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07 Jun 2024

Strike-Offs for Companies in India – Types, Process, Requirements

07 Jun 2024
Strike-Offs for Companies in India – Types, Process, Requirements

Introduction

The business landscape is ever-evolving, and companies may face economic downturns, strategic shifts, or other reasons that necessitate closure. In India, the strike-off process provides a clear path for companies to formally shut down and remove their names from the Register of Companies (RoC). This mechanism offers a more efficient and cost-effective alternative to the lengthier winding-up process. However, a successful strike-off requires a clear understanding of its different facets. This article delves into the types of Strike-Offs for Companies in India, the process involved, and the key requirements companies must meet to ensure a smooth and compliant closure.

 

What is a strike off?

In India, a company strike-off refers to the formal process of removing a company’s name from the official RoC. It’s an alternative method for closing a company’s operations compared to the traditional, lengthier winding-up process. 

Note: The Ministry of Corporate Affairs (MCA) in India has established the Centre for Processing Accelerated Corporate Exit (C-PACE) to handle the process of striking off companies. This initiative aims to make company closure faster and more efficient. The C-PACE may initiate the strike-off for non-compliance, or the company itself can apply for voluntary strike-off.

Section 248 to 252 of the Companies Act, 2013 (hereinafter the ‘Act’) define the procedures for striking off a company’s name. This process offers a faster and simpler way to dissolve a defunct company.

 

Types of Strike Off

In India, there are indeed two main types of strike offs for companies: Voluntary Strike Offs and Mandatory Strike Offs

Voluntary Strike-Off

This is when the company itself decides to close down and takes the initiative to initiate the strike-off process. It’s ideal for companies that are:

  • No longer operational or have no plans to operate in the future.
  • Financially sound with no outstanding debts or liabilities.
  • Prepared to meet specific eligibility criteria set by the Act.

Key Requirements for Voluntary Strike-Off:

  • Settled Finances: All dues like taxes, loans, and employee salaries must be paid off.
  • Clean Legal Status: No ongoing lawsuits or government penalties should be present.
  • Shareholder Approval: A special resolution passed by at least 75% of shareholders is required.
  • Inactivity or Dormancy: The company may need to demonstrate it hasn’t been actively trading for a while. In some cases, obtaining “dormant company” status might be necessary.

Mandatory Strike-Off

This is when the C-PACE initiates the strike-off process due to the company’s non-compliance with regulations:

  • Failure to File Financial Statements: The company fails to file its annual financial statements (balance sheet and profit & loss) for consecutive years. This indicates a lack of transparency about the company’s financial health.
  • Inactivity in the Business: The C-PACE suspects the company hasn’t conducted any business activities for a significant period. This might be identified during physical verification by the C-PACE. A company that isn’t actively conducting business goes against its purpose of registration.
  • Dormant Functions: The company hasn’t commenced business operations within one year of incorporation. This suggests the company might have been registered for illegitimate purposes or simply never got off the ground.

 

Which companies can go for Strike off?

The strike-off process in India allows companies to formally close their operations and remove their names from the RoC (Registrar of Companies). However, not all company types are eligible for this option.

Eligible Companies:

  • Private Companies: These companies with a limited number of shareholders (maximum 200) can initiate a voluntary strike off if they meet the eligibility criteria.
  • One Person Companies: Similar to private companies, but with a single shareholder-director, OPCs can also undergo a voluntary strike off if they qualify.
  • Section 8 Companies: These non-profit companies can also pursue strike off if they comply with the regulations. 

Ineligible Companies:

  • Public Companies : Due to their larger size and public accountability, public companies with more than 200 shareholders cannot utilize the strike off process. They must follow the more complex winding-up procedure.
  • Limited Liability Partnerships (LLPs): India has a separate legal structure for LLPs, which are not eligible for company strike-off. They have their own dissolution process.

 

Additional Considerations:

Regardless of the company type, both voluntary and mandatory strike-off (initiated by the C-PACE) are subject to specific eligibility criteria defined in  the Act. These conditions include financial solvency, shareholder approval (for voluntary strike-off), and business inactivity.

 

Companies that are not eligible for strike off

  • Listed Companies
  • Delisted companies due to non-compliance
  • Vanishing Companies – Companies that cease to file their statements of return after raising capital, and whereabouts of their registered office or directors are not known.
  • Companies that are subject to investigation or have pending cases in court
  • Companies that have outstanding public deposits, or defaulted in repayment
  • Companies that have secured a loan or where repayment of debt is outstanding to banks or other financial institutions and in this regard no objection certificate is not obtained
  • Companies with pending charges
  • Companies with outstanding tax dues

 

Procedure for Striking Off 

The procedure for striking off a company in India involves several steps, whether it’s a voluntary strike-off initiated by the company itself or a compulsory strike-off initiated by the (C-PACE) due to non-compliance or other legal reasons. Here’s a comprehensive outline of the process:


Procedures for Voluntary Strike-Off

The procedure for striking off a company in India involves several steps, depending on whether it’s a voluntary strike-off initiated by the company itself or a compulsory strike-off initiated by the C-PACE due to non-compliance with regulations. Here’s a comprehensive outline of the process:

1. Board Meeting and Resolution: Convene a board meeting to pass a resolution authorizing the strike-off. This resolution will require approval of the majority of the Directors through a board meeting.

2. Extinguishment of all the Liabilities: Following the board’s approval for striking off the Company, the Company shall be required to extinguish all its liabilities.

3. General Meeting and Special Resolution: Hold a General Meeting (AGM or EGM) where shareholders approve a special resolution for strike-off by a 75% majority vote or obtain  consent of 75% of the shareholders in terms of Paid-up share capital for striking off. Following this meeting, file the special resolution or consent in e-Form MGT-14 with the C-PACE. Within 30 days of passing the resolution or obtaining the consent, whichever the case may be.

4. Application Preparation: Prepare the necessary documents required by the C-PACE. These may include:

  • Board Resolution for Strike-Off: Certified True copy of the board resolution authorizing the strike-off process.
  • Shareholders resolution or Consent for Strike-Off: Certified True copy of the shareholders resolution or consent for striking-off the Company. 
  • Statement of Accounts: A statement demonstrating the assets and liabilities of the Company up to the day not more than 30 days before the date of application which shall be certified by a Chartered Accountant .
  • Indemnity Bond (STK-3): A notarized document by directors indemnifying all the lawful claims against the Company and any losses of any person arising in future after the striking of the name of the Company..
  • Affidavit (STK-4): By directors, confirming the company’s eligibility for strike-off and no dues towards any statutory authorities.
  • Statement of Pending Litigation (if any): Details of any ongoing legal disputes.

5. Filing Application: File the application for strike-off (e-Form STK-2) with the C-PACE along with the required documents and pay the prescribed fee. This form is critical as it formally requests the C-PACE to remove the company’s name from the register.

6. Public Notice: Upon receiving the application, the C-PACE will scrutinize the documents and, if satisfied, publish a public notice inviting objections to the proposed strike-off. This notice will be published in the Official Gazette and on the MCA website, providing a period of 30 days for any objections to be raised by stakeholders or other interested parties.

7. Objections and Scrutiny: If objections are received, they must be addressed by the company within a stipulated time frame. If no objections are received or they are resolved satisfactorily, the C-PACE will proceed to issue a strike-off order.

8. Strike-Off Order: If no objections are received or resolved satisfactorily, the C-PACE issues a strike-off order, removing the company’s name from the Register of Companies and the company gets dissolved.


Procedures for Mandatory Strike-Off

  1. Notice from C-PACE: The C-PACE may issue a notice to the company and all its directors informing them of the intent to strike off the company’s name from the Register of Companies due to non-compliance.
  2. Opportunity to Respond: The company will be given a chance to respond to such notice along with the relevant backup documents within a period of 30 days from the date of the notice.. 
  3. Publication of Notice: Unless any cause to such notice is shown by the Company, the C-PACE shall publish a notice in the Official Gazette about the striking-off of the company and on such publication the Company shall stand dissolved.
  4. Objections and Scrutiny: Similar to the voluntary process, interested parties can file objections with the C-PACE within a specified period . The C-PACE will consider these objections.
  5. Strike-Off Order: If no objections are raised or resolved satisfactorily, the C-PACE will issue a strike-off order, removing the company’s name from the Register of Companies and dissolving the company.

 

Effects of strike off on a company 

The strike-off process effectively shuts down a company by revoking its operating license. However, it allows the company to address any outstanding financial obligations and legal issues, ensuring a cleaner closure for all parties involved.

Key Effect: Company Ceases Operations and Legal Existence (for most purposes)

Following a strike-off notice published in the Official Gazette by the  C-PACE under Section 248 of the Companies Act, a company undergoes a significant transformation:

  • The company officially ceases all operations on the specific date mentioned in the Strike-Off notice. This marks the end of its legal existence for most purposes.

Limited Validity of Certificate of Incorporation:

While the certificate of incorporation issued to the company is generally considered canceled from the dissolution date, it retains some validity for specific purposes:

  • Settling Debts: The company can still use the certificate to settle outstanding financial obligations to creditors, employees, or other parties.
  • Collecting Funds: Any receivables owed to the company can be collected using the certificate.
  • Fulfilling Legal Obligations: The certificate remains valid for addressing any legal matters associated with the dissolved company, such as tax filings or ongoing lawsuits.

 

Conclusion

The strike-off process in India provides a clear and efficient mechanism for companies to formally close their operations. The legal framework outlined in the Act offers a comprehensive guide to determine eligibility and navigate the process effectively. Compared to the more complex and expensive winding-up procedure, strike-off presents a streamlined and cost-effective solution for company closure.

Understanding the different types of strike-off (voluntary and mandatory) and their respective requirements is crucial for companies considering this option. Whether a company chooses to pursue voluntary strike-off due to planned closure, or faces a mandatory strike-off initiated by the C-PACE, a successful outcome hinges on meeting the specific criteria.

Ultimately, a successful strike-off allows a company to achieve a clean closure. It removes the company’s name from C-PACE, preventing future liabilities and ensuring transparency throughout the process. By following the established procedures, companies can responsibly conclude their operations while maintaining accountability to stakeholders.


Frequently Asked Questions (FAQs) on Strike Offs for Indian Companies

  1. What is a company strike-off?
    A company strike-off is the formal process of removing a company’s name from the official register maintained by the Ministry of Corporate Affairs (MCA) through the Centre for Processing Accelerated Corporate Exit (C-PACE), effectively ending its legal existence.

  2. What are the types of strike-offs available for companies in India?
    There are two main types of strike-offs:
    Voluntary Strike-Off: Initiated by the company itself due to a decision to close down operations.
    Mandatory Strike-Off: Initiated by C-PACE due to non-compliance with regulations or prolonged inactivity.
  3. Who can apply for a voluntary strike-off?
    Companies that meet the following criteria can apply for a voluntary strike-off:
    Operationally Inactive: The company is no longer conducting any business activities.
    No Financial Liability: The company has no outstanding debts or liabilities.
    Eligibility under the Companies Act: The company meets specific criteria set forth in the Companies Act to be eligible for strike-off. (e.g., Private companies, One Person Companies (OPCs), and Section 8 companies typically qualify)

  4. What triggers a mandatory strike-off by C-PACE?
    C-PACE may initiate a mandatory strike-off under several circumstances, including:
    Non-filing of Annual Filings: Failure to file annual financial statements (balance sheet and profit & loss) for consecutive years.
    Suspected Inactivity: C-PACE suspects the company has not been conducting business for a significant period.
    Non-commencement of Business: A company hasn’t commenced business activities within one year of incorporation.

  5. What are the steps involved in applying for a strike-off?
    The process includes passing a resolution at a board meeting, extinguishing all liabilities, obtaining shareholder approval through a special resolution, preparing necessary documentation (like indemnity bonds and affidavits), and filing an application with C-PACE using e-Form STK-2.

  6. What happens after the application for a strike-off is filed?
    C-PACE will examine the application and documents. During scrutiny, they may request additional information or clarification from the company. If satisfied, they will publish a public notice inviting objections for a period (usually 30 days).

  7. Are there any types of companies that cannot be struck off?
    Generally, the following types of companies are not eligible for strike-off:
    Public companies with more than 200 shareholders
    Limited Liability Partnerships (LLPs)
    Listed companies on stock exchanges
    Companies with ongoing legal disputes
    Companies with outstanding financial obligations

 

Posted by
Treelife
Last updated on
Jun 07, 2024, 11:12pm

Disclaimer:

The content of this article is for information purpose only and does not constitute advice or a legal opinion and are personal views of the author. It is based upon relevant law and/or facts available at that point of time and prepared with due accuracy & reliability. Readers are requested to check and refer to relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc. before acting on the basis of the above write up. The possibility of other views on the subject matter cannot be ruled out. By the use of the said information, you agree that the Author / Treelife is not responsible or liable in any manner for the authenticity, accuracy, completeness, errors or any kind of omissions in this piece of information for any action taken thereof.

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