State Government or the contributor of the Company.
Procedure to be followed in Compulsory Winding Up of the Private Limited Company:
The Companies (Winding-Up) Rules 2020
Under the Company Act 2019, the Ministry of Corporate Affairs has made the Companies (Winding-Up) Rules 2020 to systemize the procedure of Winding Up of a company under Section 271 and Summary Procedure for Winding Up under Section 361 of the Act, which came in effect from the 1st day of April 2020. The format for different forms is provided under this Rule.
Corpbiz Assistance for Winding Up of a Private Limited Company
Frequently Asked Questions
A company decides to wind up mostly when it is not active, or it is failing to fulfil the business compliances.
A company that does not go for winding up even if it fails to maintain the compliances then has to pay the penalty or fine, and the Director of such Company is debarred from starting a new company.
The companies that can apply for fast track winding up are:
- In the preceding two years from the date of application, the companies that are not active and have failed to carry on their business, or
- The companies which are not active or carrying on their business for one year since the day of their incorporation
- The companies that have no assets or liabilities.
The following is the list of companies that are not eligible for voluntary Winding up:
- The Company which is incorporated after 2nd November 2018 but has not filed form 20A.
- The Company has not completed one year since the day of its incorporation.
- The Company which is having its business transaction in the last 1-2 years, meaning the Company which has ongoing business.
- The Company whose Director’s DIN is deactivated.
- Such Company whose any director is disqualified.
- The Company has already received notice from the Registrar of Company to wind up.
- Such Company which has any pending litigation in its name.
The petition should be advertised in the regional language of that area as well as in the English language.
The Companies (Winding-Up) Rules 2020 is enforced for reducing the burden of the National Company Tribunal as it has enabled the summary procedure for liquidation of the Company’s assets.
The Company should fulfil the following obligations before winding up:
- A resolution should be passed by the Board of Directors
- There should not be any ongoing business
- The directors of the Company should declare that there is no debt pending on Company.
The summary procedure provided by the Companies (Winding-Up) Rules 2020 is that the Company can directly apply to the Central Government for its Winding Up instead of a Tribunal.
As per the 2020 Rules, the following are the class of companies for the purpose of the summary procedure:
- The companies accept deposits and have total outstanding deposits up to Rs. 25 lakhs.
- The companies have total outstanding loans of up to Rs 50 lakhs.
- The companies having a total turnover of Rs. 50 crores.
- The companies with total paid-up capital of Rs. 1 crore.
