Step-by-step Process to Close a Business

Normally, it can take several months to properly close down a business. Your closing plan should provide the maximum security for your personal assets, credit, and reputation in the community—as well as for those of your spouse, co-signers, and lenders. But these are not typical times. The coronavirus (COVID-19) pandemic’s extraordinary economic impact may force the immediate closure of several firms. Even yet, it’s never a good idea to just stop and allow everything to fall into place. This might result in unneeded headaches, lawsuits, and debt that would last for years.

Even though your shut-down period may be brief, you should still make an effort to provide your creditors and clients adequate notice before closing your business. What you must do is as follows.

Legal Provisions in the Companies Act, 2013 for Company Closure

In certain circumstances, Section 248 gives the Registrar of Companies the authority to revoke a company’s name. The ROC itself may use these powers, or the corporation may voluntarily use them. The following table lists the prerequisites for dissolving a Private Limited Company. If any one of these criteria is met, a firm may be dismissed.

Section 248 (1) a: If the company does not start doing business within a year of incorporation,
Section 248 (1) c- A firm has not conducted any commercial operations for the two financial years immediately prior and has not submitted an application to become a dormant company under Section 455 during that time.
Section 248 (1) d: Within one hundred and eighty days of the date of formation of a business, the subscribers to the MOA have not paid the capital amount that they were required to pay.
Section 248 (1) e- According to the ROC’s physical inspection of the company’s registered office, the company is not engaged in any commercial activity.

Striking off a Private Limited Company

According to the Companies Act, the company is created through a certain legal procedure. Therefore, the same Private Limited Company or OPC can only be closed using the procedures outlined in the Companies Act 2013. A company being “struck off” simply means that the ROC is removing its name from the Register of Companies because it has been inactive for a long time or has been unable to start up its business operations. A struck-off firm, unlike one that has been wound up, maybe reinstated after regaining its financial stability.

business closed

Minimum Requirements to Strike Off a Private Limited Company.

Determine the specific section 248 of the Companies Act that applies and states that the entity is inactive or defunct.
Verify that throughout the time the company has been inactive or dormant, it has not submitted any annual returns to the ROC.
A special resolution authorizing the closure of the business must be approved by at least 75% of all shareholders.
Ensure that all corporate debts, including taxes and other obligations, are settled.
The applicant must have the bank closure letter and statement, and the company’s current bank account must be closed.
Verify that the business has no assets or obligations prior to filing the STK-2.
The assets and liabilities listed in the statement of accounts were Nil, and the CA’s attestation was required.
The company’s name cannot be involved in any ongoing legal disputes or tax assessments.
Each director’s DIN and DSC must be current.

The required documentation list for company closure

An indemnity bond that each director has signed (STK-3)
Original copies of the special resolution (MGT-14) approved by the shareholders and signed by all the directors, or copies of the permission of at least 75% of the shareholders.
A declaration signed by each director (STK-4)
Board Resolution authorizing Secretary to sign STK using DSC and Directors, MD, Managers,
Bank closure statement and letter;
Statement of Accounts (STK-8);

Step to follow to close a business.

Documentation

Without pertinent and current documentation, a Private Limited Company strike-off application is not complete. These comprise a number of documents, some of which can be obtained from the relevant authority and others which need to be drafted. To avoid any delays in the procedure later on, we advise the applicant to make sure they have all necessary documents before starting the application filing process.

Get the approval of shareholders

A Private Limited Company must receive the consent of at least 75% of its shareholders before being struck off the register. Either getting their written consent or having the general meeting pass a special resolution can accomplish this. Copies of the agreement or resolution must be included in the application for striking-off that is submitted to the ROC.

Surrendering licenses and registrations

Any registrations and permits held by a Private Limited Company that is about to be struck off must be given up. Currently, some registrations and licenses may be revoked prior to the company being struck off, while others may only be revoked after the company has been struck off. For instance, only once the company is closed may some registrations, such as EPF, ESI, PAN, TAN, and IEC, be canceled. However, prior to the company being struck off, the GST registration can and must be given up.

Close the bank account and create the financial statement

If the company already has a current account, it must be closed before submitting the application to have the firm struck off. Additionally, the banker must provide the applicant with the bank closure letter and statement, which must both be obtained. Additionally, three months must have passed since the date the application for striking off must be filed before financial statements that show Nil. assets and liabilities of the company can be used. Additionally, it needs to be approved by an active CA.

All Directors’ Affidavit & Indemnity Bond

The directors must all draught and sign an indemnity bond outlining their individual or group duty to cover any liabilities that may arise after a company is struck off. Additionally, an affidavit declaring the company’s inactivity for the previous two fiscal years, or ever since incorporation, whichever comes first, must be written and signed by all of the company’s directors.

Board Decision

The next step is to schedule a Board of Directors meeting so that someone, ideally a director, can be given the go-ahead to sign the application for the business to be struck off. This is accomplished by having the meeting pass a regular resolution.

STK-2 Form filing

Once all conditions are met, the application to strike off the company may be submitted electronically to the ROC in form STK-2, along with all required supporting documentation and the applicable application fee. For STK 2 forms, the prescribed government fee is Rs. 10,000. Keep in mind that before submitting the form, it must be certified by a licensed CA, CS, or CMA.

the ROC struck off

The ROC carefully reviews the application after receiving it to look for any potential problems. If the application and the supporting documents are judged to be error-free, the ROC will publish a form STK-7 in the Official Gazette notifying the public of its intention to strike off the firm. If there are no objections from the general public, the ROC will strike off the firm, and its status on the MCA website will then change to “struck-off.” The notification will remain in the gazette for a month.

Types of actions must be taken on before closing a business:

There are a few advised steps that are involved in the business closing process, as we had already described under benefits. They are as follows:

Notifying the staff: It’s crucial to inform the staff before the business closes. Informing the staff must be done in the least disruptive way feasible.

Employee compensation: Before closing the business, it’s crucial to pay the staff their final month’s income. The business owner must additionally include a bonus sum, compensation for unused vacation time, etc. These will guarantee that they don’t cause any problems related to this while also giving the employees the necessary financial support during this difficult time.

Notifying the creditors: In order to avoid potential legal repercussions, the business leaders must also notify the creditors. Vendors, suppliers, service providers, etc. are among the creditors.

Debt settlement: Prior to closing a business, all potentially repayable obligations must be paid in full. You can ask for the other debts to be paid in installments over the next months.

Receivables collection: Given the present pandemic situation, this phase may be difficult, but business owners might try to collect as many overdue receivables as they can through bank transfers or other appropriate methods.

Client and customer notification: It is essential to notify clients and customers of the closing of the firm and not keep them in the dark. Additionally, this will enable them to plan and, if necessary, make their pending payments on time.

Taking possession of business property from employees: The majority of employees receive electronics and other resources while working for the company. Therefore, it is advised to retrieve the company property from the employees. These include portable internet modems, laptops, mobile phones, sim cards, and other devices. Deactivating their official login credentials is also required in order to prevent any misuse of the data.

Selling of extra stock for cash or credit: The business owner must always sell any excess stock for cash or credit. There are many licensed liquidators on the market who will pay a single sum to buy all the assets at once. The assets can also be sold separately through other channels.

Dividing up the company’s assets among the partners: In the case of a partnership firm, it is advised to divide up the company’s assets equally among the partners. This will not only help them avoid any negative consequences, but it will also enable them to keep a positive connection despite difficulties.

Commercial lease termination: If a business was established in a leased space, the lease agreement must be terminated. In light of the epidemic, some landowners might consent to postponed lease payments.

Closing the business bank account: All bank and other accounts associated with the business must be closed.

Canceling the central and state licenses and permits: All relevant licenses and permits, such as seller’s permits and state permits, should be revoked.

The business owner must file the final income tax returns for the company and notify the Indian government of this. To finalize the final tax return payment, the taxpayer must check the “final tax” box.

Firm dissolution: The company must submit the article of dissolution.

Removing the company name from the Ministry of Corporate Affairs (MCA) database: The company name must be removed from the MCA database. After a board meeting, the company’s name is deleted from the MCA database.

All sole proprietorship and partnership businesses adhere to these procedures for closing the business. Private limited businesses, however, could require some additional measures.