Difference Between Strike Off and Winding Up of a Company

When a company decides to close down its operations, it needs to follow a legal procedure. It can be carried out through strike off and winding up. While both result in closing up, the key difference between strike off and winding up of a company is their procedure, intention, consequences, cost, and timeline.

Before closing down the business, directors, business owners, legal advisors, and accountants need to understand the key difference between the two methods. It helps in selecting the right closing process.

To help you out in this, the blog provides complete information about both the methods, key differences, and how to choose the right one as per your situation. So read the blog and gather all the information.

What is the Strike Off of a Company?

Strike off refers to a legal process of removing the name of the company from the Registrar of Companies (ROC) register. It generally applies to inactive companies with no assets, liabilities, or business activity. It is a simple, less costly, and quicker closure method used mainly for non-operational or dormant companies. Further, the process can be initiated:

• Voluntarily by the Company: Under section 248(2) of the Companies Act, after settling liabilities and getting approval from shareholders and the board, a company can apply for strike off with the ROC.
• Suo Moto by ROC: If a company within one year fails to commence business or is inactive for two consecutive years and has not applied for dormant company status, the ROC, under section 248(1), can strike off its name.

For an NRI company founder in India, it is often a preferred route when:

• The company was set up for testing the Indian market.
• Operations were never started.
• The business never scaled.

Key Features of Strike Off of a Company

Key features of striking off a company include:

• Quick and Simple: Generally completed within 3 to 4 months.
• ROC Filing-Based: No tribunal intervention.
• No Liabilities or Assets: The company should be clean with no active business or dues.
• Used for Dormant Companies: This option is the best for companies with no activity.

Who Can Apply for Strike Off?

A company can apply for voluntary strike off if it fulfills the following requirements:

• Not commenced business since its incorporation, or has not carried out any operations for the last two financial years. 
• Has no outstanding loans, liabilities, or statutory dues.
• At least 75% of shareholders, through a special resolution, approved the closure.
• All company bank accounts should be closed before applying for strike-off.
• No regulatory investigations or legal proceedings exist against the company.
• The company should file all pending financial statements and annual returns with the Ministry of Corporate Affairs (MCA).

This was a complete overview of the strike off of a company. Moving ahead, let's now know about the winding up of a company.

What is the Winding Up of a Company?

Winding up is also known as company liquidation. It is the process of closing a company by selling its assets and settling its liabilities. Considering this, it applies to companies that have assets, ongoing operations, or debts. In India, the winding up of a company is primarily governed by the Insolvency and Bankruptcy Code, 2016 (IBC).

Under the current legal framework, winding up broadly takes place either through voluntary liquidation under the Insolvency and Bankruptcy Code, 2016, or winding up by the National Company Law Tribunal (NCLT) under the Companies Act, 2013.

Under section 59 of the IBC, solvent companies can opt for voluntary liquidation. Additionally, in certain circumstances, the winding up of a company may be governed by the National Company Law Tribunal (NCLT).

Types of Winding Up Process

Under the Companies Act 2013, there are two ways for winding up a company, i.e., 

• Voluntary Winding Up: It is initiated by the company members when they voluntarly decides to close the company as it has served its purposes or is no longer viable. Under IBC, voluntary winding up of a company in straightforward cases generally takes 6 months to 1 year. Further, if an NRI is involved, they need to submit a declaration of solvency and stay compliant with FEMA if there are any foreign investment exits. Additionally, coordinate with Indian professionals (CA/CS) for smooth winding-up.
• Compulsory Winding Up: When a company is not able to meet its financial or legal obligations, the NCLT orders the compulsory winding up of the company. The process is also conducted by a licensed liquidator. This winding-up process through the NCLT, depending on the complexity of assets and conflicts, generally takes 1 to 2 years or longer. Further, a compulsory winding-up situation generally occurs under the following circumstances:
• The company is not able to repay its debts. Additionally, under the IBC, through the Corporate Insolvency Resolution Process (CIRP), it enters liquidation.
• It conducted unlawful activities, committed fraud, or repeatedly violated statutory compliance requirements. 
• To protect stakeholders and creditors, the authorities determine that tribunal-supervised liquidation becomes vital.

Key Features of Winding Up

Here are the key features of winding up a company:

• Supervised Process: Overseen by a Tribunal or Liquidator.
• Legal Proceedings: Includes multiple stages and requires legal filings.
• Asset Distribution: Once the liabilities are paid, remaining assets (if any) are divided among shareholders. 
• Time-consuming: Depending on complexity, this process can take several months or even years.
• Applicable to Active Companies: Winding up process is applicable to companies with assets, operations, or liabilities. 

This was all about the winding up of a company. Moving further, let's see how both methods are different from each other. 

Winding Up vs Strike Off of a Company: Key Difference

The table below showcases the key differences between strike off and winding up of a company:

The comparison table above clearly states that the practical strike off vs winding up depends on the business operations, assets, and debts of a company. Now, moving forward, let's know winding up vs strike off, which closing up option is better. 

Strike Off v/s Winding Up of a Company: Which is a Better Option?

The right option between striking off and winding up completely depends on the financial position and activity level of the company.

• Select Strike Off if:
• After incorporation, your company never started its business operations.
• For two or more consecutive financial years, it has been dormant.
• All bank accounts of it are already closed.
• Your company has no outstanding liabilities, loans, or creditors.
• Seeking a more affordable and faster closure process. 
• Select Winding Up if:
• The company has assets that need to be sold and distributed.
• Have pending litigation or legal disputes against the company.
• Company have outstanding debts or creditors that need to be paid.
• Due to legal violations or insolvency, NCLT ordered the closure of the company.
• The company is solvent, but ongoing operations need to be formally wound down.

Choose the method that perfectly aligns with the financial status, operations, and legal obligations of the company. Further, consider taking the help of professionals to close your company legally, without any penalties and hassle.

Now, moving ahead, let's know if a company can be restored after winding up or striking off. 

Can a Company be Restored After Winding Up or Strike Off?

Yes, a struck-off company can be restored, but not a wind-up company. To restore a struck-off company, directors, shareholders, or creditors need to file a legal application with the NCLT. Under section 252 of the Companies Act 2013, a company can be restored if, during the strike off, it was conducting fair business or held assets.

Considering this, the NCLT may approve the restoration application. However, for this, the company has to prove that it was carrying on business, had proper operational reasons to continue, or owned assets. 

In many cases, within three years from the strike-off date, the company, its shareholders, or creditors need to file a restoration application. Further, the tribunal may permit other aggrieved individuals to apply for restoration within 20 years from the strike-off date. 

Once the company has done the winding-up process and the final dissolution order has been issued by the tribunal, you cannot restore a company. Then, under the corporate law, the company ceases to exist permanently. 

So, from the above information, it is clear that a struck-off company can be restored, but not a wind-up company. Moving further, let's know the common mistakes to avoid before winding up or striking off a company. 

Common Mistakes to Avoid Before Winding Up or Striking Off a Company

Many directors unknowingly make avoidable mistakes that further complicate or delay the process. To help you out, the most common mistakes and their solutions are as follows:

• Not Filing Pending MCA Returns: Many directors with pending financial statements or pending returns with the MCA apply for a strike off. 
• Solution: Before submitting Form STK-2, it is advisable to file all overdue financial statements and MCA returns.
• Leaving Bank Accounts Active: Active bank accounts of the company indicate possible financial activity. 
• Solution: Close all your corporate bank accounts and get a bank closure confirmation form.
• Keeping GST Registration Active: If the companies have active GST registration, their closure requestes gets rejected by officials.
• Solution: Before applying for closure, first apply for GST cancellation and obtain the official cancellation order.
• Applying Strike Off with Existing Assets: Officials cannot approve a strike off when companies still have their own properties, assets, or investments.
• Solution: Considering this, dispose of all assets and, before applying, prepare a CA-certified nil liabilities and assets statement. 
• Ignoring Tax Obligations: Your closure approval may also be blocked because of pending income tax assessments or dues.
• Solution: Before applying for a strike-off or winding-up process, it is advisable to clear all your outstanding tax dues and file the latest income tax returns. 

Further, consider the above-mentioned points and try to avoid all these mistakes. For accurate results and an easy company closure process, consider taking help from professionals.

Final Thoughts

Lastly, closing a company needs correct documentation, proper legal procedures, and updated compliance filings. In this understanding, the difference between strike off and winding up helps in choosing the right closure method. The wind-up compared to strike off is a little complex, as it involves settling debts. In contrast strike process is quite easy as it only includes the removal of the name of the company from the list of Registrar of Companies.

Further, even small errors in indemnity bonds or affidavits can lead to rejection, but with Savetaxs, you do not need to worry about this. We provide end-to-end assistance to our clients and ensure you close your company without any hassle. From choosing the right closure method as per the company's situation to coordinating with licensed professionals, we handle all.