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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:

  • Unpaid debts of the Company
  • A special resolution passed for winding up a company
  • Any illegal or unlawful act by the Company or its members
  • Any fraudulent act or misconduct is done by the Company
  • Default in filing an annual account or financial statement for continuing five years to the Registrar of Company
  • Tribunal is of view that the Company should wind up
  • Any act omitted or done which has been mentioned in AOA to be provided for winding up of Company
  • The Company voluntarily decides to wind up.

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:

  • Consent of all the creditors of the Company
  • Indemnity bond notarised by directors of the Company
  • A certified statement of all assets and liabilities of the Company by the Chartered Account
  • Affidavit from the directors of the Company
  • Duly signed CTC of a special resolution by directors of the Company
  • Digital signature of all the directors of the Company
  • The PAN and Aadhar Card of all the directors
  • Consent letter of all the directors
  • A statement related to pending litigation of the Company
  • No Objection Certificate (NOC) from the Income Tax Department

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:

  • Formal declaration by the Registrar of the Company
  • Appointment of liquidator
  • Collection of assets and payment of debts

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:

  • Resolution of winding up to be passed in general meeting
  • Meeting of creditors
  • Appointment of liquidator or liquidators by the members or creditors
  • Incorporation of Committee of Inspection

Procedure to be followed in Voluntary Winding Up of the Private Limited Company:

  • Declaration of solvency by Director or Directors in a board meeting, verified by an affidavit that the Company will be able to clear all debts. The date of the general meeting of the board should be fixed five weeks from the date of the board meeting.
  • The Director or directors will issue a notice regarding the date fixed for the general meeting.
  • An ordinary resolution passed in the general meeting or a special resolution passed with a 3/4th majority.
  • After the resolution is passed, there will be Creditor's meeting, and if 2/3rd of the Creditor will not agree, then there will be no voluntary winding up.
  • If the creditors agree, then within ten days from the resolution, the Registrar of the Company will be notified about it.
  • Appointment of Liquidator by the Registrar of the Company.
  • The liquidator will prepare a report and ask the Company to file a statement of accounts in a general meeting and also send the report to the Tribunal within 14 days of the meeting.
  • The Tribunal will pass an order of dissolution of the Company within 60 days.
  • The copy of such order shall be forwarded by the liquidator to the Registrar of Company within 30 days of the order.
  • Registrar is satisfied, then it will pass an order of winding up of Company.
  • The Registrar of Company will publish the order of winding up in the Official Gazette.

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 petition for winding up of the Company is to be filed with a statement of affairs.
  • The tribunal/court will accept or reject the petition after scrutinizing its credibility.
  • A liquidator will be appointed by the Tribunal/court.
  • The liquidator will execute all the assets of the Company, examine the book of accounts, etc., and after that will prepare a draft report.
  • The liquidator will give the report to the winding-up Committee, and after the approval of the report by the Committee, the liquidator will submit the final report to the Tribunal/court.
  • Once the order is passed by the Tribunal/order then, the liquidator will forward the copy of the order to the Registrar of Company within 30 days.
  • When the Registrar of Company is satisfied, it will approve the Winding up of the Company and strikes off the name of the Company from the Register of Companies.
  • The Registrar of Company will send the notice for publication of Winding Up of Private Limited Company in the Official Gazette.

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.

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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.

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