Procedure for closing a private limited company in India

Procedure for closing a private limited company in India

Often, we register a company for a business idea we wanted to implement and for some reasons it does not work, we do not even start the work. Also, there are times when we register a company for a future project and hence those companies are not operational in present.

There are various compliances which one needs to meet after registering a company and it takes a cost to meet them. Who would want to bear more cost for the company which is not working in the first place?

So, what do we do, we just keep the company like that, either we get the compliances done or many times we just ignore it.

Earlier, closing a company was a tedious process, which required a lot of formalities, things have changed now and there are now quicker modes to close the company.

Here we bring you two options for such companies that you have formed but not functional anymore.

Option 1: Fast Trick Exit (FTE) mode: Let’s you close your company

This mode as suggested by name lets you close your company quickly, any company which is defunct can apply for this mode.

Let’s understand what’s a defunct company

A Defunct company is a company which has:

1. Nil asset and nil liability, and

2. Not commenced any business or activity since its incorporation

or

Not been carrying any business operation since last one year.

Now we know if our company is a defunct or not, let’s move on to see the procedure for applying for the FTE mode

1. To close a company under FTE, one should apply through Form FTE, available in MCA website. This form should be digitally signed by authorised director.

The application fee will be Rs.5000/-

2. On receiving the application, the Registrar would display the name of the company on its website for a period of 30 days, to give notice to anyone who may have objection to the striking off the name of the company.

3. After 30 days, the Registrar will issue a certificate for closure of the company stating that its name is struck off from the register of companies maintained with the ROC.

The documents stated below are to be attached with the form FTE

i) We need a Board of Directors approval for closure of the company

Through a board resolution, BOD must approve applying for the FTE.

Note: All bank accounts, Registrations with the govt. authorities should be closed/ cancelled before applying for closure of the company.

ii) Once board resolution is passed, all the directors of the company should produce an affidavit on a stamp paper or Rs 100/- duly notarised & individually stating the following in it:

  • The directors swear that they are the directors of the company applying for closure.
  • That the company has closed all the bank accounts in its name.
  • That the company has nil assets & liability.
  • That the company has not been carrying on any business for the past one year at least.
  • The reasons for not carrying on any business.
  • That the company has no statutory dues as on the date of declaration and that there are no litigations pending before any court of law against or involving the company.

iii) Next, all the directors of the company should execute an Indemnity Bond witnessed by 2 persons on a stamp paper of Rs 200/- and undertake to do the following:

  • To indemnify any person for any losses that may arise pursuant to striking off the name of the company.
  • To pay and settle all lawful claims arising in future after the striking off the name of the company
  • To settle all lawful claims and liabilities which have not come to our notice up to this stage.

Option 2: Granting the “Dormant status

This option is suitable when you have registered a company for a future project and hence the company is not operational currently. Also, where an in-operational company cannot be closed as it might be holding assets such as land, building etc., choosing the “dormant status” is a good option.

Let’s understand what’s a Dormant company?

A dormant company is a company which is inactive i.e. a company which has the following characteristics:

  • It has not been carrying on any business or operation
  • It has not made any significant accounting transaction during the last two financial years.
  • It has not filed financial statements and annual returns during the last two financial years.
  • A defaulting Company which has not filed annual returns and financial statements for two years or more.

Procedure for obtaining status of dormant company:

  1. An application must be made in form MSC-1 to get the “Dormant” status.
  1. A special resolution should be passed to authorize the directors to make application for Dormant status. Thus, we need to file E-form MGT-14 with ROC for filing special resolution.
  1. The Registrar shall, after considering the application filed in Form MSC-1, issue a certificate in Form MSC-2 allowing the status of a Dormant Company.

Advantages of applying for ‘Dormant Status’

There is lesser compliance burden for a dormant company which reduces the costs of maintaining such a company.

‘Dormant Companies’ are exempted from the following compliances:

  • To include cash flow statements in their financial statements.
  • Reduced compliance for holding board meeting in each quarter. These companies are required to hold only two board meetings during the year.
  • These companies do not require to rotate the auditors

Compliances to be met by a dormant company:

  • It shall file a “Return of Dormant Company” each year, indicating financial position which should be audited by a chartered accountant in practice in
  • Form MSC-3 along with such annual fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within a period of thirty days from the end of each financial year.

Also, note that maximum tenure for which a company can remain dormant is 5 consecutive financial years.

If a company remains dormant for more than 5 years, the Registrar commences the process of striking off the name of the company from the Records, i.e. the company will be removed.

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