written by khatabook | November 17, 2022

Exclusive Guide On Closure of Inactive Or Defunct Company

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Table of Content


Business ownership comes with its own set of challenges. Occasionally, if some things in the company need to stabilise, then in such cases, the business may need to shut down. Several reasons can lead to a company's closure or winding up. You can now remove your company's name from the MCA records to close down your business quickly. 

Did You Know? In India, over 784 thousand companies have ceased operations or been struck off by their respective jurisdictions as of June 2022, while around 29 thousand have amalgamated or merged during the measurement period.

What is a Defunct Company?

Defunct companies have no assets or liabilities and failed to commence operations within a year of incorporation. On 5th April 2017, the fast-track exit came into reality for removing defunct companies. As a result of the strike-off mode, the Ministry of Corporate Affairs (MCA) eliminated the names of defunct companies from the Register of Companies (ROC).

Registrars can execute fast-track exits by striking off a company's name if:

  • An incorporated company has not conducted any business within one year of incorporation.
  • The company has not shown any business activities for the past two years.
  • There has been no application for dormancy status under the Companies Act.

Every company director should receive a notice from the Registrar of Companies (ROC) stating the intention to remove the company's name within 30 days. Also, companies can clear their names voluntarily from the registrar.

Also read: Top Multi-Millionaire Business Ideas One Must Know!

Closure of Defunct Company

Company registration with the Ministry of Corporate Affairs (MCA ), and Registrar of Companies (ROC), is mandatory. Then you should file regular returns with the ROC and other statutory authorities as soon as possible. Promoters should apply to the Registrar of Companies for Dormant Company status if the company has been inactive for two years to keep the company alive for future business.

Companies Act 2013 provides that penalties and prosecution processes may apply if the company fails to file regular returns with the Registrar of Companies.

Promoters can apply for closure of the company if they do not intend to keep it alive by removing its name from the MCA's list of companies.

Even if the "Company does not carry any business," there is no relaxation for compliance filings. It is essential to ensure that filing the company's name in time or its removal from the Registrar of Companies is done in time to avoid penalties and prosecution.

As a defunct company, the following companies can apply to have their names struck off the company register:

  • Within one year of incorporation, companies have not started any business.
  • Subscription money is unpaid within one hundred eighty days of the incorporation date by companies that subscribed to a memorandum but did not pay it.
  • For the two years immediately preceding the financial year, companies that have not conducted business or operations.

Companies That Cannot Be Closed As Defunct

The following company types cannot be closed as a defunct or inactive companies:

  • Companies listed on the stock exchange
  • Companies that were delisted for non-compliance with listing regulations, listing agreements, or other statutory laws
  • There are disappearing companies (listed companies that have not filed returns with the Registrar of Companies or SEBI for two years or don't maintain a registered office, or whose directors are not traceable)
  • There are companies whose inspections or investigations have been ordered and carried out or are pending in court. In contrast, prosecutions from such reviews or studies still need to be completed.
  • Registrars or inspectors have issued notices for books inspection to companies awaiting a reply, report, prosecution, etc.
  • Those companies that are the subject of pending prosecutions in any court for an offence
  • There are no pending compounding applications with any competent authority.
  • A company that has accepted public deposits is either in default or has yet to repay them.
  • A company that has unpaid charges
  • This act or an earlier act may apply to a non-profit organisation.

Some of the other restrictions are also present. And, in any of the below events, the companies cannot be closed as inactive or defunct companies. In the past three months, the company has not taken any of the following actions:

  • There has been a change in the company's name.
  • Changed the registered office of the company from one state to another
  • In the ordinary course of operation or otherwise carrying on business, has made a disposal of property or rights it holds for value immediately before ceasing trade or otherwise taking on business;
  • The Tribunal has not yet sanctioned a compromise or arrangement applied for by an applicant; or
  • Insolvency and Bankruptcy Code, 2016 or Chapter XX of this Act, is used to wind up the business.

Also read: Top Small Trading Business Ideas

Defunct Company Closure Process

Section 248(2) of the 2013 Companies Act and the Rules on Defunct and Inactive Companies prescribe a method to close defunct or inactive companies. The following is a step-by-step guide to completing a company.

Step 1: General Meeting of Shareholders is Called

At least 75% of the voting rights of the company's shareholders must be present at a meeting to decide about the closure before filing the STK-2 Form for Company Closure with the ROC.

Step 2: Registration And License Surrender

Before closing, the company must surrender any licenses or registrations held under GST or government departments.

Step 3: Closure of Bank Accounts and Preparation of Financial Statements

The banker must issue a certificate for closing the company's bank accounts. Obtain the certification of a Practicing CA or Auditor on financial information with Nil Assets and Liabilities.

Step 4: Affidavit and an Indemnity Bond for Each Director

All directors and shareholders must sign an affidavit of truth and accuracy, plus an indemnity bond that the directors must pay in person in case of liability.

Step 5: Fill STK-2 Form.

The Ministry of Corporate Affairs (MCA) announced Form STK-2 to remove names from the Registrar of Companies. It is important to make sure all pending ITRs and ROC returns have been filed with the ROC.

Also Read: All About Small Scale Industries in India (SSI) and Their Registration Process

Application Filing Instructions

  • Applicants must complete Form STK-2 and have it signed by the company's director authorised to sign it.
  • Chartered Accountants or Cost Accountants in full-time practice must certify the application.

How Will Registrar Proceed After Filing Application

  • The registrar will review the application and determine if it is in order
  • Publication of a notice in a government publication
  • An English and vernacular language newspaper should publish public information at least once
  • Notify other regulatory authorities, such as the Sales Tax Department, Income Tax Department, and Service Tax Department. The relevant authorities with jurisdiction over the company are presumed to only object to the proposed action of striking off the company's name if they receive an objection within 30 days of the date of notification.

Removal of the Company's Name 

In the Official Gazette, the registrar shall issue a notice in the prescribed format announcing the dissolution of the company after completing all the procedures.

Also Read: How to start a Readymade Garment Store? A Complete Guide 

Conclusion

Since the government is taking action against non-compliant companies, promoters and directors of inactive private companies are no longer willing to hold them. To reduce the cost of running a company, many corporate groups have restructured by closing passive companies and merging others with similar purposes. To reap the benefits of corporate structure, it is always best to use it wisely. The creation of an unnecessary entity may cause financial burden, and thus it is wise to shut that entity down. 

Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.

FAQs

Q: What is the average closing time for a company?

Ans:

It typically takes three months for a limited company to dissolve after the winding-up notice is advertised in the Gazette. Still, if the process is complicated, then it may take longer.

Q: Can one director close a company?

Ans:

The company CANNOT be closed or dissolved by a single director. Dissolving /closing a company must be initiated by the ROC if there is misappropriation, malfunction, and non-compliance with statutory laws.

Q: What is the difference between defunct and dormant companies?

Ans:

In the case of a defunct company, it has now become dormant. Such companies receive financial assistance from the government. Partnerships between two parties in a defunct company end when the company ceases to exist. Currently, it may be considered that such companies are not active.

Q: What are the needed documents for a company's closure?

Ans:

Closing a business requires the following documents:

  • The Board of directors should pass a resolution authorising the company's closure. 
  • The Directors of the company must sign an indemnity bond. 
  • All company directors must sign an affidavit—statements of financial position with no liabilities.

Q: How are struck-off companies' assets handled?

Ans:

Struck-off companies have their names removed from the company register, and they cannot trade, sell their assets, make payments, or engage in other business activities. In this case, new companies can use the company's name.

Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.