Under the erstwhile Companies Act, 1956, one of the quickest ways to wind up a company that was non-operational over a period of time was through a process called the fast track exit (FTE) mechanism. The government introduced FTE on 3 July 2011 to provide an opportunity for owners of defunct companies to get their names struck off the register without getting involved in the lengthy process of winding them up.
After the Companies Act, 2013, came into effect, these exit provisions were replaced by the new act through a process called removal of names of companies from register.
The new act provides for two modes of strike off being through the Registrar of Companies (RoC) itself and by way of filing application by the company. The procedures to be followed to strike off the company’s name from the RoC and the categories of companies that cannot be removed from the RoC are also provided under the new act.
Where any legal proceedings are pending, the new act prohibits the companies to file an application for striking off. However, there is an exception to this. If the pending prosecutions are only for non-filing of annual returns and balance sheet and the company has filed a compounding application, then the company can make an application for striking off. The steps for final strike off the company’s name will be initiated only after disposal of compounding application by the competent authority.
Under the new act there is a requirement to pass a special resolution and obtain the consent of 3/4ths members to proceed for strike off. Earlier, the requirement was to pass a board resolution to strike off the company. In that sense, there is an additional requirement to convene the shareholders and pass a special resolution prior to the striking-off formalities.
Once the company is notified as dissolved, it will cease to operate as a company on and from the dissolution date. Here it may be noted that dissolution will not exonerate the company (or for that matter a director, manager, officer involved in its management) from realizing the amount due to the company and for the payment or discharge of liabilities or obligations. Such liabilities shall continue and may be enforced as if it had not been dissolved.
In addition to provisions dealing with the discharge of liabilities, there are provisions to pass an order for the restoration of a company that has been struck off by the RoC. The restoration order can be passed based on appeal by any aggrieved person or where the tribunal is of the opinion that the removal of the company’s name is not justified. Even where the RoC is of the opinion that the name of the company has been struck off from the register either inadvertently or on the basis of incorrect information furnished by the company, such restoration order can be passed.
There are specific penalties prescribed for any contravention of provisions dealing with striking off, besides being punishable for fraud or prosecuted under law if found guilty.
The obligations of the company and its directors to discharge their liabilities, the provisions on restoration of the company after it is dissolved and the stringent penalties prescribed under the new act ensure that striking-off provisions are not used as a tool to defraud any person or deceive creditors.
As part of the recent crackdown and clean-up drive, the RoC has been issuing public notices to strike off companies from the register and to dissolve them unless a cause is shown to the contrary, within 30 days from the date of the notice. Despite the short timespan after the new provisions came into effect, about 209,000 companies had been struck off by September 2017 for failing to comply with regulatory requirements.
Considering that the striking-off provisions have far reaching impact on the company, its shareholders and its creditors, the RoC has to comply with the comprehensive procedural obligations before passing the final order, as a “not so firm” approach of the RoC would lead to abrupt conclusion of the company’s operations. It will be interesting to see how the assets and liabilities of the 209,000 companies will be liquidated, the liabilities of the creditors will be factored and settled and also the manner in which the surplus amounts will be dealt with. These companies could also be revived where the need is felt.
Shisham Priyadarshini, Partner and
Amish Shroff, Associate Partner