Strike off Vs. Members’ Voluntary Winding Up

Strike off Vs. Members’ Voluntary Winding Up

14 August 2019 • bsamrishindia.com

For whatever reasons, if you have decided to close your company in India, it is very important that you decide the right format of doing it and understand the cost implication. We will restrict our discussions here to a company which is solvent (can pay it’s debts).

There are two modes to close down your company, one is Strike off (Section 248 of the Companies Act, 2013) and the other is Voluntary winding up (under IBC-Insolvency and Bankruptcy Code, 2016). This write up will help you to understand the basic difference between Strike off and Voluntary winding up and therefore, will help you decide the correct mode to dissolve your company.

The most important factor in the decision making process will be whether or not the company has outstanding debts and has assets that need distribution.

Let’s examine both the processes one by one.

Strike off:

Strike off is a cost effective method of dealing with closure of companies but is only for companies with no assets or liabilities (including contingent liabilities).

The following companies are eligible for opting for strike off:

• • A company which has failed to commence its business within one year of its incorporation; or

  • A company which is not carrying on any business or operation for a period of 2 immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company.

Before making an application for strike off, Company needs to ensure that it has:

• • Utilised all it’s assets
  • Paid all the debts/ liabilities
  • Cleared all taxes
  • There should be no outstanding legal cases
  • Closed all existing company bank accounts
  • Prepared final accounts with Nil assets and nil liabilities

Voluntary Winding up / Members winding up:

• Company is solvent: You may choose members’ voluntary liquidation if your company is ‘solvent’ (can pay its debts) and to this effect has to make a ‘Declaration of solvency’. Voluntary winding up of a company is a formal procedure that needs to be carried out by a licensed insolvency professional appointed as the liquidator. A liquidator is personally appointed by the Shareholders of the company.
• Comparatively more costly process: Liquidation happens when the company’s business is closed down, its assets are sold off, the creditors are paid, the balance of the assets are distributed to the members and at the end of the whole process the company ceases to exist. Liquidation, being a more elaborate process, is comparatively more costly process.
• Substantial benefits: However, there are also substantial benefits to opting for voluntary winding up process as it is the only process by which proceeds from sale of surplus assets can be distributed to the members. Also, the directors’ personal liability to any future debt / demand also comes to an end through this process.
• Director’s Personal Liability: After voluntary liquidation, no debt can be held against the directors personally. Therefore, you are free to move on to your next chapter with a clean slate. On the other hand, if you successfully get the company struck off whilst there is any outstanding debt or demand from Tax Department or other Government departments, it’s possible that the company can be resurrected by such creditor/ Government department due to the outstanding debts/ demands. If this occurs, the debts can then be held against you personally, as director.

Moreover, while you are waiting for two years to become eligible for strike off, during this waiting period and during the period thereafter, the Directors and Company remain exposed to liabilities/ demands.

Procedural Aspects:

Strike off:

The striking off process requires the company to make an application in form STK-2 to the MCA. The form must be accompanied with a statement of accounts showing nil assets and liabilities, Shareholder’s approval, Affidavits and Indemnities by the directors. Government fees of INR 5,000/- is payable. NOC is not required from Income Tax / GST / other Govt. authorities. All directors need to confirm that there are no dues pending against Company with any such authorities.

Make sure that the company does not maintain any bank account as on the date of filing application and also does not have any assets and liabilities. (For more details, please visit Strike-off )

Voluntary winding up:

You may choose members’ voluntary liquidation if your company is ‘solvent’ (can pay its debts and the estimated liquidation costs). Majority of directors have to make a ‘Declaration of solvency’, stating that the directors have assessed the company’s solvency and believe that it can pay its debts. This Declaration is to be supported by a statement of the company’s estimated assets and liabilities. ,em>(Insolvent companies are covered under separate chapters of the IBC Code, 2016).

• Shareholders meeting: Convene a general meeting of shareholders and pass a resolution for voluntary winding up. At the meeting, appoint a licensed insolvency professional as a liquidator who will take charge of winding up the company. The company passes in the administrative control of the company to the Liquidator.
• Responsibilities of a Liquidator: The Liquidator will start their administrative duties straight away and will take various steps till dissolution of the company.

The liquidator is an insolvency professional, who runs the liquidation process upon his appointment. As part of process, he will settle any legal disputes, outstanding contracts, sells off the company’s assets and use proceeds to pay creditors, meet deadlines for paperwork and keep authorities informed, pay liquidation costs and the final tax / GST liabilities, surrender various Government registrations, obtain NOC from Income Tax Department, keep creditors informed on their claims and also keep the company informed regularly.

Effect of appointing a liquidator

When a liquidator is appointed, directors ceases to have control of the company but can oversee liquidation through reports submitted by Liquidator. All the assets including bank account are utilised by the liquidator for the purpose of beneficial liquidation and distribution of proceeds to all stakeholders.