Defunct Company under Companies Act 2013

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Date added: 17-06-26

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Defunct Company under Companies Act, 2013 Introduction: A company which is not carrying on any business or which is not in operation is called a defunct company.[i] In a general circular[ii], issued by the Ministry of Corporate Affairs (MCA) the defunct companies have been described as that: certain companies have been registered under the Companies Act, but due to various reasons some of them are inoperative since incorporation or commenced business but became inoperative later on and are not filing their due documents timely with the Registrar of Companies. These companies may be defunct and are desirous of getting their names strike off from the Register of Companies.[iii] Where the company is not carrying any business or operation or it has discontinued the operations completely, then it can make any application to the Registrar of Companies for declaring it as defunct company. This is the most easy and shortest method for dissolving of any company. After being declared as defunct, the name of the company is removed from the records of the Registrar of Companies.[iv] The capacity of the company ceases on becoming defunct. Where the date on which a suit was filed in the name of the company it had been struck off the Register as being defunct, the proceeding was held to be not valid.[v] Section 560 of the Companies Act, 1956 dealt with the ‘Power of Registrar to strike defunct company off register’. With modification of this provision, it is reincorporated in Section 248 of the new Companies Act, 2013 with the ‘Power of Registrar to remove name of company from register of companies.’ Striking off the name from the Register: Three grounds are prescribed under Section 248(1) of the Companies Act, 2013 for removing the name of the company from the register of the companies. When any or all of the three mentioned grounds are satisfied, then the name of the Company could be strike off from the register of the companies. Firstly when, a company has failed to commence its business within one year of its incorporation.[vi] Secondly when, 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.[vii] And thirdly when, 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.[viii] Procedural Requirements: When the registrar has the reasonable cause to believe that all or any of the above three mentioned grounds are satisfied by any company then, 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. The registrar shall also requesting them to send their representations along with copies of the relevant documents, if any, within a period of 30 days from the date of the notice.[ix] The second method of removing the name of the Company from Register is by on its own motion by the Company. A Company may by a special resolution or consent of 75 % members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the above three grounds specified Section 248(1). The Registrar shall issue a public notice in the prescribed manner on receipt of such application. But this provision does not apply to the companies registered under any special law. When the company is regulated by any special Act then approval of concerned regulatory body constituted or established under that Act shall also be obtained and enclosed with the application. But this second method of removing the name of the Company is not applicable to Companies which are registered under Section 8 (Companies with charitable objects).[x] The notice issued by the registrar under the above two mentioned method shall be published in the prescribed format and also in the Official Gazette for the information of the general public.[xi] In the case of Sitaram Singh Construction P. Ltd v. Union of India[xii], the issue was whether the Registrar can strike off a company without publishing a gazetted notification in this regard? In this case, the Registrar of Companies had neither published the notice in the Official Gazette nor sent the notice to the company by registered post as required under Section 560(3) of the Companies Act, 1956. On the other hand, the company was continuously carrying on business. It was held that although, there was a serious omission on the part of the company in not filling its annual returns, the mandatory requirement under Section 560(3) of the Act was not complied with by the Registrar. Therefore, the notice issued under Section 560(5) of the Act was to be quashed and the name of the company was to be restored. Powers of Registrar: After the expiry of the time mentioned in the notice the registrar may, unless cause to the contrary is previously shown by the company, strike its name off the register and shall publish notice thereof in the Official Gazette, and on the publication of this notice in the Official Gazette, the company shall stand dissolved.[xiii] Before striking off the name of company, the registrar 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.[xiv] If there arises any necessity the registrar can obtain necessary undertakings from the managing director, director or other persons in charge of the management of the company.[xv] Notwithstanding the undertakings taken by the registrar from the director, 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.[xvi] Despite the striking off the name of company, 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, shall continue and may be enforced as if the company had not been dissolved. Restrictions on Company for making Application to strike off its name: An application under Section 248(2), by the company on its own motion is prohibited in certain circumstances. These conditions are given under Section 249(1) of the Companies Act, 2013. If the Company files an application under Section 248(2) in violation of the conditions specified in Section 249(1), it shall be punishable with line which may extend to one lakh rupees.[xvii] An application filed under sub-section (2) of section 248 shall be withdrawn by the company or rejected by the Registrar as soon as conditions under sub-section (1) of Section 249 are brought to his notice.[xviii] The Conditions are that: The company shall not made application if at any time in the previous three months the company[xix]-
  • has changed its name or shifted its registered office from one State to another
  • has made a disposal for value of property or rights held by it, immediately before cesser of trade or otherwise carrying on of business, for the purpose of disposal for gain in the normal course of trading or otherwise carrying on of business
  • has engaged in any other activity except the one which is necessary or expedient for the purpose of making an application under that section, or deciding whether to do so or concluding the affairs of the company, or complying with any statutory requirement
  • has made an application to the Tribunal for the sanctioning of a compromise or arrangement and the matter has not been finally concluded, or
  • is being wound up under Chapter XX, whether voluntarily or by the Tribunal
In case it is found that an application by a company under sub-section (2) of section 248 has been made with the object of evading the liabilities of the company or with the intention to deceive the creditors or to defraud any other persons. Then the persons in charge of the management of the company shall, notwithstanding that the company has been notified as dissolved, be jointly and severally liable to any person or persons who had incurred loss or damage as a result of the company being notified as dissolved; and also be punishable for fraud in the manner as provided in section 447.[xx] Where a company stands dissolved under section 248, the company from the date mentioned in the notice under Section 248(5), shall cease to operate as a company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date except for the purpose of realising the amount due to the company and for the payment or discharge of the liabilities or obligations of the company.[xxi] Rectification of errors: If there happens any error, then the solution lies with the Appeal to the National Company Law Tribunal. Section 252 of the Companies Act, 2013 provides that- any person aggrieved by an order of the Registrar, notifying a company as dissolved under section 248, may file an appeal to the Tribunal within a period of three years from the date of the order of the Registrar.[xxii] If the Tribunal is of the opinion that the removal of the name of the company from the register of companies is not justified, then it may order restoration of the name of the company in the register of companies.[xxiii] But before passing any order under this section, the Tribunal shall give a reasonable opportunity of making representations and of being heard to the Registrar, the company and all the persons concerned.[xxiv] On the other hand, if the Registrar is satisfied, that the name of the company has been struck off from the register of companies either inadvertently or on the basis of incorrect information furnished by the company or its directors, which requires restoration in the register of companies.[xxv] Then the registrar may within a period of three years from the date of passing of the order dissolving the company under section 248, file an application before the Tribunal seeking restoration of name of such company.[xxvi] After the decision given by the Tribunal, a copy of the order passed by the Tribunal shall be filed by the company with the Registrar within thirty days from the date of the order. On receipt of the order the Registrar shall cause the name of the company to be restored in the register of companies and shall issue a fresh certificate of incorporation.[xxvii] Rights of Affected Parties: If a company, or any member or creditor or workman of that company thereof feels aggrieved by the company having its name struck off from the register of companies, then that person may appeal to the Tribunal by an application, before the expiry of twenty years from the publication in the Official Gazette of the notice under Section 248(5).[xxviii] In this case, that person should establish that the company, at the time of its name being struck off was carrying on business or was in operation or otherwise and it is just that the name of the company be restored to the register of companies.[xxix] If the Tribunal is satisfied that the company was actually carrying on business or it is otherwise just to do so, the Tribunal may order the name of the company to be restored to the register of companies. It 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.[xxx] In case of Bhogilal v. Registrar of Joint Stock Companies[xxxi]: The creditor of a defunct company filed a petition for restoration of its name. The petitioner alleged that he had obtained a decree against the company a day before the publication of the notification. The directors of the company on being asked by the Registrar misinformed him that the company was not in operation. It was also found that the entire share capital of the company was not called up and that the uncalled capital was sufficient to satisfy the decree. Holding that it was just and equitable to restore the name of the company to the register, the court observed: “No steps were taken to discharge the liability which the company owed to the petitioner. The effect of the order of removal would be to make it difficult for the petitioner to obtain the fruits of his decree. Had the Registrar known that the company was actually defending a suit, it is extremely unlikely that he would have ordered the name of the company to be removed from the register.” In another case of Vijayawada Chamber of Commerce and Industry v. Registrar of Non-Trading Companies[xxxii], the company was actually functioning, only its returns had been delayed. The striking off the companies name was set aside. An income tax officer is a creditor for this purpose and can apply for restoration.[xxxiii] The company which has been struck off may itself apply for restoration, though the court would not order restoration unless there is sufficient evidence of likely benefit to creditors or members.[xxxiv] Restoration operates retrospectively,[xxxv] means that on the restoration of a company back to the register after its being struck off the consequence is as though it had never been struck off the register. The company will be deemed to have had its existence althrough.[xxxvi] Thus the provision relating to restoration “seems primarily intended for companies which were active at the moment of their mortal wound”[xxxvii]. But discovery of outstanding assets of the company is, of course, one of the reasons why restoration is sought. This is why a period of twenty years is allowed. The company may have unknown assets which do not come to light until many years after the company has been struck off and so dissolved.[xxxviii] Page | 1
[i] Avtar Singh, Company Law, 15th Edition, p. 639 (Eastern Book Company) [ii] General Circular No. 2/2010, Government of India (Ministry of Corporate Affairs) [iii] Easy Exit Scheme, 2010 retrieved from http://www.mca.gov.in/Ministry/latestnews/CircularEES27may2010.pdf [iv] Declaring the Company as Defunct, retrieved from http://www.startbizindia.in/declaring_company_defunct.php [v] Floating Services Ltd. v M.V. San Franscesco, (2004) 25 SCL 762 Guj. [vi] Section 248(1) (a), The Companies Act, 2013 [vii] Section 248(1) (b), The Companies Act, 2013 [viii] Section 248(1) (c), The Companies Act, 2013 [ix] Section 248(1), The Companies Act, 2013 [x] Section 248(3), The Companies Act, 2013 [xi] Section 248(3), The Companies Act, 2013 [xii] [2010] 156 Comp Cas 127 (Pat) [xiii] Section 248 (5), The Companies Act, 2013 [xiv] Section 248 (6), The Companies Act, 2013 [xv] ibid [xvi] ibid [xvii] Section 249 (2), The Companies Act, 2013 [xviii] Section 249 (3), The Companies Act, 2013 [xix] Section 249 (1), The Companies Act, 2013 [xx] Fraudulent Application for removal of name, Section 251 of Companies Act, 2013 [xxi] Effect of Company notifies as dissolved, Section 250 of Companies Act, 2013 [xxii] Appeal to Tribunal, Section 252 of the Companies Act, 2013 [xxiii] ibid [xxiv] First Proviso of Section 252 of the Companies Act, 2013 [xxv] Second Proviso of Section 252 of the Companies Act, 2013 [xxvi] ibid [xxvii] Section 252(2), The Companies Act, 2013 [xxviii] Section 252(3), The Companies Act, 2013 [xxix] ibid [xxx] ibid [xxxi] AIR 1954 MB 70 [xxxii] (2004) 122 Comp Cas 796 AP [xxxiii] Harvest Lane Motor Bodies Co, Re, [1951] 2 All ER 898 [xxxiv] ITO (Companies Circle), Re, [1970] 1 Comp LJ 46 [xxxv] Lindsay Bowman Ltd, Re, [1969] 3 All ER 601 [xxxvi] Supra note 1, p. 642 [xxxvii] Test Holdings, (Clifton) Ltd, Re, [1969] 3 All ER 517 [xxxviii] Supra note 1, p. 641
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