GROUP 10 (717-723)

PROJECT REPORT

TOPIC – CLOSURE: COMPANIES WHICH HAVE CLOSED DOWN,

ITS REASONS AND PROCEDRUAL CHALLENGES FACED IN
CLOSING A BUSINESS ENTERPRISE

CLOSURE

Closure is the term used to refer to the actions needed when it is no longer necessary or
possible for a business or an organization to continue to operate. Closure may be the result of
1. Bankruptcy, 2.as a result of the proprietor of the business dying, 3. as a result of a business
being purchased by another organization or 4. because it is the non-surviving entity in a
corporate merger.

The methods of closure of companies can be broadly classified as follows:

-winding up of a company

-strike off of a company

WINDING UP: It is a process of putting an end to the life of the company. While winding up,
a company ceases to do business as usual. Its sole purpose is to sell off stock, pay off
creditors, and distribute any remaining assets to partners or shareholders. Winding up or
liquidation represents the last stage of a company’s life.

As per section 270 of companies act 2013 there are two modes of winding up of a company
i.e. compulsory winding up by the tribunal and voluntary winding up by members and by
creditors.

PROCEDURE OF CLOSURE OF COMPANIES

Voluntary Strike off of the Company

1. The Company shall hold Board Meeting to get approval from the Board of Directors for
striking of a name of the Company and shall approve the notice of EGM.

2. The Company shall take approval from Shareholders bypassing the special resolution in
General Meeting for such strike off. The Company is regulated by any other authority than
shall take approval from them.

3.After taking approval the Company shall file an application in form STK-2 along with the
following documents:
STK 3: An indemnity bond by every director duly notarized.

STK 4: An affidavit by every director of the Company.

4.Statement of accounts containing assets and liabilities of the company made up for a day,
not more than thirty days before the date of application and certified by a Chartered
Accountant;

5.A copy of the special resolution duly certified by each of the directors of the company or
consent of seventy-five percent of the members of the company regarding paid-up share
capital as on the date of application;

6. A statement regarding pending litigation, if any, involving the company.

7. After receiving an application, ROC shall publish a public notice STK-6. Any objection to
the proposed strike off shall be sent within 30 days.

8. After complying with all the process, ROC shall strike off the name and dissolve the
company by sending notice in the official gazette in form STK-7.

Compulsory Strike off

The ROC may remove the name of a company from ROC on below following grounds:

A company has failed to commence its business within one year of incorporation;

The company is not carrying out any business or Activity for the preceding 2 financial years
and has not sought the status of Dormant Company under Section 455 of the Act.

Procedure

1.ROC shall send notice in STK-1 to the Company and all the Directors by speed post.

2.The notice shall contain the reason for the removal of the name and seek the representative
of the Company.

3.The Company shall send the required documents and representation within 30 days from
the date of the notice

4.On satisfaction of representation, the ROC may drop out the strike off. IF ROC is not
satisfied, then it may proceed with a strike off the name of a company.

5.The notice for removal of name under sub-section (1) of section 248 in STK-5 shall be
published on the official website of MCA, in Official Gazette, English newspaper and one
vernacular language at the place registered office is situated.

6.TO ROC shall also intimate to the Authorities regulating the Company about the proposed
action of removal or striking off the names of such companies.
7.If no cause to the contrary is shown by the company, ROC may on expiry of the time
mentioned in the notice strike off the name of the Company and shall be published in Official
Gazette

CASE STUDY – KINGFISHER AIRLINES

THE REASONS FOR THE CLOSURE OF KINGFISHER AIRLINES

High operating costs and fuel prices amounting to more than 90% of their income.

 The airlines was unable to make profits and kept on piling debts.
 Acquisition of Air Deccan
 Depreciation of Indian rupees
 Lack of long-term strategy
 Expansion into the international arena.
 Lack of stability at apex level of management
 high training costs
 high maintenance costs
 delayed salary
 govt dues
 bank arrears
 fuel dues
 aircraft lease rental dues

CHALLENGES FACED BY KINGFISHER AIRLINES

1. Banks came to the rescue: Vijay Mallya borrowed huge amount of loans from various
banks during 2008-10. Surprisingly these banks provided loans to KFA by taking ‘brand
value’ into consideration.

2. Piling debt: KFA had an accumulated debt of Rs. 7000 crore and suffered losses of Rs.
1608 crore.

3. Consortium of banks: In November 2010 Consortium of banks led by SBI, restructured the
KDS debt for the first time.

4. Grounded: In December 2012 the company’s license got cancelled. In 2013 the company’s
license got cancelled.

5. Wilful Defaulter: Banks labelled Mallya as a Wilful Defaulter. Banks also started acting on
his collateral securities. In 2015, the consortium of banks took over the Kingfisher house in
Mumbai worth 100 crore rupees.
6. Aftermath: As it stands today KFA has a total debt of $1.2 billon. Mallya got arrested and
the kingfisher airlines empire can to an end.

CASE STUDY – LEHMAN BROTHERS

INTRODUCTION
Lehman Brothers Holdings Inc. was a global financial services firm founded in 1847. Before
filing for bankruptcy in 2008, Lehman was the fourth-largest investment bank in the United
States, with about 25,000 employees worldwide

THE REASONS FOR THE CLOSURE OF LEHMAN BROTHERS

1. The financial crisis of 2007–2008, also known as the global financial crisis, was a
severe worldwide economic crisis, it was considered by many economists to have
been the most serious financial crisis since the Great Depression.

2. On March 14, 2007, a day after the stock had its biggest one-day drop in five years on
concerns that rising defaults would affect Lehman's profitability, the firm reported
record revenues and profit for its fiscal first quarter. Following the earnings report,
Lehman said the risks posed by rising home delinquencies were well contained and
would have little impact on the firm's earnings.

3. Over the summer, Lehman's management made unsuccessful overtures to a number of

potential partners. The stock plunged 77% in the first week of September 2008, amid
plummeting equity markets worldwide, as investors questioned CEO Richard Fuld's
plan to keep the firm independent by selling part of its asset management unit and
spinning off commercial real estate assets.

4. Lehman's stock fell sharply as the credit crisis erupted in August 2007 with the failure
of two Bear Stearns hedge funds. During that month, the company eliminated 1,200
mortgage-related jobs and shut down its BNC unit.5 It also closed offices of Alt-A
lender Aurora in three states.

CHALLENGES FACED BY LEHMAN BROTHERS

Lehman’s bankruptcy had five underlying causes:

1.Risk
The bank had taken on too much risk without a corresponding ability to raise cash quickly.

2.Culture

Management rewarded excessive risk-taking. Top managers wanted to stay ahead of

competitors that also used high-risk strategies, and they also thought the company was too
smart to fail.

3.Overconfidence

The firm relied on complicated financial products based on quick real estate growth just as
the real estate market began to decline. Management thought it would make more money
owning these assets but its timing couldn’t have been worse.

4.Regulator Inaction

The Securities and Exchange Commission and other regulators didn’t take action. As early as
2007, the SEC knew Lehman Brothers were taking on too much risk, but the agency never
required Lehman to do anything about it.

5.Used a high-leverage business model

They required it to raise billions of dollars every day to keep the doors open. In 2006, it had
invested heavily in high-risk real estate and subprime mortgages. When these markets turned
south, Lehman couldn’t raise enough cash to stay in business.

CONCLUSION

A famous quote goes, "If you fail to plan, you plan to fail." While no entrepreneur goes into
business planning to fail, many of them start off failing to plan. If you own a business and
your sales or top line are growing at a rampant pace and you're increasing profits each year,
you’re certainly headed in the right direction. Even growing, profitable companies can be hit
with cash flow problems if their finance, operations, and/or investing activities aren't running
efficiently.
REFERENCES

- https://www.investopedia.com/articles/economics/09/lehman-brothers-
collapse.asp#:~:text=The%20firm%20survived%20many%20challenges,and%20its
%20share%20price%20dropped
- https://grm.institute/blog/case-study-corporate-governance-kingfisher-airlines/
- https://enterslice.com/learning/procedure-for-striking-off-a-company-under-
companies-act-2013/
- https://en.wikipedia.org/wiki/Closure_(business)
- https://www.thebalance.com/lehman-brothers-collapse-causes-impact-4842338