Recently, Rajya Sabha passed the Companies (Amendment) Bill, 2019 ("Amendment") , which seeks to amend the Companies Act 2013 ("Act") and replace the Ordinance promulgated by the Ministry in February 2019. Amongst, other things one of the notable amendments is the amendment to Section 248 of the Act with an objective to keep a check on "shell companies". Previously also the Government along with Ministry of Corporate Affairs has taken several noteworthy steps to remove shell Companies from the system. To quote the Hon'ble Finance Minister, Nirmala Sitharaman, "four lakh companies have so far been de-registered as they did not file financial results for two years and did not even apply for dormant status."
Section 248 (Power of Registrar to remove name of company from register of companies) was notified by the Ministry on 26th December 2016. Section 248(1) of the Act empowers the Registrar of Companies ("RoC") to remove the name of company from the register of companies, if it has reasonable cause to believe that it falls under one of the three specified situations. Now, with the Amendment, Section 248(1) has been modified to include two additional grounds. The purpose of the amendment is also to codify and incorporate the consequences of the new provisions under Section 10A and 12 of the Act inserted vide Companies (Amendment) Ordinance, 2018.
Set out below is a quick summary of the existing and revised positions for your ready reference:
| Head | Companies Act, 2013 | Companies (Amendment) Bill, 2019 | Remarks |
| Grounds to remove name from the Register of Companies. | Section 248 | Section 36 | |
| (a) a company has failed to commence its business within one year of its incorporation; | No Change | -- | |
| (b) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay within a period of one hundred and eighty days from the date of incorporation of a company and a declaration under sub-section (1) of section 11 to this effect has not been filed within one hundred and eighty days of its incorporation; or | No Change | Section 11 of the Act was omitted by the Companies (Amendment) Act, 2015. Therefore, the existing subsection (b) is futile and should be removed. | |
| (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, | Minor clerical tweak- (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;or | ||
| -- | New sub-clause added- (d) the subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company and a declaration to this effect has not been filed within one hundred and eighty days of its incorporation under sub-section (1) of section 10A; or | Section 10 A inserted by
Companies (Amendment) Ordinance, 2018 replaces and serves the
purpose of Section 11. In terms of Section 10 A(1), company incorporated after the commencement of the Companies (Amendment) Ordinance, 2019 and having a share capital shall not commence any business or exercise any borrowing powers unless- (a) a declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company with the RoC that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; and (b) The company has filed with the RoC a verification of its registered office as provided in Section 12. |
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| -- | New sub-clause added- (e) the company is not carrying on any business or operations, as revealed after the physical verification carried out under sub-section (9) of section 12. | In terms of Section 12(9) o the Act (inserted by Companies (Amendment) Ordinance, 2018), if the ROC has a reasonable cause to believe that the company is not carrying on any business or operations, he may cause a physical verification of the registered office of the company. |
ARA LAW View: The Government is consistently making efforts and taking serious steps to track all the existing shell companies in the system and deter the players from using shell company as a devise to evade any tax in the name of "tax efficient structuring". Going by the reported figures, approximately 226,166 companies were identified as "shell companies" and removed from the register of companies in the last financial only basis the non compliance in filing of Financial Statements or Annual Returns for a continuous period of two or more financial years.
The current Amendment is a step ahead in the same direction which essentially tries to avoid the practise of "dummy" registered offices of the non-operating companies. To crack down on shell companies, it has now been made mandatory to ensure that the company is carrying out its business/ operations from the registered office. Without undermining the underlying objective of the Amendment, the implementation of the newly added ground (specifically in relation to physical verification) may lead to unnecessary hassles for the genuine corporates which operate from the locations other than the registered office. Also, the applicability of the same to the new generations "e-offices" is dubious. Ideally, any serious consequence like striking off the name should trigger only upon complete verification and proof (beyond doubt) of nonoperation status of the company vide certain objective criteria.
August 2019
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
