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Amendments In Companies Act 2016 Makes Exit Easier For Failed Startups!

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Companies Act 2016

As per various estimates, 3 out of 5 startups fail. Failure is the default state of any startup, and it is hardly surprising. Some ideas click, some don’t. No big deal.

But what after the realization that the startup has failed? What are the options for the entrepreneur and the investors for making a smooth exit? How can they ensure that the past failure doesn’t bother them in their next endeavor?

In another major reform, Govt. of India has made it easier, smoother for failed startups to make an exit. Albeit, this new form of exit will not be a permanent one.

We had earlier shared that Govt. will soon announce new easier rules for a smooth exit for all investors and founders, something which has been finally done.

Struck Off Your Startup Easily

As per new notifications announced in the Companies Act 2016, inactive companies can now easily remove their company’s name from the Registrar of Companies database. For this, they need to pay a one-time fee of Rs 5000 plus few ancillary allied costs.

In late December last year, these notifications were announced in the Company’s Act 2016, wherein relevant sections under the Removal of Names of Companies from the Register of Companies) Rules in the Act were changed for the same.

Rules For Striking Off The Company’s Name

As per Company’s Act 2016, the following are the rules for striking off the company’s name:

  • Failed to commence business after two years of incorporation
  • Didn’t apply for being a dormant company, even after being inactive for two years
  • 75% of the shareholders have approved of this decision to be struck off

Difference Between Winding Up and Striking Name Off

Now, in case the company is inactive, then besides striking off the name, there is an option to officially winding-up. But this requires several steps such as appointment of a liquidator, shareholder and creditors meeting, and declaring that there exists no liabilities. These procedures takes more time, and is expensive as well, compared to just Rs 5000 fees for striking the name off of the Registrar of Companies database.

However, note here, that in case the company’s name is removed the database of Registrar of Companies, but it’s not officially closed, then liabilities of the creditors and tax authority will continue on the directors. And legally, the creditors and tax authority can enforce recovery of the same from the directors.

Hence, if the startup is sure that there are no liabilities of the company, then striking of the name from RoC database is the best option; something which is now possible and easy to do.

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