India: Guide To Fast Track Closure Of The Companies In India

Last Updated: 8 August 2019
Article by SKP  

Comprehensive provisions have been made in the Companies Act, 2013 (hereinafter referred to as 'Act') with regard to the removal of names of companies from the register of companies. This is popularly known as Fast Track Exit/Closure or Strike-off of a company's name from the register of companies, maintained by the Registrar having the effect of dissolving the company.

A Company comes into existence by way of incorporation and enjoys abundant rights under the status of an artificial person given to it by the Law. When a company is registered on incorporation, logically, there should be a provision for its deregistration or closure other than by way of winding up, for reasons such as discontinuation of business in order to dissolve the company.

Provisions of Section 248 of the Act provide for the removal of the name of the company from the register of companies, allowing a company to deregister itself otherwise than by way of winding up. Provision for deregistration by way of removal of the name has been in existence for a long time since Companies Act, 1913 and continued to remain so under the Act under Section 248. The difference between provisions of Companies Act, 1913 and 1956 vis-à-vis the Act is albeit under erstwhile Acts only the Registrar had the powers to remove the name of a company if he was convinced that the company had not been in operation or had not been carrying on the business.

Unlike erstwhile Companies Act, where only the Registrar had suo-moto powers to remove the name of a company from the register of companies, Section 248 of the Act authorizes a company to apply by themselves for removal of the name. Therefore, this provides an opportunity to the defunct or nonoperational companies to get their names struck off from the records without having to follow the extensive procedure of winding up.

Things to know about Fast Track Closure

In the below para, we are discussing various aspects of Strike Off or Fast Track Exit or Closure of a Company

The Registrar has the suo-moto powers to remove the name of a company if,

  • It has not been carrying on the business for two immediately preceding financial years and has not applied for treating it as a dormant company;
  • or

  • It has failed to commence business within one year of incorporation.

However, before doing so, Registrar needs to send a notice to the company of his intention to remove the name of the company within a period of 30 days from the date of the notice. The Registrar has recently taken this rigorous step in a massive clean up of inactive companies to curb the black money menace.

Right of a company to apply for removal of name

As per Section 248(2) of the Act, a company can also file an application before the Registrar for removal of its name from the register on the grounds specified above. However, for doing so, it has to establish that it has no liability and has obtained the approval of shareholders by way of a special resolution. On receipt of such application, the Registrar shall cause to publish the public notice to that effect. Certain companies, however, are prohibited from making an application for removal of the name as specified in Section 249 of the Act.

Dissolution of the company

On expiry of 30 days of the public notice issued as aforesaid unless the contrary is shown by the company, the Registrar will remove the name of the company from the register and publish the notice in the official gazette to that effect. On such publication by the Registrar, the company shall stand dissolved. The effect of dissolution is that the company shall cease to operate as a company and certificate of incorporation is deemed to have been canceled except for the purpose of realizing the amount due to the company and for the payment or discharge of the liabilities or obligations of the company. The effect of dissolution under this section can be understood in view of a couple of judicial pronouncement wherein it was held that there was no use to continue the criminal proceedings against the company as struck-off from register [Khushi Exports P Ltd. Vs. State of Gujarat, (2006) 130 Com Cases 457:(2006) 68 SCL 266 (Guj).]; where proceedings are commenced by a company which has been struck off the register, the proper procedure for the court to follow is to stay the proceedings pending an application to have the company restored to the register [Steans Fashions Ltd. Vs. Legal and General Assurance Society Ltd. (1995) 1 BCLC 332 (CA)].

Discharge of liabilities

The provisions in Section 248(6) of the Act seeks to ensure that the liabilities and obligations of the company are met and that notwithstanding the removal of the name of the company, the assets, etc. are made available for meeting the liabilities of the company. Having said that, the procedure being followed by the Registrar seems contrary to the provision of Section 248(6) of the Act as Registrar mandates to file a statement of account showing no assets and liabilities on the balance sheet. However, the statutory provision as provided in Section 248(6) of the Act is explicit which envisage that there could be assets and liabilities in respect of the company even after removal of the name from the register.

Personal liability of directors, etc.

Section 248 of the Act further provides that the personal liability, if any, of every director, manager or another officer who was exercising the power of management and every member of the company shall continue and may be enforced as if the company has not been dissolved. It appears from the literal reading of the provision that it is the personal liability of the aforesaid persons towards outsiders, which can be enforced against them. To this effect, the rules made under the section seeks to obtain an indemnity bond from all the directors of the company.

In this regard, reference is made to Section 179 of the Income Tax Act, 1961, which imposes joint and several liabilities on every director of a private company for recovery of tax dues, should the same not be recoverable from the hands of the company. Upon the section becoming applicable, the directors would step into the shoes of the company as an Assessee for the purposes of payment of all taxes due under the Income Tax Act from the company. Section 179 was amended with effect from 1 October 1975 to include all companies and not just companies that are wound up. It has been held that the provisions of Section 179 of the Income Tax Act, 1961, cannot be liberally interpreted so as to include companies which have become defunct without being wound up (removal of name does not entail winding up of the company) [G. Venkatasubbaiah Vs. Tax Recovery Officer, Vijaywada, 1973 Tax LR 702 (AP); Yeshwant Raghunath Bhide Vs. ITO, (1974) 44 Com Cases 290 (Mys)]. Although this question remains ambiguous, in the wake of recent clean up exercise carried out by the Registrar under which lakhs of companies were removed from the register, the Income Tax Department issued a circular advising its officers to restore the company and initiate the tax recovery proceedings in case of any tax demands or issues. In one of the cases, the Mumbai Bench of the National Company Law Tribunal (NCLT) has allowed restoration of the company, which purportedly rushed the application for removal of name to avoid reassessment proceedings, on the application made by the Income Tax Department. The Hon'ble Tribunal allowed restoration to safeguard the interest of the Department. In view of the draconian tax recovery provision, one has to critically examine availing removal of name option as it fastens liability on the directors. Pari materia provisions are there under the Goods and Service Tax Act and Customs Act as well.

What happens to the assets of the Company

Another unsettled issue is about what happens to the assets of the company who ceased to carry on the business and prefers the application to the Registrar for removal of its name. The company either suo-moto removed by the Registrar or on an application made by the company at its volition may have any assets vested in it, and in that case how to deal with such assets. Winding up entails the distribution of assets whereas Section 352(2) and 352(7) of the Act provides for the distribution of unclaimed assets, but that is applicable only in case of winding up. Similar is the case under Insolvency and Bankruptcy Code, 2016. However, Chapter XVII for the removal of names of companies does not provide explicit provision in this regard. Unlike provisions under UK Companies Act, 2006 which provides distribution of assets up to a certain value in case of removal of the name of the company and remaining assets vested in the company shall become bona vacantia, and the Act has incorporated no such provision. But the laws of India provide that the property of an estate dying without leaving lawful heirs passes to the government by escheat or as bona vacantia. Whether it can be inferred that the property of a dissolved company shall also pass to the government by escheat or as bona vacantia? Although, the sections in aforesaid Chapter at various places indicate that the company can remain with the assets which shall be made available for payment or discharge of liabilities and obligations even after the date of the order of removing the name or that the company deemed to be dissolved except for the purpose of realizing the amount due to it or payment of liability, the procedure with the Registrar does not seem in consonance with this provision as the Registrar requires balance sheet with no assets and liabilities duly certified by the chartered accountant affirmed by the majority directors.

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