Closing or winding up a business can be as challenging for first-time entrepreneurs as setting it up. It involves shutting down all business operations and settling the company’s debts by selling its assets. Any remaining assets, after clearing the liabilities, are distributed among the shareholders in proportion to their investments in the company.
There are two ways to close a company; first, compulsory winding up wherein it involves striking off the company name under the Companies Act, 2013. It applies if the business has not started operations within one year of incorporation, has been inactive for the past two consecutive financial years (resulting in it becoming a dormant company), or has engaged in illegal or unlawful activities, among other reasons.
The second way is wherein the company voluntarily decides to cease operations, provided all its liabilities are cleared and it has not committed any defaults.
For a company to close its operations, it has to follow the below process:
- A resolution has to be passed by the company in a general board meeting seeking consent from the majority of its directors
- A special resolution seeking approval of three-fourths of its shareholders has to be passed
- Consent is needed from trade creditors that they don’t have any responsibility if the company is closed
- As a private limited company, a Declaration of Solvency has to be prepared and accepted by the trade creditors
- Get a liquidator to implement the procedure to wind up the business and also to prepare a report on assets, debts, and properties
- The report has to be shared in the general meeting and a resolution has to be passed to dissolve the company
- The liquidator will make an application to the National Company Law Tribunal (NCLT) to dissolve a company
- The tribunal then may pass the dissolution order within 60 days of verifying the documents submitted
- After the dissolution, the company should file a copy of this record with the registrar of the company.
To close a company, certain documents are required, including a board resolution, a special resolution, affidavits from the directors, indemnity bonds, and a statement of the company’s affairs. Additional documents may include the incorporation certificate, company PAN, directors’ PAN and Aadhaar, the last utility bill, copies of the articles and memorandum of association, GSTR-10 acknowledgement, ITR acknowledgement, a letter of bank account closure, bank statements, etc.