Fri. Apr 23rd, 2021

The MCA’s Drive Against Non-Operative Companies

7 min read

[Guest post by Dheeraj Kumar Sharma, who is an Associate at Vinod Kothari & Co.]IntroductionThe discussion on the existence of non-operative companies is garnering the attention of the corporate sector with special emphasis from various regulatory arms in addressing issues pertaining to such companies. The Government had clearly indicated that actions will be initiated against companies which have been strictly formed for purposes such as money laundering and are not carrying any business activity. It now seems that the Registrar of Companies (RoCs) all over the country have given such non-operative companies an ultimatum to either ensure various compliances and commenced the business activity for which they were formed or alternatively to cease existence. In accordance with a long list of companies that have been issued show cause notices (SCNs) under section 248(1) of the Companies Act, 2013 (the “Act”), it is evident that every RoC has published a list of non-operative companies (‘NOCs’) under their jurisdiction which have failed to comply with the provisions of the Act. These NOCs must either submit their reasons for such failure or to get struck off from the register of companies being maintained by the RoCs.  Provisions of law248. (1) Where the Registrar has reasonable cause to believe that—(a) a company has failed to commence its business within one year of its incorporation;XXX(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,he shall send a notice to the company and all the directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice. XXX(6) The Registrar, before passing an order under sub-section (5), shall satisfy himself that sufficient provision has been made for the realisation of all amount due to the company and for the payment or discharge of its liabilities and obligations by the company within a reasonable time and, if necessary, obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company:Provided that notwithstanding the undertakings referred to in this sub-section, the assets of the company shall be made available for the payment or discharge of all its liabilities and obligations even after the date of the order removing the name of the company from the register of companies.(7) The liability, if any, of every director, manager or other officer who was exercising any power of management, and of every member of the company dissolved under sub-section (5), shall continue and may be enforced as if the company had not been dissolved.XXXBold step taken by the RoCsPursuant to the power given under this section, the RoCs have taken a bold step to send out notices to such companies on a large scale. Overall, the number has crossed 2,53,752 as per the list available (bearing in mind that the list from ROCs such as Kanpur, Uttarakhand, Kashmir, etc. are not available yet on the website). From the data provided, it appears that Mumbai has the highest number of NOCs with 71,530 being trailed by Delhi with 53,312 and followed by Hyderabad with 40,200 NOCs. Bangalore, Chennai, Kolkata and Chandigarh also contribute to a massive number of NOCs with approximately 15,000 to 20,000 in each of them. Curiously enough, until now the more prominent RoCs reflect the highest number of NOCs registered with them. All of this collectively shows that out of a total of the approximately 9 to 10 lacs companies registered in India, nearly 30% are NOCs. The action initiated will drastically bring down the number of companies registered in India, but will however raise concerns over the sudden step taken by the RoCs. While the step is a commendable one, the moot question is why were these companies allowed to be kept in register of companies for such a long period time? Should there not be a system in place to detect companies which fail to comply with provisions of the Act at an early stage without having the RoC to wait until it is too late? This step has sent out an alarming message to those promoter/subscribers who incorporated companies for mere circulation of funds by creating layers of companies and making it difficult to track and trace the actual promoters/beneficial owners. With these SCNs being issued, companies are seeking professional advice to chalk out a suitable response. If companies accept their default and agree to being struck off, then the directors shall be held liable for the non-compliances thus far; on the other hand, if a promoter/subscriber wishes to revive the company, then the burden of resolving the defaults shall be nothing short of incurring enormous expenses without being able to assess the feasibility as to the prospects of the company.A critical question mark on the fate of creditors and other stakeholdersWith the SCNs flowing in, most of the NOCs will likely opt for a strike off, either willingly or unwillingly at the hands of the RoCs, but the question posed leaves us with an important aspect to consider, namely the fate of the creditors, stakeholders and others holding any interest in such NOCs. The SCNs issued not only command the attention of the companies to whom they have been issued, but also of the creditors, employees and other stakeholders of such NOCs. With the SCNs being significant for the interest of such creditors and workmen, they are also disseminated through newspapers and website of the Ministry of Corporate Affairs (“MCA”) so that the concerned stakeholders may take a pro-active step in this direction as there might be sumsof money owed to them by such NOCs. Moreover, there could be contractual obligations with such companies that might turn into a long battle of recovery or settlement once the RoC strikes the company off the register. Therefore, it is advisable for all the stakeholders to check these lists uploaded by the MCA on its website for initiating necessary actions. However, if somehow the relevant stakeholders miss out on the opportunity to recover their dues and such NOCs are struck off without repaying the dues to creditors, employees, etc. then the only way thereafter to claim money from such NOCs is by way of revival of the company under section 252(3) of the Act which reads as follows: 252 (3) If a company, or any member or creditor or workman thereof feels aggrieved by the company having its name struck off from the register of companies, the Tribunal on an application made by the company, member, creditor or workman before the expiry of twenty years from the publication in the Official Gazette of the notice under sub-section (5) of section 248 may, if satisfied that the company was, at the time of its name being struck off, carrying on business or in operation or otherwise it is just that the name of the company be restored to the register of companies, order the name of the company to be restored to the register of companies, and the Tribunal may, by the order, give such other directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off from the register of companies.This means that such aggrieved persons shall have a time limit of 20 years to initiate action for recovery of their outstanding dues against the companies before the National Company Law Tribunal. The said period is undoubtedly long for the aggrieved parties to initiate action to revive the company, but given the overburdened court system in India, the ability to succeed in making a timely recovery is not beyond doubt. However, the RoCs under sub-section (6) and (7) of Section 248 are entrusted with a responsibility of satisfying themselves that the companies being struck off are making proper arrangements for realization of all amounts due to the them and for the payment or discharge of their liabilities and obligations. For this purpose, if deemed necessary and just, the RoCs shall obtain suitable undertakings from the managing directors or from other persons in-charge of the management. These may provide assurances up to a reasonable extent to the creditors, employees, government authorities, and other stakeholders, but they will always carry with them a great deal of uncertainty.  Hence, it is advisable for all the concerned stakeholders to be vigilant and aware of the current operations of such NOCs and take prudent steps beforehand.   ConclusionWith the widespread presence of non-operative and bogus companies in the Indian corporate environment, the ROCs have come up with a well devised plan to address the issue. At present, it would be necessary to await the next step of the ROCs against the responses being submitted by the companies, which have been given merely 15 days’ time to respond to the SCNs. In the end, the RoC’s, although belated, are indeed necessary.- Dheeraj Kumar Sharma

Source: Corporate

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