The instinct to just stop filing and let the company die is understandable and it is a costly mistake. Penalties accrue daily, and the consequences attach to you personally.
What happens if you do nothing
- Late filing fees on the annual return and financial statements accrue per day of default, and there is no upper limit in the way there once was.
- Under Section 164(2), a director of a company that has not filed financial statements or annual returns for three continuous financial years is disqualified for five years, and that disqualification attaches to every other company where they are a director.
- The Registrar may strike the company off anyway, but that does not erase the accumulated liability of the officers.
The strike off route
Section 248 allows a company to apply to the Registrar to have its name removed where it has not commenced business within a year of incorporation, or has not been carrying on business for two immediately preceding financial years and has not applied for dormant status.
- Clear all outstanding statutory filings and dues, and close bank accounts.
- Extinguish all liabilities. The company must have nil liabilities on the date of application.
- Pass a special resolution or obtain the consent of 75 percent of members by paid-up capital.
- File Form STK-2 with the prescribed fee, together with an indemnity bond, an affidavit from each director, a statement of accounts certified by a chartered accountant and not older than 30 days, and the resolution.
- The Registrar publishes a notice and, if there is no objection, strikes the name off.
A company with outstanding liabilities, ongoing litigation, or a pending prosecution cannot use this route. Nor can certain companies excluded by the rules. If there are creditors who cannot be paid, the correct process is insolvency and liquidation under the Insolvency and Bankruptcy Code, 2016, or voluntary liquidation under Section 59 where the company is solvent and can pay its debts in full.
The fee for Form STK-2 is currently ten thousand rupees, and applications go to the Centre for Processing Accelerated Corporate Exit, not the jurisdictional Registrar. Fee rules change, so take the current figure from the MCA portal. Our note on striking off a company in India lists the annexures.
The three month look-back that catches people out
Check what the company has done recently, because the Act bars an application in situations founders do not anticipate. A company cannot apply if, in the previous three months, it has changed its name, shifted its registered office to another State, disposed of property held for value immediately before it ceased trading, engaged in any activity beyond what the application required, or applied to the Tribunal for a compromise. The commonest trap is the disposal of assets: sell the remaining equipment and you wait out the three months.
Note also that even after removal the assets of the company remain available for its liabilities, and the liability of every director and member continues. Strike off closes the register entry; it does not extinguish what the company owed.
Which closure route fits the company
- No operations, no assets, no liabilities, filings up to date? Strike off on application, which is the cheapest route.
- Not operating but you may revive it later? Dormant status, which keeps the company alive on a reduced compliance burden.
- Assets and liabilities to be realised and distributed? Voluntary liquidation under the Insolvency and Bankruptcy Code, with an appointed liquidator.
- Unable to pay debts? Not strike off at all. The insolvency route, and directors should take advice before choosing.
- Already struck off by the Registrar? Appeal to the NCLT for restoration, within the period the Companies Act allows.
The alternative to closing it: dormant status
If there is a realistic chance you will want the company again, do not strike it off. Section 455 allows a company formed for a future project, or to hold an asset or intellectual property, and equally an inactive company, to apply for the status of a dormant company. An inactive company here is one that has not carried on business or made a significant accounting transaction in the last two financial years. It keeps its name, incorporation date and assets, files a reduced set of documents and an annual fee, and can be revived on application. For a founder holding a trade mark or a lease inside a company he is not trading through, this is usually the right answer.
If the name has already been struck off
Restoration is possible, through two windows. A person aggrieved by the Registrar's order may appeal to the Tribunal within three years. Separately, the company, or any member, creditor or workman, may apply within twenty years of publication of the striking-off notice in the Official Gazette, where the company was in fact carrying on business. For a company sitting on land or a bank balance, that twenty year window is the one that matters.
Where strike off is not the answer at all
Where creditors cannot be paid in full, the route is insolvency rather than removal. A creditor can move under the Insolvency and Bankruptcy Code, 2016 only where the default reaches the minimum fixed under the Code, which the Code sets at one lakh rupees while allowing the Central Government to notify more; the Government has notified one crore rupees. Our note on the one crore insolvency threshold explains what that left behind: most small operational creditors are back in the civil courts.
LLPs and firms
An LLP is closed by filing Form 24 for strike off, subject to similar conditions. A partnership firm is dissolved by deed and by giving public notice, and the registration should be updated.
The LLP conditions are specific: it must have ceased business for a year or more, the application needs the consent of all partners, and overdue annual filings must be brought up to date, with a statement of accounts showing nil assets and liabilities certified by a chartered accountant.
If you intend to start again, close the old entity first: a director carrying a live disqualification cannot be appointed to the new company. Our note on private limited company registration covers what the new incorporation asks you to certify about existing directorships.