In various situations, business owners may opt to formally close down their company, especially when it has been incorporated but operations have not yet commenced. This scenario can be particularly challenging for first-time entrepreneurs who may find the compliance and administrative requirements daunting. Alternatively, a decision to close down a company might be prompted by a business owner’s relocation of company operations.
Regardless of the reason, it’s crucial to adhere to the correct procedures and formally close down the company rather than abandoning it without proper closure. Failing to do so can lead to legal consequences. In this article, we’ll delve into the two methods available for closing down a company in Singapore: striking it off and winding it up. We’ll outline the disparities between each approach, guide you on selecting the most suitable method, and advise on circumstances where maintaining the company as a dormant company in Singapore might be preferable to complete closure.
Striking Off a Company & Deregistration
Striking off, also known as deregistration, is a process wherein a company director or secretary requests the removal of the company from the Registrar. To initiate this process, the director or secretary must apply to the Accounting and Corporate Regulatory Authority (ACRA).
ACRA may approve the application if the company meets the following criteria:
- The company has not engaged in any business transactions since its incorporation or has never conducted any business.
- The company does not have any outstanding debts owed to government agencies, including the Inland Revenue Authority of Singapore (IRAS), Central Provident Fund (CPF) Board, and others.
- All directors of the company, or at least a majority of them, authorize the applicant to submit the application on behalf of the company.
- The company does not possess any assets or liabilities at the time of application.
- There are no contingent assets and liabilities that may arise in the future for the company.
- The company does not have any outstanding charges recorded in the charge register.
- The company is not involved in any domestic or foreign legal proceedings.
- The company is not subject to any ongoing or pending regulatory action or disciplinary proceedings.
Meeting these criteria allows for the smooth approval of the striking off application by ACRA. It’s essential for the applicant to ensure compliance with these requirements before proceeding with the application process.
Winding Up a Company & Liquidation
Winding up, often referred to as liquidation, involves the sale of a company’s assets to convert them into cash. The generated cash is then utilized to settle all outstanding debts and liabilities of the company. Any surplus funds are distributed among the company’s shareholders. Once this process is completed, the company is officially terminated and ceases to exist. There are three primary methods for winding up a company: members’ voluntary winding up, creditors’ voluntary winding up, and winding up by order of the court.
Members’ Voluntary Winding Up: In this method, the company appoints a liquidator to oversee the winding up process and file the necessary notifications as required by the relevant laws, such as the Companies Act or the Insolvency, Restructuring, and Dissolution Act. This option is suitable if the company’s directors believe that it can settle all its debts within 12 months of commencing the winding up process.
Creditors’ Voluntary Winding Up: If the directors are uncertain about the company’s ability to settle all its debts within the specified timeframe, they may opt for creditors’ voluntary winding up. In this scenario, the creditors have a say in the appointment of the liquidator and whether the company should be wound up. A creditors’ meeting is typically held to discuss these matters and other relevant issues.
Winding Up by Court Order: This method involves the court ordering the winding up of the company. Unlike the voluntary methods, where the company’s directors initiate the process, winding up by court order occurs when creditors, a liquidator, or a judicial manager apply to the court for the company to be wound up due to its inability to repay existing debts.
These three methods provide avenues for winding up a company based on its financial circumstances and the preferences of its stakeholders. Each method has its own set of procedures and implications, and the appropriate approach depends on the specific circumstances of the company.
Closing Down a Company Due to Low Activity? Try Keeping It Dormant Instead.
If your company is facing a temporary downturn in business activity due to exceptional circumstances like a pandemic, it might be prudent to consider keeping it operational rather than shutting it down prematurely.
If the core aspects of your business remain strong—such as a validated product or service, effective marketing strategies, and positive customer feedback—and you have no significant debts or liabilities to creditors, maintaining your company as dormant could be a viable option while navigating through the current challenges.
For a company to be classified as dormant by both IRAS and ACRA, it must meet the following criteria:
It is not a listed company or a subsidiary of a listed company.
The company’s total assets do not exceed $500,000 during the financial year.
There is no revenue, expenses, or staff except for those required for the basic maintenance of the company.
Opting to keep your company dormant can alleviate the burden of company administration and compliance obligations during this period of reduced activity. It allows you to preserve your business entity without the need for extensive operational involvement, providing flexibility and the opportunity to reactivate operations when conditions improve.
