** Closing
business? Check these 27 rocks that can cause hurdle in closing a company!**
Are you
thinking about closing business in India? Wait, do check these 27 rocks that
can create hurdle and cost you more money if you do not plan exit for each of these
items. Here is the list
1. Exit of
Employees:
Unlike
Western countries, losing a job is an emotional trauma in India. When
the bad time starts, you come to know true character of person. Every
person reacts differently to pink slip (termination notice of employment). Employees
need to be handled very carefully when company intends to wind up operations.
Company should assist employees in job referrals, providing service letters and
other documents that are needed to make him employable again. A
common question asked to person who is handing over employment exit letters is
– “How will I pay my home loan EMI next month?”. Companies need to
show maturity and affection to their employees on exit path. After
all, in your good days and bad days, employees have run the show with whatever
efficiencies and deficiencies! Exit of employees is key task on
closing down business.
2. Fixed
Asset Counting and Listing:
When company is up and running,
fixed assets are added … rarely discarded or deleted. Even if laptop has ended
its life, Indians use this laptops for office boys/ assistants for data entry
purposes. Depreciation is charged every year on assets of the
company. However, assuming net book value/ written down value as
realizable value is myth for 2 reasons – a) Where assets are not counted for
more than 4 years, in all likelihood at least 5% assets will be missing! And b)
Realizable value is driven by second hand/ used item market. Hence
expect too low realizable price. For example, you may show net book
value of 5 Mass Rack Cabinets as INR 120,000. But in reality, only
start up companies (small scale with lack of funds) would buy it at extreme
cheap price. Expect to fetch scrap price of Rs. 12000 with remote
possibility.
3. Office
Lease/ Warehouse lease etc.:
Lease period are not agreed based
on company’s decision to close its business. Lease agreements for office lease/
warehouse lease usually have lock-in-period for rental as well as property
maintenance. Thus, if company decides to close its business within
lock in period, landlord would expect company to pay all rental and maintenance
before signing exit letter. He would obviously also crib about
minimum electricity of commercial meter that is burdened on him due to
company’s decision to wind up. Further, office
property/factory property/ warehouse property are originally given in shell
structure. Landlord specifically mention in agreement that he
expects return of property in exact same situation. Now, cost of
demolition is very high as it includes disposal of wastage and debris etc.
4. Employee
Referral and Background Check:
Employees expect positive reply to
background check and referral in their new employment. They expect
company closing its business to have provision for such referral and background
checks. Referral Checks, Service Certificate verification can happen
even 10 years after closing entity.
5. Provident
Fund Transfer and Withdrawal:
Provident Fund transfer and
withdrawal is portal driven process now-a-days. Unfortunately
employees raise requests for transfer and withdrawal on their day of
convenience. This needs support from designated director who can use
DSC to approve transfer and KYC documents of employees to ensure smooth
transition of Provident Fund Account to their new employer.
6. Profession
Tax:
Logically profession tax is not
applicable for the companies after business closure. However, till
company’s name is removed from registrar of Companies, Profession Tax
office is likely to send notice for default. Where company
approaches Profession Tax office for cancellation of PT registration, usually 7
years’ assessment is opened up and company representative is required to
provide reconciliation between Balance Sheet Numbers and Salary Register numbers. Non
compliance of profession tax often result in show cause notices and thereby
unwarranted summons on directors and bank account freeze orders from department. Important
to also note that only employees PTEC number can be cancelled, but company’s
profession tax number shall be active till GST Number exists. Companies
need to file online cancellations accordingly.
7. Provident
Fund Return:
Similar to profession tax, where
contribution to Provident Fund is not received, provident fund office sends
email and notices on registered email ID and address respectively. 3
Reminders result in marking establishment as “Category A” defaulter even though
company has paid administrative fee of Rs. 75. Since criminal
provisions are attracted, company should respond to this compliance notices
very carefully and in time.
8. Statutory
Audit Completion and Financial Year end:
Where company/business closure is
closed, the statutory audit is to be completed before proceeding for voluntary
liquidation of the company. Unfortunately since Finance Team is not
available after suspension of business activity, companies find it extremely
difficult to complete statutory audit. In many cases, statutory
auditor is given access to books of accounts for audit and tax returns, but no
one is available for explanation. CFO is not available for evaluating and
securing correct tax position. As a result, risk of tax demands and
other compliance failures increases. Companies need to plan for the
same.
9. Financial
Documents, Employee Service Records and Other Business Documents:
Post closure, companies vacate the
office premises. All financial records and all business documents
are packed by Finance Team with the help of housekeeping staff. Some
companies lease small place/ shop to store records, while some companies
provide the documents packed in corrugated boxes to Documents Warehousing
Service Provider. In my experience cost of storage at warehousing is
costlier and inconvenient to person handling assessments.
10. Selling of
Assets to Employees:
Companies closing down businesses
gives first preference to employees present on last day. Obviously
this is better idea. Employees are also happy since they get used
office equipment like TV, Refrigerator and other assets such as computers at
depreciated value. Of course, if hard drives are removed and
destroyed, instead of low level formatting, no employee would be interested to
buy. GST on scrap value implication need to be carefully considered
while selling assets to employees.
11. Electronic
Wastages:
Gone are days when e wastages such
as unused cables, CDs, DVDs, non functioning servers, wires, telephone
instruments and lot more to be sold to scrap dealer. Due to
environment laws, most municipal corporations in India have e-Wastage
destruction policy. Company need to follow electronic wastages
regulations and procedures to avoid show cause notice from environment
department.
12. Tax
Returns, Directors’ Report, Notes to Accounts in last year:
Tax assessments are not mandatorily
carried out every year for all companies. However, the moment
liquidator issues notice to Income Tax and other departments for tax
clearances, assessment of immediate previous year is opened. It is
extremely critical to ensure tax returns have right tax positions. Directors’
Report state correct facts to avoid ambiguity on discontinued operations and
Notes to Accounts provide fair view of situation of financial statements. Last
year is most important to avoid opening closed assessments!
13. Group
Transfer Pricing Positions:
Where business entity which is
being closed is associate of another group company in India and transfer
pricing margins assessed are different, the transfer pricing positions of group
becomes very delicate. Companies need to assess risks associated
with different transfer pricing (TP) margins for similar businesses of the
group.
14. International
Reporting to Group:
In large multinational
corporations, financial and business reporting of even nominal transactions
continues. Sudden break in the reporting affects groups financial
report. Therefore, companies should make provision to ensure timely
financial and business reporting as per financial calendar of the group.
15. Auditors
cannot be caretaker !:
Companies who make auditors as
caretaker to ensure smooth closure makes 100% wrong decision for two reasons –
a) Auditors
would never understand how business side of the table works. How
vendors, customers and employees are communicated and worked in corporates.
b) Auditors
are not aware of how documents are stored in business, how banking terms are
negotiated for taking foreign currency inwards. As a result,
auditors working as consultant often find short cuts and hit financial
interests of the company.
Companies should consider
appointing either existing CFO or specialized business closure experts
like www.closemycompany.in for
better management of closing entity. 😊
16. Pending
Litigations in Courts:
Litigation by and against the
company in various courts cannot be left to lawyers for deciding its fate. Litigation
often requires companies to dig out more evidence, deny evidence and/or verify
evidence. This is possible only if current employee handling
litigation is specifically told to handover all KT to person who will be
co-ordinating lawyers till disposal of case.
17. Withdrawal
or Transfer of Provident Fund by employees:
In case of company which employed
hundreds and thousands of employees with shortest duration of 1 month,
provident fund transfer or withdrawal is never ending task. Old
employees would wake up anytime and expect companies to help them for
transferring their PF or authorizing PF withdrawal forms. Post
closure of operations, it is important that authorized person must send
messages to employees and request them for PF transfer or withdrawal. During
PF transfer and withdrawal, several cases of name change, name/DoB mismatch
arises which needs to be solved. Companies should pay attention to
PF withdrawal and transfer.
18. Digital
Signature of Authorized Signatory:
Where existing authorized signatory
exists, it is very critical to change his/her digital signature with the new
authorized signatory on GST, Income Tax and Provident Fund Portal.
Otherwise, adding new digital
signature without using digital signature of existing authority becomes Everest
task!!
19. Bank
Account Signatories:
Changing bank account signatories
where existing signatory has resigned… is a big challenge since demonetization. Preferably
bank signatories should be added at least 10 days before closure date, which
means all documents should be submitted to bank at least 20 days before the
scheduled close date.
20. Consultants
Co-ordination:
During ongoing operations of the
company, consultants associated are well co-ordinated by Finance Team/ Finance
Head. Consultants should be well co-ordinated after closure to
ensure maximum interest of the business is achieved.
21. Accounting
System Backup:
Accounting systems which digitally
records all accounting records need to be backed up. This is more
important since after closure of the company, the back up servers are removed
and data is kept offline away from Network server. Similarly all
important digital records should be kept in encrypted format at secured place. Companies
closing businesses need to consider this factor carefully.
22. Evaluate
options of Merger vs Voluntary Dissolution vs Fast Track Closure:
Companies should evaluate options
of merger of closed entity with another entity of the same group versus
voluntary liquidation under Insolvency and Bankruptcy code vs Fast Track
Closure. Company need to assess tax cost/risks-benefit analysis and
other administrative challenges in case of merger with another entity of the
group.
23. Change of
Business Address:
Unfortunately even if address
change is effected, Indian tax systems send notices and summons to the address
recorded in filing tax return/ statutory forms in the respective year and not
the current year. As a result, there is always a risk of not
attending the hearing and further ex-parte order not in favor of the company. It
is advisable that company should make provision of letter box at premises where
company held its operations for last 5 years and also should be in touch with
the landlord to see if any receipts are pending.
24. Server Rack
Cabin:
The server rack cabin is useless
once company closes its business. It is not only hard to find
prospective buyer for server rack cabinet, but also to transport this heavy
asset.
25. Understanding
Books of Accounts:
It is essential to have detailed
and documented knowledge transfer of accounting books from Finance Manager to
caretaker till closure of the company. Accounting staff should be
specifically advised to clean old current assets and current liabilities to avoid
disputes and mismatch of commercial understanding. In case of any
liability not to be paid or under dispute, a specific note may be made.
26. Access to
emails of erstwhile Financial Controller and Other Passwords:
Email of financial controller should
be kept alive till closure. All legal correspondence is usually
directed to financial controller or director. Similarly, all
passwords and user names of portals such as GST, Income Tax, TRACES, Profession
Tax/ VAT, Provident Fund, ESIC etc. should be handed over in encrypted format
to new manager/ caretaker.
27. Single
Point Contact:
Finally single Point contact is
absolutely MUST post closure of operations. Former employees,
vendors, customers and bankers demands some support, reference, backlog, old
issue and lot more. Companies just cannot vanish in India without
providing single point of contact. Either employees, vendors or
customers filing litigation takes away chance of company to peacefully settle
transaction or support these stakeholders.
Writer of the blog is a qualified
Chartered Accountant, Practicing Lawyer in Indian Courts, Master of Commerce
and Master of Arts (Economics). Ambarish is a business closure
expert. He can be reached out at ambarish@closemycompany.in OR ambarish.vaidya@outlook.com
