Winding up, also known as liquidation, involves the process of collecting and selling a company’s assets to settle its debts. When a private limited company decides to wind up, it essentially removes its name from the records of ROC.
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The process of liquidation is initiated by a private limited company to close its business. This decision can stem from various reasons such as insolvency or the company’s unwillingness to continue its operations. Liquidation involves selling off the company’s assets to settle its obligations and repay its liabilities, ultimately leading to the dissolution of the company.
If a company fails to fulfill its compliance obligations, it can face fines, penalties, or even disqualification of its directors from incorporating another entity. Therefore, it’s advisable for companies to wind up promptly when they become inactive or insolvent. Winding up entails ceasing all business activities, liquidating assets, and distributing the proceeds among shareholders.
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Winding up a private limited company can be executed through two primary processes:
1. Voluntary Winding Up
2. Compulsory Winding Up (by the NCT)
Voluntary winding up hinges upon the shareholders’ decision. It can be initiated by passing either a special resolution or a resolution during a general meeting of the company. The decision to wind up can be triggered by the expiration of the time period stated in the Articles of Association (AOA) or the occurrence of an event specified for dissolution.
Voluntary winding up can take two forms:
– The directors of the private limited company affirm the solvency of the company through a declaration presented on affidavit. This declaration must be made within five weeks preceding the date of the resolution for winding up.
– The declaration, along with the latest profit/loss statement, balance sheet, and statement of assets and liabilities, is submitted to the Registrar of the Company.
– Subsequent steps include formal declaration by the Registrar, appointment of a liquidator, collection of assets, and settlement of debts.
– If the directors fail to declare solvency, the company is presumed insolvent. In this case, creditors convene to pass a resolution for winding up.
– Steps involve passing a winding-up resolution in a general meeting, convening a creditors’ meeting, appointing liquidators, and incorporating a Committee of Inspection.
Compulsory winding up occurs when the company is engaged in fraudulent or unlawful activities. The National Company Tribunal or court handles the process.
Procedure for Compulsory Winding Up:
Under the Companies Act 2019, the Ministry of Corporate Affairs introduced the Companies (Winding-Up) Rules 2020. These rules streamline the winding-up procedure under Section 271 and Summary Procedure for Winding Up under Section 361 of the Act, effective from April 1, 2020. The rules provide formats for various forms required in the process.
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