[Vaibhav Gupta and Vaibhav Nishad are students at Gujarat National Law University.]
In the recent Ministry of Corporate Affairs’ (MCA) crackdown on shell companies, striking down many companies in the process, has created a spurt to burnish the operation of these non-functional companies. Under this haste to clamp down on shell companies, it has also been observed that some cases like that of M/s Sanmati Agrizone Private Limited v. Registrar of Companies becomes a matter of discrete, where the Registrar of Companies (ROC) unilaterally struck off the name of the company without following the due process as provided under the law.
The author analyzes how the action of the ROC of striking down the name of the company without notice has raised concerns about the possible erosion of the fundamental due process as laid down in Section 248 of the Companies Act 2013. Further, the company law tribunals, by endorsing this regulatory action, have potentially failed to abide by the fundamental principles of natural justice.
Facts of the Case
The case involves M/s Sanmati Agrizone Private Limited, a company incorporated under the Companies Act 2013. Due to financial instability, the company missed filing financial statements with the ROC for two consecutive financial years post FY 2015-16. The management later realized this oversight and intended to rectify it. While in the process of preparing documents for filing with the ROC in July 2020, the company became aware of its name being struck off. Subsequently, the company filed an appeal before the NCLT Delhi bench under Section 252 of the Act. NCLT upheld the decision of ROC by stating that the company was not in operation or carrying out its business at the time it was struck off.
This decision was further appealed by Sanmati Agrizone to the NCLAT under Section 421 of the Act, contending that the decision was arbitrary and against the principles of natural justice, as no notice was served to the company by the ROC. It was also contended that the company was incurring the cost on employees, signifying that the company was working. This appeal was also dismissed with the Bench giving the observation that the company in its financial statements has “zero revenue” for the preceding two years and therefore, the company was neither in operation nor carrying out its business at the time of its name was struck off. However, crucially, Sanmati Agrizone's contention regarding the notice was left unaddressed.
Due Process and the Precedents Thereof
Section 248 (1)(c) of the Companies Act 2013 enables the ROC to strike off the name of a company from the register, if it has not conducted business for two consecutive financial years and has not applied for dormant company status.
On meeting the aforesaid conditions, Section 248 to be read with The Companies (Removal of Name of Companies from the Register of Companies) Rules 2016, provides for the ROC to issue a formal notice (show cause notice) vide form STK 1 to both the company and its directors. This notice conveys the ROC’s intent to remove the company’s name from the Register of Companies. Within thirty days of receipt of such notice, the defaulting company may provide justifications as to why the strike-off should not occur and at the same time notice also provides a window for the company to take corrective measures to avert the impending removal.
The significance of notice in adjudicatory procedure was examined by the Hon’ble Supreme Court in Gorkha Security Services v. Government of NCT of Delhi, where the apex court emphasised that for significant and adverse executive actions such as debarring or blacklisting orders, a show cause notice to the affected party is necessary.
Additionally, the Patna High Court, in Sitaram Singh Construction Private Limited v. Union of India and Another emphasised on the importance of adhering to due process. Section 560 of the Companies Act 1956 mandates the ROC to issue three notices before striking off a company, and the court held the omission of the third notice led the decision of striking off to be arbitrary and ruled in favour of the company. Furthermore, NCLT Delhi in Poly Auto System v. RoC Delhi similarly gave importance to due process, where due to lack of proper notice, the tribunal directed the ROC to restore the company’s name in the register without deciding on merits of the arguments of ROC.
From the outlined procedure and the judicial precedents thereto, it can be said that the ROC is authorised to proceed with the strike-off of a company only when the company is unable to present substantial evidence against the action or acts to rectify the cause. However, the provision does not enable ROC to adjudicate on non-compliance ex-parte, rather provide for an opportunity of hearing as well as rectification, which signifies the nature of provision and the powers conferred to ROC as non-punitive and tilted in favour of company’s existence.
Tribunal Oversight: Addressing Procedural Deficiencies
This judgement in Sanmati Agrizone Private Limited seems to have expanded the scope of Section 248(1) which leads to expansion of power of the ROC to the extent where it may strike-off any company without prior notice in an arbitrary manner. In such a scenario, the defaulting company may itself not be aware of the fact that it does not remain a registered “company” anymore.
Furthermore, the decision of strike-off can be equated to a “death sentence” for the company by the ROC as once the company is struck down it cannot operate anymore as per Section 250 of the Act. Therefore, to avoid such situations, the ROC is mandated to follow the due process by sending notice to the company intending to strike-off its name from the registrar and provide them with the opportunity to make their representations to the ROC. This, in turn, serves as the essential tenet of the principles of natural justice i.e., audi alteram partem, which asserts that every individual has the right to be heard and defend themselves before any action is taken against them. In the recent case of State Bank of India v. Rajesh Agarwal, the Supreme Court reaffirmed the significance of audi alteram partem in India.
In the landmark case of State of Orissa v. Dr Binapani, the Supreme Court emphasised that administrative orders with civil consequences must align with the principles of natural justice. Additionally, it highlighted the imperative nature of affording the defaulting party an opportunity of being heard prior to the execution of any action. This essential right enables party to address any shortcomings and engage with the presented evidence against them.
The principle of audi alteram partem is a non-negotiating principle, and in no case can ROC justify non-issuance of notice on any ground. This same has been held by the Supreme Court in Olga Tellis v. Bombay Municipal Corporation, where it was observed that an action without affording the defaulting party with an opportunity to be heard cannot be justified on the mere ground that the affected party would have no explanation even if hearing is afforded by serving notice.
In the present case, the removal of the company’s name by the ROC, without issuing any notice to the company and affording it with “an opportunity of being heard”, unequivocally violates the essence of audi alteram partem, making the order by ROC liable to be declared illegal on account of fundamental breach of the principles of natural justice. Regrettably, both the NCLT and the NCLAT have ignored the company’s contention that the order of ROC is arbitrary and in violation of the principles of natural justice.
Conclusion
The case of M/s Sanmati Agrizone Private Limited serves as a poignant reminder of the intricate interplay between regulatory imperatives and the sacrosanct principles of due process and natural justice within the realm of corporate governance. While the Ministry of Corporate Affairs’ vigilance in addressing dormant companies is commendable, it is imperative that the spirit of the law, which upholds fairness and transparency, prevails in every instance. The substantive provisions along with the jurisprudential evolution clearly demonstrates the significance of notice and the principle of “opportunity to be heard”.
The Sanmati Agrizone case raises pertinent questions about the extent of regulatory authority, urging a judicious balance that safeguards the interests of all stakeholders involved. As the corporate legal landscape continues to evolve, it remains incumbent upon regulatory bodies and judicial authorities to navigate this terrain with unwavering commitment to both the letter and the spirit of the law, ensuring that the principles of due process and natural justice remain inviolate pillars of corporate governance in India.