The MCA’s Drive Against Non-Operative Companies

[Guest
post by Dheeraj Kumar Sharma, who is
an Associate at Vinod Kothari & Co.]
Introduction
The 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 law
248.
(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.
XXX
Bold step taken by the RoCs
Pursuant 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 stakeholders
With 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 sums

of 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.   
Conclusion
With 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

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

3 comments

  • as you written in your blog that "professional advice to chalk out a suitable response". what will be the suitable response in the both cases, 1. the company do want strike off its name itself; or 2. company want to revive……

    seeking a best advise from you side Mr. Dheeraj

  • OFFHAND

    The write-up makes for a timely reading. In that, a mention has been made of , besides 'non-operative' companies, so called shell- companies known or suspected to have been operating simply with the object of engaging selves in the loosely termed, highly objectionable, activity of 'money laundering'.
    What must be of added interest , and real concern, is the ongoing exercise named FATCA, under which the government has, for its own reasons, entrusted the principal responsibility to banking and other institutions, comprehensively referred to as 'FRIs.

    (May have more to share !)

  • The issue of nearly 30% non-operative companies still registered with ROC as articulated in the above article may be an indicator of riskier part of Indian Corporate world.

    On a cursory glance of notices issued by ROC, it seems that most of them are private companies with few exceptions. Further on random check on ZAUBACORP it seems that these entities have failed to file returns regularly and mostly not filed during the recent past financial years. So my guess is that they may be falling under the second part of S.248 i.e. not carrying on any business or operation for a period of two immediately preceding financial years.

    The fact that entities have failed to file returns shows that they are non-operative or might have adopted a care-free approach to compliance. There might also be companies having genuine reasons which may demand a lenient consideration. Whatever the case may be, it is clear that ROC is trying to mitigate the huge regulatory risk of allowing these companies under category “Active”. Corporate “swatchata” is a welcome move. The clean-up will add to overall health of corporate world.

    Companies falling under such categories may explore opportunities to turn to be a compliant company or get them declared to be dormant as notice provides 30 days window. If striking down is one thing, it may also be open for ROC to take steps for failure to file returns under S.92 r/w S.403. As pointed out in article above, if there are objections from depositors/investors/creditors etc. the process may get entangled leading to delay but may not affect the stand of ROC, as the S.248 envisages addressing the issue of liability. Thumbs-up ROC!

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