Want to Shut Your Nonoperative Startup : You Can Do it in a Month Only

India, till recently, was highly criticized for not having any kind of closure process and for complicated time taking, unclear liquidation process. Now a day’s when corporate advisors are celebrating new bankruptcy code, it’s surprising that except the company law professionals, very few are aware that a much simplified closer process popularly known as Fast Track Exit Scheme or "Easy Exit Scheme” is in existence for last six years.

Even If I remember more in 2014-15 I had been approached by a panel of MCA and Law ministry officials. It was a time when Companies Act, had just came and its implementation was in a nascent stage, on Business front Young India was highly excited and optimistic about future of startups with help of PE funding. The success of E-Com ventures Flipkart, Snapdeal and Jabong etc. were although looking lucrative and all wanted to be the next one. Hardly two three years back, at that time, it was a time when college graduates were becoming billionaire and by working in their own ventures.

It was a time when many people entered in innovation, E-Com, M-com, few got success but many not and those who don’t had to shut down their business. Running a company without a business became a burden for them. These people who have incorporated companies but are not doing any business and are thinking to close down the companies because of the increased compliance and resultant costs involved.

For all those “fast track Exit route (now named as “Removal of Names of Companies from Register (Section 248 of Companies Act, 2013)” is a big relief. The process to close a company is quite simple, easy and offer quick way to shut down a company, when non-operational over a period of time.

A company can apply for a shut down under the new process when:

1. A company has failed to commence business within one year of incorporation, or
2. A company is not carrying on any business or operation for a period of two immediately preceding financial years,
3. When a company voluntarily wants to shutdown, it can, after clearing all its liabilities, by obtaining consent of at least 75% of shareholders in terms of paid-up capital.

This facility can be availed by all companies except listed companies, companies formed as not for profit (section 8) companies, vanishing companies, non-compliant companies under various statutory laws, where investigation or inspection or enquiry is ordered, where prosecution or application for compounding is pending, where the assets of the company still have a charge on them. Also a company can become ineligible if three months prior to such application, it has changed its name, shifted registered office, has disposed property or rights for value, made an application to National Company Law Tribunal (NCLT) for any compromise or arrangement or is under a winding up process.

These measures have been made to ensure that there are no fraudulent applications for removal of name including ensuring that there is no intention to deceive creditors or defraud any person.

A company wants to remove its name can apply to registrar of companies by complying the following procedures.

1. By filling Form-STK2 along with

a) A fee of INR 5000,
b) Indemnity Bond from directors,
c) Statement of Accounts certified by a chartered accountant,
d) Affidavit from directors,
e) Shareholders special resolution (consent given in the meeting of shareholders with 75% of total vote ) signed by every director,
f) A statement that there are no pending litigations involving the company.

2. An application filed, will be cross-verified by ROC, by giving a notice to all the directors at the address on record, along with reason cited by company for shutting down and if the directors have any representation to make/seek.

3. ROC will further intimate and seek objections if any, from income tax, central excise, service tax authorities. There is a time lines of 30 days within which such authorities have to respond and if no response is received, then it is presumed that such authorities do not have any objection.

4. For Fintech and others starups, based on their business, if they are carrying approvals/license from any regulators for example, NBFC, insurance, housing finance, collective investment schemes, asset management companies, ROC requires a no-objection certificate from the applicable regulatory bodies.

Public Notice:

1. ROC on receipt of application, issues a public notice, by notifying on MCA’s website.
2. Publish in Official Gazette
3. Publish in newspaper (English and vernacular) having wide circulation in the State where the registered office of the company is located
4. Company will have to notify on its own website

Effect of company notified as dissolved:

Though the company has been dissolved and its name removed from the ROC’s registers and intimation provided to tax authorities, it has to be noted that liabilities, if any, continues on every director, key officer, members of the company continues and may be enforced as if the company had not been dissolved. This is the major difference between the process as described above and winding up through NCLT. The process is simpler and economical also, only major expenses of opting this route of shutdown is the cost of publication of notification in newspaper, fee of ROC and a minimal amount which professionals may charge.

Authors:

Kumar Aniket

Kumar Aniket is a finance and legal wizard associated with various startups and innovative companies. He is a competent professional with experience of startups across industry spectrum He has over 15 years in various positions in Finance & Legal Functions with expertise in International Taxation and Transaction Processes. Aniket is a member of the Institute of Company Secretaries of India (2002) and a Legal Professional.

Ashish Panday

Ashish is Member of ICSI & Graduate in Economics. He is associated with M/s Uniserve Knowledge Foundation (ÜKF") in his capacity as Head of Legal & Secretarial Committee.