This article is written by Dhruvi Dharia and Gaurav Prabhughate, students at University of Mumbai Law Academy. 

Background

In the wake of the COVID-19 Pandemic, numerous companies globally have found it tough to sustain their operations. The exposure to different kinds of risks, losses, market fluctuations, political instability, economic pressure, and other unforeseen circumstances have forced some businesses to opt for termination of their activities. Removal of name of the company from the Register of companies (‘Register’) has been one such viable option for closure of business at minimum cost and compliance requirements as compared to liquidation, winding up, or insolvency proceedings. Section 248 of the Companies Act 2013 (‘the Act’) provides for two methods by which a company can be struck off from the Register that is maintained by the Registrar of Companies (‘Registrar’).

First, the Registrar can order striking off of companies if a newly incorporated company has failed to commence its business within one year of its incorporation, or if a company has failed to conduct its daily operations for two consecutive preceeding financial years, or the subscribers of the memorandum of association have failed to pay the subscription amount within one hundred and eighty days from its incorporation. In this case, the Registrar can issue a notice to the company and its directors stating his intention to strike off the company. Subsequently, the Registrar may strike off the name of the company if the company fails to prove the contrary, and it shall cease to operate as an incorporated company leading to dissolved.

Secondly, the company may apply for striking off its name to the Registrar on extinguishing all its liabilities and after seeking approval of 75% of its shareholders. Striking off can be a massive relief for struggling companies to end their existence after repayment of all the debts, dues, liabilities, pending investigations, and deposits, thus, ensuring end-to-end security of interests of the company and its stakeholders. However, certain classes of companies are debarred from applying for removal of their name. Striking off of these companies might either cause a detrimental impact on its stakeholders or prima facie appears to be a non-genuine step of closure by the companies. Section 249 and Companies (Removal of names of companies from the Register of Companies) Rules 2014 excludes listed companies, delisted companies, companies against whom investigations is pending or those who have in the preceeding three months, undergone a name change, address change, disposed of a property or right held by it, have been wound up, and so on, from filing application under section 248. 

Legal ramifications of a strike off 

‘Striking off’ is among the last stages in the life of a company. The consequences of a strike off on companies are as follows:

Liabilities of a director post-strike off– Section 248(7) of the Act crystalizes the liabilities of the directors and other officers of the company that exercises the power of management within it. The responsibility of directors to pay the outstanding dues, debts, deposits held by the company, and other liabilities subsists post-strike off. However, this responsibility does not include the personal liability of directors in repayment of the same. A strike off is merely a temporary suspension of the company’s operations providing a chance for revival and restoration of all its rights and liabilities. Thus, conferring an exclusive liability on the company in repayment of its accruing dues. Further, the Ministry of Corporate Affairs press release issued on September 6, 2017 (see here) laid down that the director is disentitled from accessing bank accounts of a struck off company, leaving no scope for channeling of company’s funds for illegal purposes. If any director of a struck off company is found to be flouting the same, he is liable to imprisonment of a minimum of six months to ten years. Further, the directors are also debarred from performing the daily activities of a company post-strike off and are solely responsible for the realization of the amounts due to the company and discharging its liabilities. 

Assets of a struck off company -The proviso of section 248(6) states that the assets of the struck off company shall be utilized towards payment of the company’s outstanding liabilities. After the settlement of these liabilities, the assets shall vest in the Crown as bona vacantia and no individual is entitled to claim such property. Hon’ble Justice Mukharji propounded the ‘Doctrine of Bona Vacantia’ in the case of Re. U.N. Mandal’s Estate (see here), he laid down that the assets of a struck off company will not be without an owner and it shall be taken over by the State. The State shall be conferred with the exclusive right to disclaim such property.

This principle of bona vacantia was derived from English law. Hence, when no liquidator is appointed for the management of the assets or properties of a struck off company, no individual can assume the title of ‘heirs’ or ‘successors’ or ‘owner’ of such assets. No shareholder, director, or any other member will be entitled to initiate recovery action for such property. Article 296 further exemplifies that the property accruing from the doctrine of bona vacantia or lapse or escheat shall vest in the State or the Union of India exclusively. Hence, conferring on the Government ultimate ownership of such properties and assets of a struck off company. However, the Companies Act 2013, till today has not provided for the treatment of the assets and properties of a struck off company. The above deductions have been made based on the precedents of the Courts.

The treatment of shell companies– Striking off is a tool to combat shell companies that are indulging in illegal financial maneuvering. Many such shell companies are set up as smokescreens, to enable embezzling, siphoning, and laundering of money via them. In other words, shell companies are formed primarily to evade taxes and conceal the identity of its owners. Hence, it is necessary to trace the ultimate beneficiaries and subject them to the full force of the law. One of the objectives of striking off of companies is to weed out these companies that are evading taxes or channeling money by and to unauthorized sources. Supervision by various regulatory bodies like Securities Exchange Board of India, Registrar, Income tax officers, and others has helped to curb the menace of non-genuine transactions floating in the economy. Further, the Assessing Officer is entitled to apply for restoration of struck off companies to secure public interest and collect pending dues from such companies.

This measure is to safeguard the Government against revenue loss from tax-evading companies. Contrarily, if a struck off company has no asset or liability, it is presumed that it has no untaxed wealth. In the case of Principal Commissioner of Income Tax v. Registrar of Companies (see here), the company was struck off by the Registrar, and the tax department was not allowed to claim tax or pass an assessment order against the struck off company for revival, as the officers did not raise any tax demand before the strike off order. Also, the tax department did not have proof of any assets or liabilities possessed by the company. Hence, NCLT refused to allow the restoration as no fault was found in striking off the company.

A path towards restoration

A detailed procedure for restoration of the name of struck off companies in the Register is established under section 252 of the Act. Restoration of the name nullifies the act of striking off, thus conferring all the rights, powers, and liabilities that the company had previously. An aggrieved person may file for the restoration of the name of struck off company before the National Company Law Tribunal (‘NCLT’) within three years from the date of the Registrar’s order under section 252(1) of the Act. When the company itself or its members, creditors, or workmen are aggrieved, an application under section 252(2) of the Act, may be filed before the NCLT within twenty years from the publication of strike off in the official gazette. In M.A. Panjwani v. Registrar of Companies (see here), a company was struck off by the Registrar, irrespective that the company was a defendant in an ongoing legal proceeding. To ensure justice was meted out, NCLT on an application made by the petitioner restored the struck off company’s name in the Register to revive it. 

One can also file a writ petition in the High Court against the order of the Registrar striking off a company. However, it is necessary to file the application in the Court having jurisdictional power to try such cases. Recently in the case of Money Market Services (India) Private Ltd. v. Union of India (see here), the petitioner had challenged the order of the Registrar of Chennai that had ordered a striking off of the company’s name. The petitioner contended that since an investigation by the Serious Fraud Investigation Officer is called against them, the company was not liable to be struck off under Rule 3 (1) of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016.

Whereas, the Respondents contended that the Delhi High Court had no jurisdictional power to hear this case since no cause of action had arisen in Delhi. The petitioner stated that the High Court was entitled to hear the matter since SFIO was to investigate, who has received directions from the Central Government and authorities in Delhi. However, the court held, since the writ petition challenged the order passed by the Registrar in Chennai and not the investigation to be led by the SFIO, the Delhi High Court was not entitled to hear the case. Hence, this court lacked the jurisdictional power to evaluate the case since no cause of action arose in Delhi.

Tracing NCLT’s Outlook

The NCLT has repeatedly adopted a liberal approach, to enable the restoration of companies whilst considering the interests of all the concerned parties. It has scrutinized the bona fide intention of the company and its stakeholders at every instance. In instances when a company intended to continue its operations despite failing to adhere to the legal provisions, the tribunal has been lenient in allowing the restoration of the name of the company and secure its stakeholder interests. Additionally, the onus is placed on the Registrar to comply with its legal obligations concerning striking off and providing a fair representation. In the case of Bara Machine Pvt. Ltd. v. Registrar of Companies Gujarat (see here), the Tribunal allowed the restoration of companies as it was found that the Registrar had failed in discharging the statutory obligation of sending a notice to the company before the strike off, depriving it of a fair chance of representation. 

However, deviating from the past trend of leniency, the court has recently disallowed the restoration of struck off companies. In R. Narayanaswamy v. The Registrar of Companies (see here), a company had failed to file the statutory returns for three consecutive years, which ultimately led to its name being struck off by the Registrar. Also, the company had not been performing its operations and did not intend to do so in the future. As a result, the NCLT refused to restore the company’s name.

Similarly, in the case of Alliance commodity Pvt. Ltd. v. The Registrar of Companies West Bengal (see here), the Registrar had struck off the company name when it had failed to file for annual documents since 2014. The primary object of the company was the trading of commodities. Upon scrutiny, it was confirmed that the company was solely advancing loans to its sister concerns, violating section 186 of the Act. Hence, prima facie company seemed to be a shell company engaged in siphoning off money and tax evasion. Additionally, the company had failed to establish itself as a going concern, as a result, NCLT refused to allow restoration of its name.

Conclusion

This article provides a bird’s eye view of the law relating to the striking off of companies. It describes the concept of ‘strike off’ as a viable alternative for closure of the business. Further delving into the legal implications post a strike off and analyzing the scope of reviving struck off companies if necessary and avoiding misuse of the provision. Strike off was brought into force to encourage ease of conducting business with the option of exiting the market in a simplified manner if necessary. Time and again, the tribunal has allowed the revival of dead companies, contingent on the willingness of the companies, its ability to sustain its operations, and compliance with the statutory requirements to promote the longevity of healthy companies. At the same time, it has been cautious in screening those companies that are potential defrauders. Hence, providing a holistic environment for genuine businesses to thrive in the markets.