Your company’s name will be removed from the Register of Incorporated Companies that is maintained by the ROC (Registrar of Companies) through the process known as “striking off.” Taking this technique is a straightforward method that is ideal for businesses that have less complicated financial situations, such as those that do not have any income, assets, or liabilities. On the other hand, winding up is a more complicated technique from a legal standpoint, and it takes things to the next level by liquidating your company’s assets, collecting its obligations, and distributing the remaining monies to stakeholders before closing it down.
Companies with complicated financial statuses, such as those who are experiencing constant losses, have accrued enormous debts and liabilities, and are on the verge of going bankrupt or becoming defaulters, are often the ones that are subject to this financial strategy. Within this blog, we will investigate both of these processes and gain an understanding of the specific differences between them.
What does it mean to “Strike off” a company?
All right, As the name suggests, striking-off is the procedure by which the name of your company is struck-off, or removed from the register that contains the names of incorporated companies in India. This is done in order to remove the name from the register. The consequence of this is that it loses its position as a “incorporated” business, and as a result, it would no longer have any legal existence to carry out any operations or activities in its name. In accordance with the provisions of Section 248 of the Companies Act, the procedure can be carried out only in the event that the organisation satisfies the following criteria:
Inactivity: The company must have been inactive for a continuous period of at least two years from the date of the application for striking off, or for a period of one year from the date of formation, whichever comes first. A period of inactivity is one in which there are no important accounting entries, business transactions, or operations that have taken place during the specified time period.
In addition, a company may be eligible for being struck-off if its shareholders have not deposited any capital for a period of six months beginning on the date when the firm was incorporated.
Current Bank Account Closed: The organisation must not have any ongoing liabilities or bank balances in order to be considered closed. Before the period of inactivity begins, it is the responsibility of the individual to satisfy all of their responsibilities, including statutory commitments such as tax obligations and outstanding loans. At long last, once all of the obligations have been satisfied, the bank account must be closed.
The corporation should not be involved in any legal proceedings, such as pending disputes or litigations, but it should also avoid getting involved in any legal proceedings. The regulatory authorities should not be able to conduct any kind of investigation or prosecution that pertains to it.
There should be no immovable property or assets available in the name of the firm. The corporation should not have any assets or property. During the period of inactivity, any assets that are present should be sold, and the revenues from the sale should be dispersed to the appropriate parties.
When it comes to the process of striking off, there are a few essential actions that must be taken and completed. To begin, a written consent from at least seventy-five percent of the company’s shareholders or a special resolution is required to be acquired. The bank account of the company is closed, and all registrations, licences, and identity documents belonging to the firm are surrendered, provided that they are still active and valid.
One who is actively practising as a Chartered Accountant (CA) is the one who prepares the financial statements that indicate negative assets and liabilities. To be removed from their positions as directors of the corporation, each director must sign an indemnification bond, an affidavit, and a board resolution. The next step is to submit an application to the ROC using Form STK-2, and if the application is accepted, your firm will be struck-off.
What does it mean to wind up a company?
Bringing an end to the existence of a company is accomplished by the legal process of winding up, which is also referred to as liquidation. Additionally, it entails the sale of the firm’s assets, the settlement of its liabilities, the distribution of any remaining monies, if any, to the stakeholders, and lastly, the permanent closure of the organisation. An order from the court can either compel the corporation to wind up its operations or the company can choose to wind up on its own volition.
Two distinct types of winding up are as follows:
The term “voluntary winding up” refers to the process by which a firm decides to bring about its own voluntary dissolution. Two different scenarios are possible for this to occur.
The Members’ Voluntary Winding Up is a method that is utilised when the company is financially stable and has the ability to pay off all of its obligations within a period of twelve months from the beginning of the winding up process. A special resolution must be accepted by the shareholders in order for the decision to wind up to be granted, and a liquidator is appointed to manage the process of winding up the company.
Creditors’ Voluntary Winding Up is a process that is relevant in situations where the corporation is unable to pay its debts in full and is therefore insolvent. In this scenario, the creditors of the firm get together to organise a meeting, during which they choose a liquidator to oversee the process of winding up the business.
The term “compulsory winding up” refers to the situation in which the court requires the firm to be completely dissolved. The inability of the firm to pay its financial obligations or other legal non-compliances is typically the impetus for the company to file for bankruptcy, which is typically started by creditors, shareholders, or regulatory agencies. For the purpose of managing the procedure, the court will appoint an official liquidator.
In order for a corporation to be eligible for winding up, there is only one need that it must fulfil, and that is that it must be actively executing its business operations. It is not possible to wind up a firm that is dormant or inactive. There could be a wide variety of factors that led to the conclusion of the relationship.
Insolvency, inability to pay debts, financial difficulty, failure of a firm, irreconcilable conflicts among shareholders, violations of regulatory requirements, and other just and equitable causes as established by the court are among the most common types of grounds.
The process of winding up a company involves a number of steps, including the appointment of a liquidator to oversee the winding-up process, the evaluation and settlement of the company’s debts and obligations, the sale of the company’s assets to repay any outstanding liabilities, the distribution of any remaining funds to shareholders after all debts have been settled, and finally, the acquisition of the necessary approvals to dissolve the company.
There is a significant distinction between winding up a company in India and striking off from it.
There are two choices that are frequently examined when it comes to the process of closing a corporation in India. These are striking off and winding up. There is a substantial difference between the two approaches in terms of the procedures, eligibility requirements, and legal repercussions, despite the fact that both methods involve the termination of the existence of a corporation.
Because of this, it is necessary for business leaders and stakeholders to have a thorough understanding of these disparities in order to make educated judgements regarding the most appropriate course of action.
When confronted with the option to shut down a business in India, it is essential to do a thorough analysis of the many aspects that can play a role in impacting the decision between going out of business and winding down operations. It is imperative that these aspects be taken into consideration in order to ascertain the most appropriate strategy for putting an end to the operations of the organisation.
The company’s financial status, obligations, regulatory compliance, employee and creditor claims, future business possibilities, tax ramifications, and the desired level of formality are some of the most important factors to take into consideration. Stakeholders are able to make educated judgements and successfully manage the intricacies involved in selecting the most appropriate way for closing their firm if they take these things into consideration.