Secretarial Audit

Overview of Closure of Private Limited Company

At Kanakkupillai, we understand that running a business comes with its challenges, and sometimes, despite our best efforts, we need to close our business.

The Private Limited Company is defined in the Companies Act 2013 as a business entity with a minimum share capital and a restriction on the transferability of its shares. It is a company that limits the number of its members to 200. The business structure is quite popular among the Small and Medium-Sized Enterprises (SMEs). It offers limited liability protection, flexibility in the business, and decision-making. There are several advantages of a Private Limited Company, such as easy access to capital of the business through equity shares, separate legal identity, perpetual succession, and limited liability.

However, there are instances when closing the Private Limited Company becomes necessary, mainly when the company is not carrying any business or when continuing the business is no longer desirable or profitable. A Closure of a Private Limited Company refers to a private company that has completed the process of winding up its operations, either voluntarily or through the order of a court of law. A Private Limited Company's closure application is submitted to the Registrar of the Companies (RoC). To guarantee that all debts are paid off, taxes are paid, and employees are paid, the closing process entails a number of legal and financial procedures. Directors and shareholders are key players in the decision-making process.

Some Private Limited Companies can choose voluntary winding up, and some may be forced to close because of insolvency or failure to comply with legal obligations. The main goal of closure is to ensure the business is legally dissolved, its debts are paid off, and no new liabilities emerge at the end of the process.

What is a Private Limited Company?

As per Section 2(68) of the Companies Act 2013, a private limited company is a kind of company that has a minimum share capital that restricts the right to transfer its shares. You only need a minimum of two (2) shareholders to incorporate a Private Limited Company in India.

What is the Closure of a Private Limited Company?

Closing or closure of a Private Limited Company refers to the process of officially shutting down a business and legally ending its existence as a registered entity. The reasons for closure can be financial difficulties, business reorganisation, or a decision to stop operations.

Importance of Closure of the Private Limited Company

• Financial Relief to the Directors and Shareholders
• Less Legal and Financial Liabilities
• Avoid ongoing costs
• New Opportunities for Business Ventures

Grounds for Closure of a Private Limited Company in India

Section 248 of the Companies Act 2013 provides grounds for the Closing of a company in India:

• The company has not commenced its business within one year of its incorporation.
• The company is not carrying any business or operation for two (consecutive) preceding financial years. It has not made an application within such period to obtain the status of a Dormant Company under Section 455 of the Companies Act, 2013.

Closure Options for a Private Limited Company

Defunct Company Closure: Companies that have not been carrying on any business or have not been in operation for at least two (2) financial years, have no assets or liabilities, and have no pending legal proceedings or tax liabilities in their name are eligible for this kind of closure. Such type of company obtains the status of a ‘Dormant Company.’ The main advantage of a Defunct Company Closure is that it is relatively quick and involves a less complicated process compared to others.

Voluntary Winding Up: Companies that have decided to cease operations voluntarily, have paid off their debts to stakeholders, and have decided to cease operations voluntarily choose this option. The process is quicker, and since it is a planned closure, the company has time to set off the debts and liabilities of its stakeholders as well as its employees.

Compulsory Winding Up: When a company becomes insolvent and unable to pay its shareholders' debts, has not been carrying out any business for a year, its debt exceeds a specific amount or has acted against the national or public interest, the process of compulsory winding up is carried out when the National Company Law Tribunal (NCLT) is responsible for winding up insolvent companies in India.

Requirements for Winding Up a Private Limited Company

• No Liabilities or Assets: There should be no open bills or responsibilities on the company. All the company's assets and liabilities must be fully cleared.
• Filing of Tax Returns and Financial Statements: All taxes and responsibilities must be paid. This includes the submission of income tax returns, GST reports, and other financial records needed by law.
• Settlement of Outstanding Debts and Liabilities: All bills, collectors, and other financial tasks must be paid off. The company should not leave any unpaid bills or duties.
• Obtaining Necessary Approvals: The regulatory bodies that have an impact on the company's operations must provide the required clearances and approvals.

Eligibility Criteria for Closing a Private Limited Company

• Inactivity: The company must have been inactive for at least one year, which means that it must not have engaged in any business activity during this time.
• Debt-Free: The company's debts and responsibilities should be cleared, and all financial obligations should be settled.
• Asset Distribution: All company assets and duties must be fully split or settled.
• Regulatory Compliance: The company must have gotten the necessary approvals and clearances from the authorities.