Process of Closing a Foreign Subsidiary in India

India has been a preferred choice for investment for several foreign organizations and their subsidiaries.

Introduction:

India has been a preferred choice for investment for several foreign organizations and their subsidiaries. However sometimes commercial reasons & at other times global reasons such as the current COVID-19 crisis or political compulsions make the closure of the Indian subsidiary, branch or a liaison / project office necessary.

Foreign Company:

Under the Companies Act, 2013 a foreign company is defined as any company or body corporate incorporated outside India which:
 
  1. Has a place of business in India whether by itself or through an agent, physically or through electronic mode; and
  2. Conducts any business activity in India in any other manner.
 
Processes through which a Foreign Company may close its business in India:
 
When a company applies for striking off then two forms are required to be filled:
  1. E-form MGT-14
  2. E-form STK-2
Fees for the forms: While E-form MGT-14 has normal associated fees, E-form STK-2 has fees of INR 10,000/-

Procedure for the strike off of a company in case of voluntary striking off of the company:

The procedure pertaining to voluntary strike off is done in the following manner:
  • Firstly, authorize an officer or any director of the company to convene a Board Meeting
  • Secondly, send a Board Meeting Notice atleast seven (7) days prior to the board meeting along with a detailed agenda.
  • Convene the Board Meeting and passing of the Board resolution.
  • Sending of Annual General Meeting / Extra-Ordinary General Meeting as the case may be
  • Convene General meeting and the passing of a Special Resolution.
  • Filing of MGT-14 along with the required attachments.
  • Filing of STK-2 along with the required documents.
  • The Registrar of companies after discovering that all the attachments have been complied with and all the conditions are fulfilled and it is just and equitable to strike off the company, shall proceed to strike off the company after publishing a public notice.
Documents attached with the forms: The following documents are attached with the E-forms for the strike off of a Company:-
  • Indemnity Bond duly notarized by all directors (in Form STK 3).
  • A statement of liabilities comprising of all the assets and liabilities of the companies which has been certified by a Chartered Accountant.
  • A Certified true copy of the Special Resolution which has been duly signed by every director of the company.
  • Copy of the Board resolution authorizing the filing of this application.
  • Indemnity bonds in Form No. STK-3
  • An affidavit in Form STK-4
  • A statement concerning any pending litigations with respect to the company.
  • A copy of the relevant order of delisting, if any, from the concerned stock exchange.
  • No objection certificate from the relevant regulatory department in case the company is governed by such a department.
 
Duration of time taken for strike off of a Company’s name from the Registrar of Companies: Once an application has been made for striking off of a company by filing the E-form STK-2, the concerned Registrar of Companies (ROC), after the verification of the documents will strike off the name of company and this procedure normally takes around 3-4 month. However, if any objection is received from Registrar of Companies (ROC) this process may take longer or may even result in the rejection of the application.
 
Procedure for striking off of a Company by the Registrar of Companies (ROC)

If the ROC is satisfied then after giving a Public notice and sending a notice to the company along with its directors and further checking if no response is received within the time period stated in notice to the contrary, the Registrar shall proceed to strike off the company.

Further, the Provisions of voluntary winding up have been removed from the Companies Act, 2013 and are now governed by the Insolvency and Bankruptcy Code, IBC, 2016.

Who may apply for a voluntary liquidation? 

A corporate person who intends to liquidate itself voluntarily and which has not committed any default may initiate voluntary liquidation proceedings under the prescribed provisions [Section 59(1)]

The Pre-liquidation Process: 
 
a)      Declaration of Solvency: A declaration must be received from the majority of the directors of the company verified by an affidavit stating that:
  • They have made a full inquiry into the affairs of the company and have formed an opinion that either the company has no debt or that it will be able to pay its debts in full.
  • The company is not being liquidated to defraud any person;
  • Further, the above declaration shall be accompanied with the following documents:
i. The Audited financial statements and the record of the business operations of the company for the previous 2 years or for the period since its incorporation, whichever is later;
ii.  A report of the valuation of the assets of the company, if any, prepared by a registered valuer.
 
b)     Approval of the Members: A special resolution of the members of the company in a general meeting, requiring the company to be liquidated voluntarily and appointing an insolvency professional to act as the liquidator must be passed within 4 weeks of declaration of solvency.
 
c)      Approval of the Creditors: If the company owes any debt to any person, the creditors representing two thirds in value of the debt of the company shall approve the resolution passed for voluntary liquidation within seven days of such resolution.
 
d)     Intimation to the ROC and IBBI: The company is required to notify the ROC and the IBBI about the resolution passed to liquidate the company within 7 days of such resolution or the subsequent approval by the creditors, as the case may be. [Section 59(4)]

Commencement date for Voluntary Liquidation: The voluntary liquidation proceedings in respect of a company shall be deemed to have commenced from the date of passing of the special resolution, subject to the approval of the creditors. [Section 59(5)]

Voluntary Liquidation Process:

a)      Public Announcement: The Liquidator shall make a public announcement within 5 working days of his appointment to submit the claims within 30 days. It must be published in one English daily and one regional daily newspaper wherein the registered office of the corporate person is situated. It must also be posted in the website of corporate persons. The Public Announcement must contain the following:
  • Liquidation commencement date;
  • Name, Address, Contact number, Registration number of liquidator;
  • Mode of submission of claim;
  • Last date of submission of claim;    
 
b)     Opening of Bank Account: A new bank account with a scheduled bank must be opened with the word ‘In Liquidation’ in the end after the name of corporate person for receiving and paying the settlement amount. Each and every financial transaction must be settled through these accounts.

Claims Collection, Segregation, Acceptance and Rejections: A claim implies:
  • A right to payment whether or not such a right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
  • A right to a remedy for the breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;
 
a)      Claim by Operational Creditors: An Operational Creditor other than a workman or employee shall submit some proof of the claim to the liquidator in person, by post or via electronic means in Form B of schedule 1 of the Voluntary Liquidation Process Regulation.
 
b)     Claim by Financial Creditors: A person claiming to be a financial creditor of the corporate person is required to submit proof of claim to the liquidator in electronic means in Form C of Schedule I.
 
c)      Claim by Workmen and Employees: A person claiming to be a workman or an employee of the corporate person shall submit proof of claim to the liquidator in person, by post or via electronic means in Form D of Schedule I. Where there are dues to numerous workmen or employees of the corporate person, an authorized representative may submit one proof of claim for all such dues on their behalf in Form E of Schedule I.
 
d)     Claim by Other Stakeholders: A person, claiming to be a stakeholder other than those above, shall submit proof of claim to the liquidator in person, by post or by electronic means in Form F of Schedule I.

Formats Prescribed in Schedule 1 of IBBI (Voluntary Liquidation Process) Regulations, 2017: 
  • Form A- Public Announcement
  • Form B-Proof of claim by Operational Creditors except by workmen & employees.
  • Form C-Proof of claim by financial creditors.
  • Form D- Proof of claim by workmen & employees.
  • Form E- Proof of claim by authorized representative of workmen and employees.
  • Form F-Proof of claim by any other stakeholder.
Process mechanism of Voluntary Liquidation:

a)  Convening of a Board Meeting: This process is an important pre-requisite for establishing the following:
  • To approve the Voluntary Winding up;
  • To approve the Declaration of Solvency to be filled with the ROC and IBBI;
  • To appoint an Insolvency Professional to act as a Liquidator and a registered valuer, subject to the Shareholder’ approval;
  • To approve the notice calling for the General Meeting for the consideration of Voluntary winding up, the appointment of the liquidator and registered valuer;
 
b)  Filing of Declaration of Solvency: The Filing of the ‘Declaration of Solvency’ with the ROC in form e-GNL-2 and further verified by an Affidavit signed by majority of Directors along with following attachments, is another pre-requisite before the voluntary winding up process. The attachments are as follows:
  • Last 2 years’ audited financial statements;
  • Valuation report, if any, prepared by the registered valuer;
 
c)  Sending Notice of EGM to all Shareholders

d)  Convening EGM within 4 weeks of filing Declaration of Solvency: This is done to establish the following aspects with regards to the voluntary winding up:-
  • To approve said voluntary winding up;
  • To appoint an Insolvency Professional to act as a liquidator and the registered valuer and fix their remuneration;
 
e)  Creditors’ NOC: An approval from the creditors’ representing 2/3rd value of the debt is required either by way of holding a meeting or through an NOC from each of the creditors.
 
f)   Public Announcement: A public announcement is required to be made within 5 working days from the date of appointment of the Insolvency Professional.
 
g)   Intimation to IBBI and ROC: Within 7 days of the public announcement, intimation must be sent to IBBI and ROC.
 
h)  Opening of ‘In Liquidation’ Bank Account: A new bank account with a scheduled bank must be opened with the word ‘ABC Private Limited-In Liquidation’ for receiving and paying any settlement amount.
 
i)    Collection and Verification of Claims: All claims must be made within 30 days of the public announcement. The liquidator must verify the correctness of each claim and prepare a list of the stakeholders.
 
j)  Preparation of Preliminary Report: Based on the claims received, the liquidator needs to prepare a preliminary report within 45 days from the liquidation commencement date containing the capital structure, assets and liabilities, claims received etc.
 
k)  Distribution of Proceedings: The liquidator needs to sell all the assets through an auction or through a direct party, to realize the amount from the creditors and distribute the proceedings amongst all the stakeholders.
 
l)  Submission of the Final Report: The liquidator must prepare a final report containing the liquidation proceedings and submit it to the ROC, IBBI and NCLT. Based on this final report and application for dissolution, the NCLT shall pass an order for the dissolution of the corporate entity.
 
m)   Filing of order with ROC: A copy of the order received from the NCLT needs to be filled with ROC in e-form INC-28 for the dissolution of a corporate entity.
 
Role of the Adjudicating Authority i.e. NCLT with the whole Process: The Adjudicating Authority i.e. NCLT is competent to declare the corporate person as dissolved after due liquidation and distribution of its assets. The NCLT comes into the picture only at the final stage of liquidation after application for Dissolution of Corporate.

Roles and Responsibilities of Liquidator in whole Process: Liquidator of corporate person is assigned with the following task:
  • To verify claims of all the creditors;
  • To carry on the business of the corporate debtor for its beneficial liquidation as he considers necessary;
  • To value, sell, recover and realize all assets of and monies due to such a corporate person in a time bound manner;
  • To open a bank account for the purpose of receiving all moneys due to the corporate person;
  • To pay and settle with the creditors of the corporate person;
  • To obtain any professional assistance from any person or appoint any professional, in discharge of his duties, obligations and responsibilities;
  • To maintain registers specified under regulation 10 of schedule 2;
  • To distribute proceeds to the stakeholders within a period of 6 (six) months of receipt of the proceeds; and
  • To preserve a physical or an electronic copy of the reports, registers and books of account for at least 8 (eight) years after the dissolution of the corporate person, either with himself or with an information utility.
 
Unclaimed Proceeds of Liquidation (Regulation 39):
  • The liquidator shall apply to the NCLT for an order for a transfer into the Companies Liquidation Account from the public account of India, any unclaimed proceeds of liquidation or undistributed assets or any other balance payable to the stakeholders on the date of the order of dissolution.
  • Any person claiming to be entitled to any money paid into the Companies Liquidation Account may apply to the Board for an order for such payment of the money claimed, which may, if satisfied that such person is entitled to the whole or any part of the money claimed, make an order for the payment to that person of the sum due to him, after taking such security from him as it may think fit.
  • Further, any money paid into the Companies Liquidation Account, which remains unclaimed thereafter for a period of fifteen years shall be transferred to the general revenue account of the Central Government.
 
Closure of a Branch / Liaison / Project Office in India:

During the winding up of Branch/Liaison offices the company must approach the designated AD Category - I bank with the following documents:
  1. A copy of the Reserve Bank's permission/ approval from the sectoral regulator(s) for establishing the BO / LO.
  2. The Auditor’s certificate:
  • Indicating the manner in which the remittable amount has been arrived at and supported by a statement of assets and liabilities of the applicant.
  • Confirming that all liabilities in India including arrears of gratuity and other benefits to employees, etc., of the Office have been either fully met or adequately provided for; and
  • Confirming that no income accruing from sources outside India (including proceeds of exports) has remained un-repatriated to India.
  1. Confirmation from the applicant/parent company that no legal proceedings in any Court in India are pending and there is no legal impediment to the remittance.
  2. A report from the Registrar of Companies regarding compliance with the provisions of the Companies Act, 2013, in case of winding up of the Office in India.
  3. Any other document/s, specified by the Reserve Bank while granting approval. The designated AD Category - I banks has to ensure that the BO / LOs had filed their respective Annual Activity Certificates with the Reserve Bank for the previous years, in respect of the existing Branch/Liaison Offices.
  4. Confirmation about the same can be obtained from the Central Office of the Reserve Bank in the case of BOs and from the Regional Office concerned in the case of LOs.
Hence, the above are some of the recourses which a foreign company may take while closing its business in India.