Effect of striking off on companies

Introduction

Nothing in this material world is immortal. One born is sure to die. The only things certain in life are death and taxes. This is equally applicable to companies as well. A company loses its perpetual existence when it is dissolved. The Companies Act, 2013 (Act) provides for various modes by which a company can be dissolved such as striking off, winding up, amalgamation etc. The mode and manner of closing a company depends upon a number of factors such as commercial rationale of the members, financial position and business operations of the company, timelines and costs involved etc.

When a company is not carrying on any business, its operations have been shut down and there is no intention of reviving it in the future, then the Registrar of Companies (“RoC”) may either on its own motion or on an application by the company strike off its name from the register of companies(“Register”) by following a simple procedure prescribed  under chapter 18 (section 248 to 252) of the Act read with The Companies (Removal of Names of the Companies from the Register of Companies) Rules, 2016 (“Striking off Rules”).

Where RoC has reasonable cause to believe that a company is not carrying on business or in operation, he may, after statutory notice calling upon the company to explain, strike the name of the company off the register and shall publish notice thereof in the Official Gazette and on the publication in the Official Gazette of the notice, the company shall stand dissolved.

Grounds for striking off a company:

Section 248(1) of the Act provides the following grounds on the basis of which a company’s name can be struck off from the Register by the RoC:

a) Where the company has failed to commence its business within one year of its incorporation;

b) The company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application to the RoC within such period for obtaining the status of a dormant company under section 455 of the Act;

c) the subscribers to the memorandum of the company have not paid the subscription which they had undertaken to pay at the time of incorporation of the company and a declaration to this effect has not been filed within one hundred and eighty days of its incorporation under section 10A(1) of the Act; or

d) the company is not carrying on any business or operations, as revealed after the physical verification of the registered office carried out under section 12(9) of the Act.

Effect of removal of company’s name from the Register

Section 248(5) of the Act provides that:

“At the expiry of the time mentioned in the notice, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies, and shall publish notice thereof in the Official Gazette, and on the publication in the Official Gazette of this notice, the company shall stand dissolved.”

Where name of the company is struck off from the Register by the RoC and a notice is published in the Official Gazette, then the company is dissolved on the date of publication of such notice. However, such dissolution is not a consequence of winding up of the company. Winding up of a company is a process by which assets of a company are disposed of, liabilities are paid and the surplus, if any, is distributed amongst the shareholders of the company. A liquidator is appointed for winding up the affairs of the company. Further, section 248(9) of the Act gives power to national company law tribunal for winding up a company whose name has been struck off by the RoC from the Register. Since in case of striking off, a company is dissolved without following the process of winding up, a question arises for consideration as to what happens to the assets and liabilities of the company whose name has been struck off from the Register by the RoC.

In this respect, section 248(6) of the Act states as under:

(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.

Also, section 250 of the Act provides that a company shall not be deemed to be dissolved for the purposes of realizing amount that were due to it on the date of dissolution and for the payment of the liabilities or discharge of liabilities which were subsisting on the date of dissolution. Section 250 of the Act is reproduced hereunder for ease of reference:

“Where a company stands dissolved under section 248 of the Act, it shall on and from the date mentioned in the notice under sub-section (5) of that section 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.”

It is pertinent to note that there is no provision under the Act which provides for ownership of assets of a company dissolved under section 248 of the Act. The shareholders are not legal heirs of the company. Therefore, where a company has asset(s), if any, on the date of its dissolution under section 248 of the Act, the same are not distributed amongst the shareholders. Rather the doctrine of escheat or bona vacantia as provided in Article 296 of the Constitution of India is attracted in such cases and the property is vested in the Union of India as the property must have owner. The Government acquires the ownership of property as bona vacantia. Article 296 of the Constitution of India is reproduced hereunder for ease of reference:

“296. Property accruing by escheat or lapse or as bona vacantia.

Subject as hereinafter provided, any property in the territory of India which, if this Constitution had not come into operation, would have accrued to His Majesty or, as the case may be, to the Ruler of an Indian State by escheat or lapse, or as bona vacantia for want of a rightful owner, shall, if it is property situate in a State, vest in such State, and shall, in any other case, vest in the Union:

 …… ”

The applicability of the doctrine of escheat or bona vacantia has also been analysed by the Hon’ble Calcutta High Court in In Re: U.N. Mandal’s Estate Private Ltd.[AIR 1959 Cal 493].The Hon’ble Calcutta High Court observed as under:

“37. Before, I conclude, it is necessary to refer to one argument which cropped up in course of the hearing of this application. Shortly put, it is this. What the applicant argued was that if there was any property or asset of the Company, then there would be none to take it over and it will be a loss to everyone concerned. Mr. Das for the applicant contends that as the result of the effect of striking the Company off the register and of the dissolution that follows, the Company loses its character as an incorporated body and, therefore, cannot recover its own properties, if there be any, Now this point has become academic on the facts of this case as I have held that there are no assets of this Company and no fund and no book debts which it can recover. But even if there were any, the situation may not be so hopeless as was argued on behalf of the applicant. Even if there were any property, such property will not be without an owner. The doctrine of bona vacantia, I think, is attracted or will be attracted in that contingency. The assets of a dissolved Company are not without owner. The State takes them over. The legal position in India on the point demands a scrutiny.

………….

39. If, therefore, without the express statutory provisions of Sections 354 and 355 of the English Companies Act, 1948, the doctrine of bona vacantia applied in England, it would be all the more so here in India because of Article 296 of the Constitution of India, which uses the words ‘any property in the territory of India which if this Constitution had not come into force would have accrued to His Majesty.’ Now if this property of a dissolved Company could accrue formerly to the Crown in India then as bona vacantia it now belongs to and vests in the Union of India under Article 296 of the present Constitution. Normally a defunct Company would hardly have any assets or property, but them may in few cases be some, however negligible. I asked Mr. Basu who was the Counsel appearing for the Registrar of Joint Stock Companies to find out whether on the point the office of the Registrar, had already any procedure, and I was told that them was none. Parliamentary legislation appears to be necessary to evolve an administrative machinery for the protection and disposal of the assets of a Company, dissolved under Section 560 of the Companies Act 1956. For unclaimed dividends and undistributed assets of Companies in liquidation there is provision for their going to the public account of India in the Reserve Bank under Section 555 of the Companies Act. But there appears no comparable provision for assets of dissolved Companies under Section 560 of the Act.”

Also, the Hon’ble Supreme Court of India in Peirce Leslie and Co. Ltd. vs. Miss Violet Ouchterlony Wapshare and Ors. [AIR 1969 SC 843] has held as under:

“10. …….The dissolution has put an end to the existence of the company. In these circumstances, the appellant contends that all the properties and the rights of the old company, if any, have vested in the Government by escheat or as bona vacantia and the plaintiffs cannot sue for the recovery of its properties. The plaintiffs dispute the right of the Government to take the properties by escheat or as bona vacantia, and they contend that on the dissolution of the old company, its assets have now vested in its shareholders.

…….

16. These enactments show that in this country the Government takes by escheat immovable as well as movable property for want of an heir or successor. In this country escheat is not based on artificial Rules of common law and is not an incident of feudal tenure. It is an incident of sovereignty and rests on the principle of ultimate ownership by the State of all property within its jurisdiction.…….. Consequently the property of an intestate dying without leaving lawful heirs, and the property of a dissolved corporation passes to the Government by escheat or as bona vacantia. The property taken by escheat or as bona vacantia belongs to the Government, subject to trusts and charges, if any, previously affecting it.

18. Accordingly, the shareholders or creditors of the dissolved company cannot maintain any action for recovery of its assets.

………”

Thus, the properties of a company dissolved under section 248 of the Act vest in the Union of India as bona vacantia by virtue of sovereignty rather than succession or inheritance of such property. However, there is no mechanism provided under the Act for vesting of properties of struck off companies in the Union of India.

Liability of members, directors etc.consequent to striking off of the company:

In terms of section 248(7) of the Act, the liabilities of members, directors, managers and officers of the company continues even after dissolution of the company under this section and these liabilities are enforceable against them as if the company was never dissolved. It is pertinent to note that the existing liability of any director or member prior to the dissolution of the company will continue in spite of the dissolution. If they are not personally liable for the claim prior to the dissolution of the company, they will not be liable after the dissolution also.[ShrikishenDhoot v. Kamalapurkar, (1965) 1 Comp LJ 233].Further, the Hon’ble Gauhati High Court in Smt. Narmada Chaudhary and Ors. vs. Motor Accidents Claims Tribunal [1985 58 CompCas 596 Gauhati],in respect of liability of directors under proviso (a) to section 560(5) of the Companies Act, 1956 (presently section 248(7) of the Act), held as under:

“The purport of proviso (a), in our opinion, is entirely different. It merely continues the liability of the officers including the Directors of the company existing, if any on the date of its dissolution it does not convert the existing liability of the company on its dissolution into that of the officers named in the proviso. The liability of such officers contemplated under the proviso is their liability qua such officers which was existing on the date of dissolution. If the named officers had no liability, independent of the liability of the company on the date of its dissolution, the proviso does not come into play. In this case there was patently no liability of the petitioners as Directors on the date of dissolution of the company in the matter of discharge of debt arising against the company as a result of the award passed against the company. The award was passed against the company which was a separate juristic entity and the petitioners could not be said to incur thereunder any liability in their capacity as Directors of the company which could be enforced in terms of the said proviso. The proposition that the company is a separate juristic entity distinct from a share-holder or Director is so firmly established that it needs no elaboration. However, in this connection Mr. Choudhury has drawn our attention to a decision reported in AIR 1955 SC 74 (Bacha F. Guzedar v. Commr. Of Income-tax) and also to the provision of Section 543 of the Companies Act. The position canvassed before us, and rightly, in our opinion, is that the liability of a Director of the company in the course of conduct of the business of the company on account of misfeasance, if any, is investigated in the course of winding up of a company as manifested by the provisions of Section 543. When such liability is determined then and then only the Directors can be proceeded against individually in their personal capacity; otherwise, for any debt due by the company they cannot be proceeded against by any creditor of the company in their individual capacity, either before or after its dissolution.”

Also, the liability of the members of a defunct company is limited to the extent of their contribution as in case of winding up of the company. Thus, the liabilities of members, directors, managers or officers of the company struck off under section 248 of the Act is limited to their liability towards the company only and they cannot be held personally liable to the outsiders.

Conclusion

The strike off provisions enables the RoC to weed out companies incorporated for siphoning off the funds, non operating companies. This has been done by it in the recent past few years. Also, these provisions enables the management to close companies which are no longer required by filing an application with the RoC. Time and costs involved in the procedure for striking off a company’s name from the Register maintained by the RoC on an application by the company itself are very less as compared to other modes of dissolution of companies. Dissolution of the company under this section does not result in cessation of liabilities of members, directors, managers as discussed above. Their liabilities continue even after dissolution. A company dissolved under section 248 can be revived within twenty years by the relevant bench of national company law tribunal having territorial jurisdiction on the company, if the same is found reasonable by it.