Introduction
Ease of doing business also includes the ease with which companies can shut operations and exit the marketplace in a country. Under Indian law, companies (or limited liability partnerships (“LLP”) have various options to wind down operations voluntarily, either under the Companies Act, 2013 (“Companies Act”), (or the Limited Liability Act, 2008, for an LLP) or the Insolvency and Bankruptcy Code, 2016 (“IBC”).
This article aims to provide an overview of the methods through which a company may be able to wind down its operations in India, along with the practical considerations that may be applicable while exercising these options.
Options for voluntary closure of an entity in India
The mode that may adopted for voluntary closure of a company largely depends on the size of the company and whether it is a going concern. Summarily, the options that are available under the law include:
(a) Striking off of a defunct company under Section 248 of the Companies Act;
(b) Winding up under the supervision of the National Company Law Tribunal (“NCLT”) under Section 271(a) of the Companies Act, read with the Companies (Winding Up) Rules, 2020 (“Winding Up Rules”);
(c) Summary winding up under the supervision of the Regional Director under Section 361 of the Companies Act, read with the Winding up Rules; and
(d) Voluntary Liquidation under Section 59 of the IBC, read with the Insolvency and Bankruptcy Board of India (Voluntary Liquidation Proceedings) Regulations, 2017 (“Voluntary Liquidation Regulations”).
(e) The IBC also provides for voluntarily commencing corporate insolvency resolution by the corporate person, which has committed a default (as defined under the IBC) under Section 10 thereof, which we have excluded for the scope of this article.
Similarly, a Limited Liability Partnership may also opt for striking off under the Limited Liability Partnership Act, 2008 (“LLP Act”) (Section 75 of the LLP Act); or voluntary winding up by the NCLT under the LLP (Winding up and Dissolution Rules) 2012; or voluntary liquidation under IBC.
Procedure under the available options
(a) Striking off
The option of striking off of a company from the register of companies was originally envisaged under Section 560 of the Companies Act, 1956, which empowered the Registrar of Companies (“Registrar”) to remove the name of the company from the register of companies.
Under Section 248(2) of the Companies Act, a company may opt to strike off its name from the register of companies after extinguishing its liabilities and on passing a special resolution to this effect on the condition that (i) it has failed to commence operations within one year of its incorporation; or (ii) it has ceased all business operations for a period of two years immediately prior to filing the application; or (iii) where the subscribers to the memorandum have not paid the subscription amount undertaken to pay at the time of incorporation and have not filed a declaration within 180 days to this effect[1].
Broadly, an application for striking is required to be accompanied with a no-objection certificate from the appropriate regulatory authority, if applicable; indemnity bonds executed by each of the directors and the statement of accounts made not more than 30 days before the date of application as certified by a Chartered Accountant[2].
Striking-off as an option is suitable for a company that is smaller in size (in terms of operations and revenue) and has already ceased operations, thereby becoming an inactive company[3], which has not applied for a dormant company status under Section 455 of the Companies Act. This option does not require intervention of a liquidator or of the NCLT, thereby making it a relatively straightforward and cost-effective process.
However, for this process to be successful, the company is required to ensure all requisite statutory compliances under the Companies Act for a period of two years are complete, to avoid penalties. It is relevant to note that while this option does not involve adjudication before the NCLT, no mandatory timelines have been prescribed for the Registrar to consider the application for striking-off and to pass an order of dissolution.
(b) Summary winding up
A more recent addition to the Companies Act, a summary procedure for liquidation by the Regional Director[4] of the Ministry of Corporate Affairs has been introduced by virtue of the Winding Up Rules, read along with Section 361 of the Companies Act.
Intended as a streamlined mechanism to help small companies wind-down expeditiously, this process does not require the intervention of the NCLT at all, instead envisages applying for winding-up before the concerned Regional Director of the Ministry of Corporate Affairs, who is in charge of the region where the Company is located, subject to the company meeting certain specified threshold. The concerned Regional Director, based on a petition filed by the company which meets the specified thresholds, appoints a liquidator for liquidating the assets of the company. After completing the liquidation process, the Regional Director is empowered to pass the final order of dissolution.
For a company intending to adopt the summary winding up process[5], it must meet the thresholds prescribed under the Companies Act and the Winding Up Rules, viz:
(a) the company should have assets of book value not exceeding one crore rupees; and
(b) Based on the latest audited balance sheet:
(i) The company which has taken deposits does not have total outstanding deposits exceeding twenty-five lakh rupees; or
(ii) The Company does not have total outstanding loan (including secured loan) exceeding fifty lakh rupees; or
(iii) The Company has a turnover up to fifty crore rupees; or
(iv) The Company has paid up capital not exceeding one crore rupees.
If the aforementioned thresholds are met, the company can file a petition in the prescribed form before the Regional Director, along with a statement of affairs. The Regional Director is required to assess whether the thresholds for commencing summary liquidation have been met, following which an order may be passed appointing the official liquidator of the company.
It is prescribed that the official liquidator disposes of the assets of the company within 60 days as prescribed under the Winding Up Rules[6] and submit a final report to the Regional Director, who upon receipt of such report can order that the company be dissolved.[7]
In theory, the summary winding up process is more streamlined, with timelines being prescribed for liquidation and more importantly it does not involve the requirement of adjudication by the NCLT. However, its applicability is restricted to entities that have smaller scales of operations, and there is presently little data available in the public domain on its practical efficacy.
(c) Winding up by the NCLT
The winding up provision under the present Companies Act is a vestige of the erstwhile Companies Act, 1956, which provided for winding up by the High Court, including for failure to pay any debt. With the introduction of the Companies Act and more importantly the IBC, the scope of winding up under Section 271 of the Companies Act has become narrower. Under the present scheme, the NCLT has the jurisdiction to entertain a petition presented either by the company, any contributory of the company, the Registrar; or any other person authorised by the Central Government or State Government[8]. A company may opt to wind up under the supervision of the NCLT by passing a special resolution to this effect or when the Registrar or the Central Government is of the opinion that the affairs of the company have been conducted in a fraudulent manner or if the company was formed for fraudulent and unlawful purpose. This was recently seen in Devas Multimedia Private Ltd V. Antrix Corporation Ltd.[9] (“Devas Multimedia Case”), where the Hon’ble Supreme Court upheld an order of winding up passed by the NCLT under Section 271(c) of the Companies Act. Further, Section 271 allows for winding up of a company that has acted against the interest of the sovereignty and integrity of India; or if the Company has made a default in filing its financial statements for five consecutive years; or if the NCLT is of the opinion that it is just and equitable that the Company be wound up.[10]
If the winding up petition is admitted by the NCLT, a liquidator would then be appointed by an order of the NCLT who shall constitute a winding up committee and submit a report within 60 days of the order of the NCLT after which the NCLT may fix a time within which the liquidation shall be completed or order the sale of the company as a going concern. After the affairs of the company are wound up, an application would be made to the NCLT for the dissolution of the company.
While the process as laid out under the Winding Up Rules is detailed and relatively well established owing to past precedents, the exercise of option Section 271 of the Companies Act as it presently stands, can be restricted to a few specific circumstances and can be considered as a more time consuming process, which requires the intervention of the NCLT at every stage of the process. Various other stakeholders will also be involved in this process – the Company Liquidator, the Winding up Committee,[11] and the Registrar.
(d) Voluntary liquidation under the IBC
The enactment of the IBC in 2016 introduced a separate voluntary liquidation process, which is more commonly adopted for winding down a corporate person (which includes both a company and an LLP) these days. Prior to the IBC, a company could initiate voluntary liquidation under Section 304 of the Companies Act, which was subsequently omitted by the IBC. The process of Voluntary Liquidation has become more streamlined under Section 59 of the IBC, read along with Voluntary Liquidation Regulations, since it does not envisage the intervention of the NCLT for commencing voluntary liquidation process.
In terms of process, prior to initiating voluntary liquidation, the company is required to prepare a valuation report and a statement of assets and liabilities of the company as on the liquidation commencement date (i.e. the date from when the company has no liabilities, employees and assets, except cash and bank balance required to make payments if any claim is filed and to cover the liquidation expenses). Thereafter, the company may initiate the process by passing a director’s declaration, stating that the company is not in debt and is not being liquidated to defraud any person.[12] After issuing the declaration of solvency, the company is required to pass a special resolution appointing a liquidator[13], following which the company shall cease all business operations except as far as required for the winding up of the business. The role of government regulators is restricted since the company is merely required to notify the Registrar and the Insolvency and Bankruptcy Board of India (“IBBI”) regarding its resolution to liquidate the company[14]. This ensures that there is no delay in commencing the liquidation process. Liquidation is also required to be conducted as mandated under the Voluntary Liquidation Regulations by the liquidator within 270 days (if the company has creditors who have approved the special resolution) or 90 days in certain specified cases.[15]
The process does not involve the courts or the NCLT until the final stage, wherein after completion of the liquidation process, the liquidator submits the final report to the NCLT, along with an application for dissolution of the Company. The NCLT is therefore merely required to ascertain whether the company has fulfilled all the compliances and procedural requirements as mandated under the IBC and the Voluntary Liquidation Regulations, before passing an order of dissolution.
Closing comments
As set out above, various modes to voluntarily wind down the operations of a company exist in India. It may be noted however that while exercising any of the above options, the company would be required to ensure certain minimum compliances such as requirement of a minimum of two (for a private company) or three (for a public company) directors[16] and the maintenance of a registered office[17] as required under the Companies Act.
While considering the most viable method to wind down a company, it is therefore important for a company to consider various aspects such as its size (in terms of revenue and the scale of busines operations), the timelines within which it wants to complete the process, the level of intervention that is required by the relevant regulators/ the NCLT, the level of control that may be exercised by the company in conducting the winding down process and the relative cost and effort required to wind down the company.
For further information, please contact:
Ankoosh Mehta, Partner, Cyril Amarchand Mangaldas
ankoosh.mehta@cyrilshroff.com
[1] See Section 248 (1) of the Companies Act
[2] See E- Form STK 2 https://www.mca.gov.in/MinistryV2/companyformsdownload.html
[3] See Section 455 of the Companies Act
[4] Under Section 361 of the Act a company may be wound up by the Central Government, a power which has been delegated vide notification dated December 19, 2016 to the Regional Directors of the Ministry of Corporate Affairs.
[5] Section 361 r/w 190(2) of the Winding Up Rules
[6] Section 362(1) of the Companies Act read with Rule 1905(5) of the Winding Up Rules
[7] Section 365(1) of the Companies Act
[8] See Section 272 of the Companies Act
[9] See 2022 SCC OnLine SC 46
[10] Section 271 of the Companies Act
[11] See Section 277 (4) of the Act
[12] Section 59 of IBC
[13] Under Section 59 (3) of IBC the company is required to appoint a liquidator who is an insolvency professional registered with the IBBI
[14] Regulation 14 of the Voluntary Liquidation Regulations
[15] Regulation 37 of the Voluntary Liquidation Regulations
[16] Section 165 of the Companies Act
[17] Section 12 of the Companies Act
