In the dynamic landscape of corporate governance in India, the choice between striking off and voluntary liquidation represents critical decisions for companies looking to cease operations. Understanding the nuances of each method is essential to navigate the regulatory framework effectively and comply with legal obligations.
In India, for the companies looking to cease operations, there are two primary exit strategies:
- Striking off under Section 248 of the Companies Act, 2013, or
- Voluntary liquidation under Section 59 of the Insolvency and Bankruptcy Code (IBC), 2016.
Each exit option has its distinct procedures, benefits, and applicability, depending on the company’s operational status and financial health.
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Strike off under Section 248 of the Companies Act, 2013
Under Section 248 of the Companies Act, 2013, a non-operational or defunct company can voluntarily file an application for closure with the Registrar of Companies. One of the conditions to file the strike off application is that the Company should not have commenced operations within a year of incorporation or should not have carried any operations for the last two financial years.
The process of Strike Off is a simplified and cost-effective process which involves
- Passing of Board Resolution for strike off
- Obtaining shareholders’ approval by way of special resolution / written consent of members holding more than 75% of the paid-up capital
- Execution of Affidavit and Indemnity Bond by all the Directors of the Company
- Obtaining Statement of Accounts certified by a Chartered Accountant
- Closing Company Bank account and obtaining account closure letter and
- Filing the application in Form STK-2 with the Registrar of Companies.
While filing such application, the Directors of the Company execute an Indemnity Bond to the effect that they shall indemnify against any lawful claims and liabilities against the Company arising in future after the removal of the name of the company from the Register of Companies.
Voluntary liquidation under Section 59 of Insolvency and Bankruptcy Code (IBC), 2016
Voluntary liquidation is a legal process through which a solvent company chooses to wind up its affairs and cease operations voluntarily. The process of voluntary liquidation is usually initiated by the company’s shareholders when they decide that the company can no longer continue its business operations.
In voluntary liquidation, the company appoints a liquidator to oversee the process of selling off its assets, settling its liabilities, and distributing any remaining funds or assets among its shareholders according to a specified order of priority. The liquidator must be licensed Insolvency Professional (IP) registered with IBBI.
The process of voluntary liquidation is time consuming and costly affair. The voluntary liquidation process briefly involves
- Declaration of Solvency by majority of the directors of the company
- Obtaining members’ approval for liquidation and appointment of Liquidator in general meeting
- Making public announcement in 2 newspapers, one in English and other in vernacular language
- Opening of new bank account
- Filing of Preliminary Report by Liquidator
- Receipt, verification and payment of claims
- Realisation and distribution of assets to stakeholder
- Submission of Final report and
- Filing of dissolution application with the Hon’ble National Company Law Tribunal
A comparison between Strike Off and Voluntary Liquidation
| Aspect | Strike off (Sec. 248 of Cos. Act, 2013) | Voluntary Liquidation (Sec.59 of IBC) |
| Applicability | Non-operational/ defunct companies | Solvent Companies with assets/liabilities |
| Governing Law | Section 248 of the Companies Act, 2013 | Section 59 of the Insolvency and Bankruptcy Code, 2016 |
| Regulatory Authority | Registrar of Companies (ROC) | National Company Law Tribunal (NCLT) |
| Initiation | Suo moto by Company or by ROC | By Company’s members |
| Process complexity | Simple process | Complicated process |
| Cost | Cost-effective | Costly process |
| Time involved | Less time involved | Lengthy process |
| Appointment of Liquidator | Not Required | Required |
| Public Announcement | ROC will give public notice | Public announcement to be issued by Liquidator |
| Closure order | Notice of Strike off and Dissolution issued by ROC | Dissolution order passed by NCLT |
Why Voluntary Liquidation under IBC?
Shareholders, especially foreign shareholders, may prefer voluntary liquidation under the Insolvency and Bankruptcy Code (IBC) over strike off under the Companies Act for several reasons:
1. Legal Framework & Structured Process: The IBC provides a comprehensive legal framework for the liquidation process and follows a structured and well-defined process, which can provide clarity and certainty to foreign shareholders. Voluntary liquidation under the IBC involves oversight by a licensed Insolvency Professional (IP), who ensures that the process is conducted in accordance with the law and the interests of all stakeholders.
2. Global Recognition: The IBC is designed to align with international best practices and standards, which can enhance the credibility and acceptability of the liquidation process in the eyes of foreign shareholders and counterparties. This may be particularly important for multinational companies or investors with cross-border interests.
3. Avoidance of Regulatory Scrutiny: Strike off under the Companies Act may attract regulatory scrutiny, especially if there are outstanding liabilities or unresolved issues. Voluntary liquidation under the IBC provides a more formal and transparent mechanism for winding up the affairs of the company, potentially reducing the risk of regulatory challenges or investigations.
4. Protection of Directors and Officers: Voluntary liquidation under the IBC help mitigate potential personal liability risks for foreign shareholders who are also directors or officers of the company by winding up the company’s affairs in an orderly manner.
Overall, voluntary liquidation provides a structured and orderly mechanism for companies to wind up their affairs and bring their operations to a close in a manner that is controlled and supervised by a professional. It allows companies to settle their obligations and distribute assets in accordance with legal requirements and established procedures.
Deciding between striking off and voluntary liquidation depends on a company’s operational status and financial health. Striking off is ideal for non-operational or defunct companies looking for a quick and cost-effective exit. In contrast, voluntary liquidation is suitable for solvent companies requiring a thorough process to settle liabilities and distribute assets. Understanding these exit strategies enables Company directors and shareholders to make informed decisions tailored to their specific circumstances.
Author Bio
Very detailed article highlighting the difference between two options !