The discussion on the existence of non-operative companies or shell companies is making the rounds of corporates, with special emphasis on government departments on curing the malady.
With the widespread epidemic of non-operative and shell companies in the Indian corporate environment, the Registrar of Companies (RoC) has come up with a well thought out cure. We are waiting to see what will be the next step of the RoC against the response being submitted by the companies, which should more or less be over by the end of this month as the companies have been given just 15 days to respond to the show-cause notices (SCNs). In effect, the RoC has turned the tables in the game. Better late than never.
The Finance Minister had clearly indicated that action will be initiated against companies which have been created for the purpose of circulating black money and are not carrying on any business. It now seems that RoCs all over the country have given the non-operative companies (NOC) an ultimatum to either make the compliances and start doing the business activity for which they were formed, or else pack up.
The RoCs have published a list of NOCs under their jurisdiction which have failed to comply with the provisions of the Act. These NOCs have to either submit their reasons for such failure or get struck off from the Companies Register maintained by the RoCs.
Provisions of law
248. (1) Where the Registrar has reasonable cause to believe that—
(b) [Omitted] (Omitted by Companies (Amendment) Act,2015 and is effective from 29th May, 2015).
(c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455,
he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.
(6) The Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company:
Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.
(7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved.
Bold step taken by the RoCs
Pursuant to the power given under this section, the RoCs have taken the bold step of sending out notices to such companies. Overall the number is over 2.54 lakh companies as per the list available. The list of ROCs of Kanpur, Uttarakhand and Kashmir are not available on the website. From the data provided, it appears that Mumbai has the highest number of NOCs, at 71,530, followed by Delhi (53,312) and Hyderabad (40,200). Bangalore, Chennai, Kolkata and Chandigarh also contribute to a massive number of NOCs, with 15-20,000 each.
Of the total of over nine lakh of companies registered in India, around 30% are NOCs. The action initiated will drastically bring down the number of companies registered in India, but will however raise concerns over the sudden action of the RoCs. While the action, brought in so late, is still commendable, the moot question is why were these companies allowed to be kept in Register of Companies for so long?
With the issue of the show-cause notices, companies are rushing to professionals to seek advice. If the companies accept their default and agree to being struck off the register, the directors shall be held liable for the non-compliances made so far. On the other hand, if someone wants to revive the company, the costs will he be huge, with no assurance on the prospects of the company.
Fate of creditors and stakeholders
What will be the fate of the creditors with this move by the government? What will be the consequences for the NOCs if their names are removed by the ROC from its records?
However, if the companies are struck off what happens to the dues outstanding towards creditors, employees, labour, etc? The only way to claim the dues from the companies will be to revive the company u/s 252 (3) of the Act which reads as follows:
“252 (3) If a company, or any member or creditor or workman thereof feels aggrieved by the company having its name struck off from the register of companies, the Tribunal on an application made by the company, member, creditor or workman before the expiry of twenty years from the publication in the Official Gazette of the notice under sub-section (5) of section 248 may, if satisfied that the company was, at the time of its name being struck off, carrying on business or in operation or otherwise it is just that the name of the company be restored to the register of companies, order the name of the company to be restored to the register of companies, and the Tribunal may, by the order, give such other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off from the register of companies.”
This means that such aggrieved persons shall have 20 years to initiate action for recovery of their outstanding dues against the companies before the Tribunal. India is already burdened with pending litigation running into lakhs. Reviving a company in such a scenario will be a daunting task. However, the RoC, under sub-section (6) and (7) of Section 248, is entrusted with a responsibility of satisfying himself that the companies being struck off are making arrangements for realisation of the money due to them and for discharge of their liabilities.
(Dheeraj Kumar Sharma works as Associate at Vinod Kothari & Company)