Jan Sat 2021

Team Simplebooks

How to Close Your Company – A Step-by-Step Guide

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There comes a time in an entrepreneur’s journey when they might have to close down their company. 

You might or might not have planned for this occasion. However, it’s always important to follow the right protocols when it comes to things like company liquidation. 

Closing down, just like any other company activity has its own procedures. 

It’s important to follow them down to the last dot, since failing to do so will result in legal and financial consequences. 

So, if you’re a business owner that’s looking to close down your company; this blog will guide you through the entire process. 

We’re going to look at every way you can possibly liquidate, and how to do so. 

Let’s get started.

What to do before you close down your company 

Now, this is really important. 

The process of winding up a company is not simple. 

There’s a lot of things you need to do before, during, and after the close down process. 

Let’s take a look at what you need to do before: 

  1. Notify and pay your employees

You need to notify your employees about your plans. This will help them get a head start on looking for new jobs. 

You can notify them via email, a memo or any method mentioned in their employment contract. 

Once you let them know, you will need to finalize their payments. 

All your employees need to be paid up until their last day of work. 

  1. Let your customers and suppliers know

It’s always best to let your customers and suppliers know about the company’s impending close down.

This will help you to maintain their trust, and also capitalise on profits until the company is closed. 

Here are three of the most important things you can notify them about:

  • Inform them that the company is closing
  • Date of closure + when you will no longer be needing your suppliers’ services
  • When you will be settling any outstanding contractual obligations (ex: debts and/or credits) with them

Remember, you need to pay off all of your company’s debts before you close down. You cannot have any outstanding liabilities. 

  1. End and settle all agreements and services 

Any agreements or services the company has become involved in must be terminated before the company shuts down. 

These can include leases, loans, business credit cards, phone lines, utilities, internet connections, and any outstanding payments. 

Remember to close all of your company’s bank accounts as well. 

  1. Settle your account receivables and account payables

You need to know whether:

  • Your customers have paid you
  • You have paid your vendors and suppliers

Look into your company’s accounts and make sure any shortfalls have been settled.

  1. Sell all business assets 

Even if the business is not being sold, the assets will have to be either sold or managed.

If your business is registered for VAT, then this will have to be added to your selling price.

Some of the common assets businesses have to sell include:

  • Outstanding stock
  • Equipment and machinery
  • Furniture
  • Vehicles 
  1. Settle all your legal matters and tax 

These can include:

  • Cancelling tax registrations such as VAT
  • Cancelling the business registration at the Registrar of Companies or the Divisional Secretariat
  • Lodging final tax returns
  • Notifying the Department of Inland Revenue
  • Settling any insurance related work
  1. Maintain and keep business records

It’s important to continue maintaining all records of your business. This includes your financial records, employee records, and customer records. 

Generally, records should be kept for 5 years from the date they are prepared, obtained or when the transaction is completed, whichever is latest.

  1. Get advice

It’s always smart to talk to the right people before you start to close down. 

Try consulting your company secretary or in-house legal counsel first. 

Since the process has a lot of legalities, it’s best to know what you’re getting into.

It’s important to follow all of these steps before you start closing down your company.

This will not only ensure a smooth transition, but also make sure that nothing goes wrong during or after closing down.

Let’s now take a look at all the different ways of closing down a company.

What are the different ways of closing down a company? 

Now, there are a few ways to close a business:

  1. Strike off method
  1. Compulsory winding up (this is ordered by the courts)
  1. Voluntary winding up: 
  • By the creditors 
  • By the members 

We’ll take a look at each of these methods in this blog. 

How to: Close down a company 

Like we mentioned before, there are a few ways to close down a company.

We’re going to explore each option individually. This way, you can decide which method suits your situation best.

Strike off method

This is the simplest way to close down a business.

It involves removing your company’s name from the Registrar of Companies’ (ROC) registered company list. 

People usually chose the strike-off method when they’re no longer able to maintain their business operations.

Now, there are three things that you need to do before you can initiate the strike off method:

  • Stop all business operations
  • Settle all business liabilities 
  • Sell off all business assets 

If you don’t do all three of these things, you cannot apply for the company to be struck off.

What are the documents you will need? 

There are two main documents you need to hand over to the ROC:

  1. A letter of request from the shareholders giving their approval to proceed with a strike off
  1. An affidavit with a covering letter from the directors and shareholders (accessed here)

In addition to these two documents, you need a few others to apply for a company strike off:

  • The Declaration and application for Strike Off
  • Tax clearance details (if applicable)
  • A recent copy of an Audited Report (if the company has previously filed audited accounts)
  • The last Annual Return of the company

After you hand in all the documents mentioned above, the ROC will take over. 

The registrar’s office will assess your documents and obtain clearance for it from the Labour and Tax department.

Once the strike off is approved, your business will no longer exist. 

The company can no longer engage in business activities or sell any company assets.

Useful information: How to file your company’s Annual Returns in Sri Lanka

Important things to remember

The Registrar of Companies (ROC) also has the power to strike off a company. They do this if they have any ‘reasonable cause’ to believe that the company is not in operation. 

There’s a process the Registrar will follow if they’re looking to strike off your company:

Step 01: The ROC will first send a letter of inquiry to you. 

Step 02: If there is no reply within a month, they will send a second letter.

Step 03: If there is no reply within a month again, the ROC will publish a notice in the Gazette to strike off your company. 

Step 04: If: 

  1. The ROC does not find a liquidator acting on behalf of the company OR;
  2. The liquidator doesn’t file the returns within 6 months of winding up the company,

The registrar will publish a notice in the Gazette and send it to the company and the liquidator.

This is why it’s important to keep an eye out and respond to the ROC’s notices, especially if you wish to continue to keep your company active. 

One last thing – if there are any remaining property that belongs to the company once the strike-off method has been completed, it will all be taken over by the state. 

Compulsory winding up (ordered by the courts)

Now, there are a few reasons why a court would close down your company. 

Let’s take a look at them.

Mainly, a court would step in the middle, and shut down your company if:

  • Your company does not commence its business within a year from its incorporation, or suspends its business for one year OR;
  • If the number of shareholders fall below the minimum number required by the Companies Act Sri Lanka OR;
  • Your company has no directors OR;
  • Your company is not able to pay its debts OR;
  • The court thinks that it is just and equitable that the company should be wound up OR;
  • Your company has decided that it will be wound up by the court through a special company resolution

We mentioned that one of the reasons a court will close down a company is if they’re not able to pay their debts. 

Let’s look at all the debt related scenarios.

Your company will be considered unable to pay its debts when:

  • It has failed to settle a debt that exceeds Rs. 50,000. This is if it misses its deadline to pay its creditor this amount within 3 weeks of the due date. 
  • The company does not follow the actions given by a court when it sides with a creditor. 
  • The court is satisfied that the company cannot pay its debts (the court will consider the current and prospective liabilities).

Now, the court doesn’t randomly step in to close your company down. 

Someone has to request it from them. 

This request has to be submitted to the courts as a petition by either:

  1. The company OR,
  2. Its creditors OR,
  3. Contributors (shareholders etc.)

The petition has to be accompanied with an affidavit that verifies the facts given in the petition.

The ‘facts’ are the reasons why they think that the company should be shut down. 

When this petition is filed, the court will appoint a ‘provisional liquidator’ for the company. This liquidator will be in charge of settling liabilities, settling creditors, dividing surplus assets and liquidating the assets.

Like before, the powers of the Directors of the company will cease to exist once the liquidator is appointed.

Voluntary winding up  

This is when the company begins the process of liquidation by themselves. 

Now, there are two types of people that can start this process:

  1. Members of the business (this process is known as ‘members voluntary winding up’). 
  1. Creditors of the business (this process is known as ‘creditors voluntary winding up’).

The difference between the two is pretty straightforward. It’s based on whether the company is solvent or insolvent. 

A solvent company is basically a financially healthy company. A financially healthy company can meet its debts and financial obligations.

An insolvent company is a financially unhealthy company. We give this term to companies that can’t pay off their debts and meet their financial obligations in the long run. 

So, when the company is solvent – its members will begin the close down process. 

And, when the company is insolvent – its creditors will begin the close down process.  

Legally, there are a few ways you can do this:

  • By passing a special resolution to wind up the company voluntarily.
  • By passing a special resolution since it cannot continue business transactions because of its liabilities.
  • The company passes a resolution to wind up the company at a general meeting. For this, the company’s ‘Articles of Association’ has to specify a period of time after which it must be dissolved.

You can start the closing down process the moment the resolution passes. 

When the process starts however, you need to stop all of your business activities.

And remember, the company has to publish a notice of closing in a Gazette within 14 days of passing the resolution. 

Let’s take a look at how members and creditors can initiate the close down process. 

Members’ voluntary wind up 

As the title reads, members – or more specifically, shareholders of the company are in charge of starting the liquidation process. 

To do this, the Directors have to first look into the affairs of the company. Once they do that, they have to make a statement that the company can pay off its debts within a year of the close-down process starting. 

The reason that they have to make a statement claiming that they will pay off all of its debts within a year is because they are solvent. 

You have to pass this statement within 5 weeks of passing and delivering the resolution to the Registrar of Companies. 

When you deliver the statement to the ROC, it’s known as a ‘shareholders voluntary winding up’.

To begin the process, you have to appoint a ‘company liquidator’. Once the liquidator is appointed, the powers of the Directors will cease. 

This liquidator will then wind up the company and distribute its assets. 

Now, this type of company closedown is usually better than other methods. 

This is because:

  1. You can sell assets of the business for cash. 
  1. Save money on taxes (you will only be charged Capital Gains Tax instead of Income Tax).

Creditors’ voluntary winding up

This is similar to the previous ‘Members voluntary wind up’ method.

The biggest difference is that all the assets of the company will go to the creditors instead of the members. 

The company must call for a meeting with all the creditors either:

  1.  On the day of passing the resolution for voluntary winding up or; 
  2. The day after the resolution for the voluntary winding up of the company is proposed. 

The notice of this meeting must be published in the Gazette and 2 local newspapers sold within the district of the company.

Here, the creditors of the company can select a liquidator.

The liquidator will solely be responsible for winding up the company. 

As usual, the powers of the directors will no longer exist when the liquidator is assigned. 

Once that’s done, the liquidator will make an account detailing the entire process. This will be presented to the company and its creditors during a general meeting. 

Within a week of the meeting, the liquidator will send the account to the ROC.

Then, the ROC will register the accounts.

Three months after this, the company will be dissolved. 

What happens after a company closes down?

If you follow the right procedure when closing down, things should run smoothly afterwards.

Once the company is dissolved, the Registrar’s office will issue a certificate stating the dissolution. 

This is similar to a death certificate. This way, the registrar gets to keep a track of all the liquidated companies as well. 

After the company ceases to exist, they can no longer engage in business activities.

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Who is a company liquidator?

You might have noticed that the liquidator plays a very important role when it comes to closing down a company. 

But who are they exactly and what do they do?

Well, a liquidator is basically an officer who is appointed to wind up the affairs of a company when it goes into liquidation.

Depending on the situation, either the courts, creditors or the shareholders can appoint them. 

When they’re appointed, the powers of the directors cease to exist. 

They’re also given the legal authority to act on behalf of the company. 

The:

  1. Control of assets 
  2. Financial affairs of the business 
  3. The conducts of the business 

are transferred to the liquidator.

They’re responsible for closing up business activities in a way that is as cost effective as possible.

According to the Companies Act Sri Lanka, some of their responsibilities include:

  • Investigating the company’s financial affairs
  • Looking into the reasons why the company failed
  • Taking control of the company’s property once a winding up order has been given
  • Bring or defend any action in a legal proceeding on behalf of the company
  • Carry on the business of the company until it is wound up
  • Settling the payments to the creditors
  • Selling the company assets
  • Act on behalf of the company in settling any receipts, deeds or documents

Get Simplebook’s help when closing down your company

You’ve probably noticed that there’s a lot of paperwork you need to process when closing down your company. 

With everything you will already need to take care of, this can be a bit of a hassle. 

This is where Simplebooks can help you. 

As a registered company secretary, we’ve advised and helped hundreds of business owners legally wind up their businesses. 

Our team could advise you and take care of your paperwork while you handle the important stuff. 

FAQs

How do I close my business in Sri Lanka?

There are a few ways you can close your business in Sri Lanka:

  • Strike off methods
  • Winding up by the courts 
  • Voluntary winding up 

Depending on what type you pick, the way in which you have to close down your business is different. Read our detailed blog here for a step by step guide of all of these methods.

What happens after I close down my business?

Once you close down your company, the Registrar’s office will issue a certificate of dissolution. 

After this, your company can no longer engage in business anymore. 

What do I do before I close down my business?

  • Notify and pay your employees
  • Pay your suppliers 
  • Let your customers know
  • End all of your services and settle all of your agreements 
  • Sell all your business assets 
  • Settle all legal matters and pay all your taxes
How do I close my business in Sri Lanka?

There are a few ways you can close your business in Sri Lanka:

– Strike off methods
– Winding up by the courts 
– Voluntary winding up 

Depending on what type you pick, the way in which you have to close down your business is different. 

Read our detailed blog here for a step by step guide of all of these methods. 

What happens after I close down my business?

Once you close down your company, the Registrar’s office will issue a certificate of dissolution. 

After this, your company can no longer engage in business anymore. 

What do I do before I close down my business?

– Notify and pay your employees
– Pay your suppliers 
– Let your customers know
– End all of your services and settle all of your agreements 
– Sell all your business assets 
– Settle all legal matters and pay all your taxes

 

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