Strike-off by RoC under Companies Act 2013: An Action Too Harsh on Companies?
[Rupa and Shariba are students at School of Law, Christ (Deemed to be University), Bengaluru.]
‘Striking-off’ means the removal of a company’s name from the register of companies by the Registrar of Companies (RoC). A company does not enjoy legal existence once its name is struck-off from the register of companies. Striking-off occurs either when RoC strikes off a company’s name as per their powers provided under Section 248(1) of the Companies Act 2013 (Act) or when a company voluntarily applies to RoC to be struck off as per Section 248(2) of the Act. While striking off a company on a suo moto basis, the RoC has to comply with Rule 3 of Companies (Removal of Names of Companies from the Register of Companies) Rules 2016, which excludes certain companies from the applicability of strike-off provisions.
In August 2022, the Union Minister of State for Corporate Affairs, Mr. Rao Inderjit Singh, in a written reply to a question in Lok Sabha stated that “4,32,796 companies were struck off during the last five years”. He had also stated that a Special Task Force was set up by the government to look into the issue of 'shell companies' and strike them off. Considering the large number of companies being struck off in the last five years, it is pertinent to understand the reasons behind their strike off. On this account, this article analyses RoC’s suo moto powers to strike off under Section 248(1). Additionally, it traverses through various cases decided by National Company Law Tribunal (NCLT) concerning strike-off and examines if such strike-off provisions are adversely affecting the ease of doing business.
RoC’s Powers to Remove the Company’s Name from Register of Companies
Section 248(1) of the Act lays down conditions under which the RoC can exercise its powers to strike off a company suo moto. First, there must be a reasonable cause to show that a company has not commenced its business within one year of its incorporation. Second, there must be a reasonable cause to show that a company is not operational for 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 of the Act. The RoC, before striking off the name of the company suo moto must send a notice to the directors of the company expressing the intention to strike off the name of the company, thereby giving them a chance to represent themselves with relevant documents. Such notice should also be published in the Official Gazette for public knowledge. Moreover, aggrieved companies can approach the National Company Law Tribunal (NCLT) with an appeal, if they are dissatisfied with RoC’s order.
Appeal to NCLT under Companies Act 2013
Section 252 of the Companies Act 2013 provides for an appeal to the NCLT against an order passed under Section 248 of the Act. If a person is aggrieved by RoC’s order, they can approach the NCLT for restoration of the company’s name in the register of companies, within 3 (three) years from the date of such order. Section 252 of the Act also empowers the RoC to approach the tribunal if the name has been struck off inadvertently. Before the introduction of Act, Section 560 (6) of the Companies Act 1956 (1956 Act) dealt with such appeals. Section 560(6) was limited in its scope as it allowed only the company or the members or the creditors to file an appeal to the court, whereas the applicable law as on date allows any aggrieved person to file an appeal. This ensures that any stakeholder of the company who is dissatisfied by the order of RoC can seek relief.
Under Section 560(6) of the 1956 Act, the RoC had to send another notice to the company if it did not reply within one month from the date of the first notice, this provision was done away within the present law. Accordingly, the 1956 Act gave the companies a better opportunity to be heard. The parties can also appeal to the National Company Law Appellate Tribunal (NCLAT), if they are dissatisfied by the order of the NCLT. The same is open to further appeal under Article 32 and 226 of the Indian Constitution.
Instances Where Companies Were Revived by the Tribunals
In the case of Vikas Sureshbhai Patel v. the Registrar of Companies, Gujarat, when the company failed to file annual financial reports for three consecutive financial years, it received a show cause notice from the RoC, in a reply to which the company’s director requested for three months in order to comply with the filing. However, RoC did not issue any reply and the company was struck off after considering non-filing of annual accounts and annual returns for three years as a ground. The company filed an appeal before the NCLT, which rejected the same and upheld the RoC's decision to strike off. Subsequently, the company approached NCLAT. NCLAT asserted that the main reason for the striking off is the non-filing of financial statements by a non operative company for two immediately preceding years. In this case, the company was in operation, and the default of non-filing of financial statements was curable in nature. Therefore, non-filing of financial statements inadvertently was held to be no ground for striking off the company’s name from the RoC’s records.
In the case of M/s Subh Laxmi Colonizers Private Limited v. ROC, Delhi, the company failed to file financial statements for two years and there was no record of land ownership. On the company's appeal, NCLT did not restore the company’s name. Therefore, the company approached NCLAT. NCLAT held that RoC was only dissatisfied about the company not filing the financial statements and thereby assumed that it was not operational. It also held that such companies are small and their businesses are erratic considering the nature of real estate business, especially during the pandemic. It restored the name of the company under the umbrella of grounds of 'just' after the company pays penalties and decided that RoC is free to take any other legal actions against the company for non-filing of financial statements.
A similar judgment was passed in the case of M.A. Panjwani v. Registrar of Companies and Another by the Delhi High Court, where the petitioner was not a member or creditor according to the requirements of Section 560(6) of the 1956 Act which was necessary to file a case. The petitioner was allotted shares in this case which were later transferred without his consent, the court held that it was ‘just’ to construe that the petitioner was a creditor for the purposes of restoration of the company.
In the case of Deorao Shriram Kalkar and Another v. RoC, although the company’s balance sheet and profit and loss account statements showed that they were unoperational and did not earn any revenuw, the court noted that the company had a fixed deposit with the Bank of Maharashtra and was earning interest and paying income tax. This was seen as sufficient to show that the company was making attempts to be operational and therefore, restored the company. The court also added that the NCLT and the RoC had been incorrect to decide the matter without taking into consideration the company’s response.
Through the cases discussed, it is evident that the RoC, in several instances, has failed to adhere to the condition mentioned in Section 248 of the Act, by virtue of which the companies enjoy a fair opportunity to be heard before their names are struck off. Arguably, this non-adherence has resulted in most companies approaching the NCLAT. Furthermore, when the RoC fails to act on the replies to the notice received from the companies, its decisions fail to conform with the principles of natural justice.
Although India’s rank in ease of doing business according to the World Bank Report has improved to 62 in 2019 from 142 in 2014, several companies continue to be struck off for curable defects. Further, as per a report by XKDR forum on cases decided by NCLT, in the period between 2018 and 2020, 16.67% of the cases involved the restoration of struck-off companies. There are few benches, such as Hyderabad where almost 50% of the cases were related to the revival of struck-off companies.
Adequately addressing strike-off cases may be tedious in view of the NCLT’s existing caseload. It is not only overburdening NCLT but is also a time-consuming process for the companies to restore their companies. Furthermore, as also acknowledged by NCLAT in the case of M/s Subh Laxmi Colonizers Private Limited v. ROC, Delhi, business operations for several entities have been erratic due to the pandemic, and companies deserve another chance to revive their businesses under the grounds of the ‘just’ principle.
Further, instead of directly striking-off the companies without due consideration of their response to the show cause notice, the RoC must give the company another chance to revive its business within a certain period if it is not operational. Making a settlement with the company at the RoC’s level may significantly save time and costs. Given that the Central Government has direct administrative control over the offices of RoC, it is recommended that a separate appellate authority may be appointed under the Central Government’s aegis to hear appeals from aggrieved struck-off companies instead of having them approach the already overburdened NCLT.
Moreover, since Section 248 does not define as to what entails ‘operational business’ and ‘non-operational business,’ different authorities have interpreted the same in a different manner. While the RoC, in many cases, has considered several companies to be non-operational merely on the ground of non-filing of financial statements, thereby striking them off, NCLT and NCLAT have, in many cases, textually interpreted the statute to hold that if a company, while operational, failed to file financial statements, will not amount to being non-operational and therefore, not open to a ‘strike-off’.
Moreover, with a special task force being set up by the Central Government to identify and strike-off shell companies, it becomes imperative to clearly demarcate what constitutes ‘operational’ and ‘non-operational companies. Although the Central Government is well-intended to strike-off shell companies to curb illegal activities, small companies with erratic businesses who make inadvertent mistakes might take the fall in view of the interpretational ambiguity.