Analysis of the Strike-Off Provisions under the Companies Act, 2013

[Utsav Mitra is a 3rd year B.A. L.L.B student from The National Law Institute University, Bhopal]

Strike Off is a method prescribed under sections 248-252 of the Companies Act, 2013 (the “Act”). These provisions have been notified by the Ministry of Corporate Affairs by way of a notification dated 26 December 2016. They provide an opportunity for defunct companies to get their names removed from the records of the Registrar of Companies (“ROC’’). By resorting to such a method, defunct companies do not have to go through the more lengthy and tedious process of winding up. Such a method is a fast track exit (“FTE’’) method, as prescribed under section 560 of the erstwhile Companies Act, 1956. Conceptually, striking off of the name of a company has a parallel in the Companies Act 2006 of the United Kingdom (the “UK Companies Act”), where the Registrar of Companies could strike off on proof of reasonable cause or the directors of the company could apply for voluntary striking off. Currently, there exist two methods of strike off under the provisions of the Act, i.e., removal by the ROC itself under section 248(1) of the Act, and an application filed by the company itself under section 248(2).

With respect to the first method of strike off, the ROC may suo moto remove the name of the company from the register of companies under section 248(1) of the Act, provided that the ROC has reasonable cause to believe that (a) a company has failed to commence its business within one year of its incorporation; or (b) 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. After the same, the ROC has an obligation to send a notice to the company and to all its directors, of its intention to remove its name, and request them to send their representations. Thereafter, if the ROC is not satisfied with the representations made by the Company, it will proceed with the publication of the notice of removal in the prescribed STK form, publishing it on the MCA website, the Official Gazette, and in a leading English newspaper and at least once in a leading vernacular language newspaper, having wide circulation in the State in which the registered office of the company is situated. Furthermore, the ROC has to intimate the concerned regulatory authorities, like the income-tax authorities having jurisdiction over the company of the proposed action of striking off and seek objections, if any, within 30 days of such notice. Before striking off, the ROC must also satisfy itself that sufficient provision has been made for the realization of all amounts due to the company for the payment and discharging of its liabilities. Once all the above-mentioned procedure is complete, the company will stand dissolved as on the date of publication in the Official Gazette, and the certificate of its incorporation shall stand cancelled. Moreover, although the company’s name has been struck off, the liability of every member of the company, including directors and managers, shall continue as if the company had not been dissolved.

The other procedure for strike off is provided for under Section 248(2) of the Act. According to this provision, a company may, after extinguishing all its liabilities, by a special resolution, or consent of seventy-five per cent of its members, file an application to the ROC for removing the name of the company from the register of companies. This application can be filed on all or any of the grounds as mentioned in section 248(1) of the Act. The procedure prescribed under this section is that the company must first hold a board meeting to pass the necessary resolution for strike off, subject to approval of the shareholders. They must also hold a general meeting consisting of the members of the company in order to obtain the shareholder’s approval by way of a special resolution. The company will have to file the application after prior approval from any regulatory body, along with an indemnity bond, and an affidavit by all the directors of the company in the prescribed form. The company also has an obligation to submit a statement regarding pending litigations, if any, involving the company. Once the abovementioned procedure has taken place, the ROC will proceed to publish a public notice inviting any objections to the proposed Strike off. If any such objections arise, they are to be sent to the respective ROC within thirty days from the date of publication. The notice will also have to be published on the website of the MCA, the Official Gazette, along with a leading English newspaper and at least one vernacular newspaper where the registered office of the company is situated. The ROC, after having followed with the above steps, shall proceed to strike off the name and dissolve the Company along with a notice of striking off published in the Official Gazette. Once the publication takes place, the company shall stand dissolved with immediate effect from the date mentioned therein. This shall also be published on the official website of the MCA.

The Act also contains in-built checks and balances to prevent the misuse of the provisions for striking off. For example, if a company files an application in violation of section 248(1), it shall be punishable with fine that will extend to Rs. 1 lakh. In the event that the application is filed with the intention to defraud, or evading the liabilities of the company, the persons in charge of the management of the company will be jointly and severally liable those who incurred loss or damage due to the company being struck off. The National Company Law Tribunal (the “Tribunal”) also has the power to restore the company under three circumstances. Firstly, the Tribunal may restore the company on an appeal filed by the ROC within three years from the date of dissolving the company if it is satisfied that the company has been struck off from the register of companies inadvertently or on the basis of incorrect information furnished by the company or its directors. Secondly, if any person aggrieved by the order of the ROC files an appeal before the Tribunal within three years of the order passed by ROC and the Tribunal is of the opinion that the removal of name of company is not justified in view of the absence of any of the grounds on which the original order for strike off was passed by the ROC. Finally, the company can also be restored on an application made by the company itself, member, creditor or workman before the expiry of 20 years from the publication in the Official Gazette if it 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. This is also similar to the UK Companies Act (sections 1024-34) where the struck off company can be restored by the Registrar on application or pursuant to a Court order.    

Thus, under the abovementioned provisions and processes, striking off serves as a faster way of dissolving a company as compared to the more lengthy and tedious process of winding up. Moreover, as already discussed, the ROC or the company itself can initiate the striking off process. However, companies cannot escape their liabilities through this method, as the liabilities of the directors continue even after the company has been dissolved. Thus, if any oppression or mismanagement proceedings are sub judice against the company, or a fraud is discovered subsequent to strike off, the directors could still be made liable. Furthermore, the Tribunal may also restore the company, thereby giving the company a chance to have its name in the register again. Given the large number of defunct companies in India, striking off serves as a solution to remove such companies from the records of the ROC and have them officially dissolved.

– Utsav Mitra

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