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Insolvency of a Private Limited Company

Insolvency of a Private Limited Company

When a private limited liability company finds itself unable to meet its financial commitments, the Board of Directors must assess whether the company is insolvent. If it is, they should initiate Insolvency proceedings by filing an application with the district court where the company is officially registered. The primary goal of these proceedings is to evaluate the company’s assets and convert them into funds that can be distributed among its creditors.

Multiple methods exist for the dissolution of a private limited company in India. These include options like company sale, compulsory liquidation, voluntary closure, and winding up inactive companies.

Shutting down a privately held corporation is a laborious yet essential process. Failing to do so would entail the annual obligation of adhering to Registrar of Companies’ stipulations, which translates to expenditures on audits and regulatory fulfillments.

The primary incentive for pursuing this course is to free up the resources and capital invested by the entity. The process of company dissolution can be instigated at the discretion of shareholders or mandated by a tribunal or legal authority.

We will first discuss the voluntary closing up of a company and, later, followed by the compelled shutdown.

Feel free to explore our additional articles for detailed guidance on company establishment, ISO registration, and income tax-related procedures. Take advantage of our available materials to navigate through these processes.

Voluntary Closure of a Business

When a Company Can Be Closed by Shareholders?

To initiate the process of company closure, shareholders need to:

  1. Approve a special resolution during a board meeting.
  2. Pass a resolution in a general meeting, stipulating the winding up of the company due to the expiration of a duration specified in the Articles of Association (AoA) or the fulfillment of a condition outlined in the AoA necessitating its winding up.

Procedure for Insolvency

  1. The majority of directors, or both directors if there are only two, must convene a board meeting. During this meeting, the directors need to announce that the company is free from debts or that its debts can be settled using the funds from the Insolvency of a Private Limited Company. Additionally, a date, time, and agenda must be set for a general board meeting that will take place five weeks from the initial board meeting. A notice should be issued for this upcoming meeting, providing appropriate explanations.
  2. On the scheduled date of the general board meeting, a resolution should be passed. This resolution can either be an ordinary resolution requiring a standard majority or a special resolution necessitating a 3/4th majority. Following this, the directors are required to meet with the company’s creditors promptly. If creditors holding 2/3rds of the total value agree to the company’s closure, a voluntary winding-up process can be initiated. If not, the matter will need to be resolved through a tribunal for compulsory winding-up.
  3. Within ten days of the resolution’s passage, the registrar of companies must be informed to appoint a liquidator. The liquidator will assume the powers previously held by the directors and will have the primary responsibility of gathering the company’s assets and settling its outstanding debts. Any surplus remaining after debt settlement will be distributed among the company’s members.
  4. Within 14 days of the resolution being passed, the resolution along with an advertisement will be published in the official gazette of the district where the company’s registered office is situated.
  5. Within 30 days of passing the resolution, a comprehensive statement of accounts must be prepared. This statement will indicate that apart from share capital and a debit balance in the profit and loss account, there are no assets or liabilities. All directors are required to furnish an affidavit and indemnity. If there’s an unsecured loan, a waiver letter should be submitted.
  6. A special resolution will be proposed during the general board meeting, which has been called for the purpose of approving the disposal of accounts.
  7. Within two weeks, the accounts and special resolution need to be filed with the Registrar. Once the Registrar is satisfied, an order will be issued, officially stating that the company will be wound up within the following 60 days.

Insolvency of a Private Limited Company by a Tribunal

The Companies Act, 2013 introduces updated regulations for the closure of companies, superseding the provisions in the Companies Act, 1956. One notable provision is that the Act specifies conditions under which a company can be dissolved by a tribunal. These conditions include:

  1. Inability of the company to repay its debts or loans.
  2. Company’s resolution for dissolution, subject to specific conditions outlined in the Act.
  3. Non-filing of returns or financial statements for five consecutive years.
  4. Engagement in activities that undermine the nation’s integrity, sovereignty, and international relationships.
  5. Tribunal’s determination, based on findings or Chapter XIX, that liquidation is the appropriate course of action.
  6. Involvement of the company or its members in fraudulent transactions, illegal financial gains, or deceitful profit generation.

In any of these scenarios, a tribunal is constituted to decide on winding up the company under examination. The tribunal’s decisions are considered conclusive, and upon receiving the order, Form 11 is issued to initiate the winding-up process

Insolvency of a Private Limited Company by Court

  1. Initiation of the process begins as the court or tribunal dispatches an official notification to an appointed liquidator. This designated individual will be in charge of the company and oversees its liquidation procedures.
  2. The court formulates a winding-up order, which is then distributed to all creditors and contributors, asking them to step forward. This order is applicable even to those who instigated the liquidation petition.
  3. The liquidator, designated by the central government, shall examine the company’s records, available cash, bank holdings, debts, creditors, loans, and other financial aspects.
  4. Within the subsequent six-month period, the official liquidator is obliged to present an initial report to the court concerning the company’s accounts, debts, debtors, as well as available funds and tradable assets. Additionally, the liquidator will indicate whether an investigation into the company’s affairs is deemed necessary.
  5. In the absence of an inquiry, the official liquidator is responsible for equitably distributing the available funds among all creditors until exhausted. A comprehensive breakdown of how funds, assets, and operations were divided is submitted to the court by the liquidator.
  6. Following a thorough review of the financial report, the court pronounces  the dissolution of the company.

Selling the company follows a similar path to voluntarily winding it down, with the difference being the transfer of responsibilities to another individual.

The company is mandatorily shut down when it is involved in some illegal actions.

Before shutting down a company through voluntary winding up, they need to follow specific compulsory procedures. When a company becomes inactive, it can be concluded and it is essential to file the STK-2 form in advance. The company’s actions make it easier to wind up the company.

Documentation Required for Winding Up a Private Limited Company:

The following checklist is required for dissolution of a Private Limited Company:

  • Obtain consent from all creditors of the company.
  • Prepare and notarize an indemnity bond signed by the company’s directors.
  • A certified report of all assets and liabilities of the Company, verified by a Chartered Accountant.
  • Affidavit from the company’s directors.
  • Secure a duly signed, certified true copy (CTC) of the special resolution, signed by the directors of the company.
  • Ensure that all directors of the company possess digital signatures.
  • Provide copies of PAN and Aadhar Cards for all directors.
  • Collect consent letters from all directors.
  • A statement related to pending litigation of the Company
  • Obtain a No Objection Certificate (NOC) from the Income Tax Department 

If you have any doubt regarding this, then you can send your doubts on companysuggestion and our team of experts will guide you.

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