Corporate clean-up: Bonafide firms can rise from the ashes

By Kartik Jain

Few months back, various registrars of companies struck off over 2 lakh companies in all for not carrying out any business operations. This action was a part of the government’s overall initiative of corporate clean-up and to curb tax evasion, money laundering, and to strengthen the norms for corporate governance in India.

In addition, more than three lakh directors of various companies were also disqualified for failing to comply with regulatory requirements of undertaking certain statutory filings. Some of these disqualified directors were also associated with the struck-off companies. As a sequel to the aforesaid efforts, bank account operations of all such struck off companies were restricted.

Usually, the striking-off method to dissolve a company is used when the company has either failed to commence its business for which it was incorporated or has lost its substratum and the long process of winding up is not required.

In which case, the registrar has the power to strike off the name of the company on its own or on an application by the relevant company after following the procedures laid down under the Companies Act, 2013. As a result of striking off the name of the company, the company gets dissolved. However, the liabilities or obligations of the company (if any) may be enforced against its directors, managers or other officers even after its name is struck off from the statutory registers.

While on the one hand, such actions of the government have led to identification and closure of various defunct companies or shell companies, on the other hand, it has also affected various bonafide/genuine businesses, which missed out on their statutory filings for one reason or the other.

In case a company falls under the latter category and is seeking to continue with its genuine business operations, it may take recourse under provisions of the Companies Act. The Companies Act permits any person who is aggrieved by the order of registrar to apply to the National Company Law Tribunal (which earlier used to be the high court having relevant jurisdiction) for restoration of name of the company within a period of three years from the date of the registrar’s order.

For obtaining an order of restoration, the applicant is required to justify before the tribunal that the company has been carrying out genuine business operations and that the grounds on which the registrar’s order was passed do not exist. In addition, the Registrar may also on its own, approach the tribunal for restoration of name of such company within three years in case it believes that name of the company was struck off either inadvertently or on the basis of incorrect information furnished by the company or its directors.

Further, any aggrieved company, member, creditor or workman may also apply to the tribunal for seeking a restoration order before the expiry of twenty years from the date of publication of the registrar’s order on the grounds discussed below.

After this massive striking-off of the names of the companies from statutory registers, various companies had approached the tribunal for restoration of its name. While dealing with these cases, the tribunals have allowed restoration of the company where the company has been able to establish and satisfy the tribunal that it was at the time of its name being struck off, carrying on business (or was in operation) and have only missed out on filing the annual returns and balance sheets with the registrar.

The tribunal has looked into these matters on a case-to-case basis. In order to establish that a company is carrying out bona fide business operations, Tribunal has appreciated evidence in the form of: (i) details of salary payments to its employees; (ii) provision of services to its clientele and receiving payments thereof; (iii) availing services from various agencies; (iv) lease documents for office space for running its operation; (v) reflection of assets in its books of accounts; (vi) reflection of turnover in its books of accounts; (vii) income tax/ service tax filings; (viii) purchase orders; (ix) bank statements; (x) TDS returns; (xi) software installation certificate; (xii) electricity bill, etc. It is pertinent to mention that the above factors may not work on a standalone basis but a combination of them which satisfies the Tribunal of existence of operations of the company are being taken into account.

While ordering restoration of the name of the company, in many a cases, the tribunal has also acknowledged that there was no reasonable explanation as to why these companies have not filed its annual returns and balance sheets before the registrars and the same was a serious lapse on the part of the companies which resulted in triggering of the whole process. Accordingly, the tribunals have also levied fines on such companies, along with the restoration order.

In addition to levying fines, in certain cases, the tribunal has also made the restoration order conditional upon the company filing all the pending statutory returns along with the fees as required under the Companies Act, filing of all the income tax returns. Further, in cases where the bank accounts of the company were frozen by the department of financial services, the tribunal has ordered that the company would be entitled to operate its bank account only after obtaining clearance from the department.

The tribunal seems very particular about the documentation and information provided by the applicant companies as part of its restoration application so that the government’s crackdown on shell companies is not jeopardized by allowing revival of non-operative companies.

Upon obtaining the restoration order and undertaking certain procedural reporting formalities, the registrar will restore the name of the company on the register of the companies and also issue a fresh certificate of incorporation. Thereafter, the company would be deemed to have come back on the register as if it was never struck off. The restoration, as and when it happens shall be reflected by change in the status of the company from ‘struck off’ to ‘active’.

Recently, by way of a written reply to a question raised in Lok Sabha, the government issued a statement to restrict the struck off companies

from using, operating, transferring or alienating its assets or properties till they are restored.

Also, in the last week of December, 2017, the government gave one- time opportunity to the defaulting companies and their directors who were disqualified few months back by introducing the Condonation of Delay Scheme, 2018 and permitting them to comply with statutory filing requirements by temporarily activating the DIN of disqualified directors. However, as of now the said scheme is not available to struck off companies. If the struck-off companies or their directors want to avail the benefit of this scheme, then they will have to first obtain a restoration order from the tribunal by following the statutory process explained in this article.

While this step of the government towards crack down of shell or defunct companies has set a good tone in the corporate world, it is too soon to predict all the outcomes and their outreach. It will be interesting to see how many companies actually approach the tribunal to seek a restoration order in next few years and how many of them ultimately manage to obtain it. In any case, it seems that this step could at least act as a severe deterrent for companies and their directors from missing out on regular statutory filing and facing the consequent trouble of this nature.

Kartik Jain is Partner at J. Sagar Associates, Advocates and Solicitors.
Ayushi Pandey, Associate at J. Sagar Associates, also contributed to this article. Views are personal)

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