Today, it has been more than two years since sub-section (9) of Section 12 in the Companies Act, 2013 was added and also to the introduction of e-Form INC-22A what we call as an ‘ACTIVE Form’ and still the comedy of errors continues to be with companies. We have been seeing companies still standing as ‘ACTIVE Non-Compliant’ in their master data, and we are still confused on the legal and logical jeopardy of the e-Form INC-22A. Even after the expiration of Companies Fresh Start Scheme, 2020 which was announced as as result of COVID-19 pandemic and which served as a “boon” for various non-functional companies to get their overdue filings filed with normal fees, still in case of defaulters of ACTIVE Non-Compliant companies, the CFSS failed there.
Let’s go back to history…
On November 2, 2018 Companies (Amendment) Ordinance, 2018 was introduced. As we know that, the life of an Ordinance is limited to the expiration of six weeks from the date reassembly of both houses of the Parliament. Lok Sabha approved the Ordinance on 4th January, 2019 but could not be passed in the Rajya Sabha, consequently the Ordinance was going to cease on 21st January, 2019 but before that could happen the Ordinance was reintroduced on 12th January, 2019 as Companies (Amendment) Ordinance, 2019 and again when Parliament reassembled after the 2019 Ordinance, this time Rajya Sabha could not be able to even consider it, resulting Second Amendment Ordinance but finally got the approval and notified on 31st January, 2019. We first time saw the word “physical verification” of the Registered Office in the Companies Act and also shocked to see that if, on physical verification, it is found that it’s just a dummy address and it is a bubble company, the ROC could initiate the process of striking off.
More surprisingly, on 25th February, 2019 MCA inserted Rule 25A in Companies (Incorporation) Rules, 2014 and introduced the controversial “e-Form INC-22A” which was called as ACTIVE – Active Companies Tagging Identities and Verification, and in the notification MCA stated that “In exercise of the powers conferred by sub-section (9) of Section 12…” and mandated the filing of forms by companies which were incorporated till 31st December, 2017. There are some interesting features:
1. Mentioning of the Longitude & Latitude of the location of the Registered Office.
2. A list of Directors, which can be pre-filled if the Directors DIN are not deactivated due to non-filing of KYC & disqualification.
3. Details of Auditors.
4. Details of the optimum combination of KMPs under Section 203.
5. Last but not the least, most exciting feature, the photographs.
Now let’s discuss legalities involved:-
Sub-section (9) of Section 12, not a part of the original Section 12, but was added later. During the era of the erstwhile Companies Act, 1956, and Section 12 of the 2013 Act was operational in the form of Sections 146, 147 & 17A, no concept of “physical verification” was there, even when the 2013 Act came into being it wasn’t there, and it was introduced as a result of the Government’s passionate project of “culminating shell companies”. It is indeed a wonderful step, at the legislative level the intention of the lawmakers of our country was perfectly reflected in the letters and spirit of the provision, the text of sub-section (9) of Section 12 is:
(9) If the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may cause a physical verification of the registered office of the company in such manner as may be prescribed and if any default is found to be made in complying with the requirements of sub-section (1), he may without prejudice to the provisions of sub-section (8), initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.
The key phrases to focus on are, first “reasonable cause to believe”, second is “physical verification” and the third one is “in such manner as may be prescribed”. Clearly, any kind of action under Section 12(9) would require a reasonability on the ground that there are some indications that a company is actually a mere bubble and not a substance, which has forced the Registrar to make a physical verification of the premises where the registered office is situated. Also, the Companies (Amendment) Act, 2019 has changed the nature of Section 248 of the Act which gave power to the Registrar to initiate action for striking off the name of the Company, as prior to the amendment Section 248 has only two grounds on which strike off by ROC was possible, one is failure to commence business within one year of its operation and second is two years of continued inactivity, and the amendment added two new grounds, that is default under Section 10A, i.e non-receipt of the subscription money from subscribers to MOA resulting in default of Form INC-20A within 180 of incorporation and second is, if ROC has found that company is not carrying operations under Section 12(9) as revealed under physical verification.
As the first and foremost of the principles of statutory interpretation, the expression “physical verification” must be read its literal sense, and that indicates that ROC should either himself or under his authorisation shall cause a “physical visit” to the premises and find whether the company is in actual existence in terms of sub-section (1) of Section 12 or not! Secondly, the sub-section (9) came with a feature of “delegated legislation” because of the words “in such manner as may be prescribed” , this enabled the administrator of the Companies Act can decide the way and procedure of the course of physical verification which later, on 25th February, 2019, turned out be Form INC-22A ACTIVE and in default of filing this form will enable ROC to initiate strike off action under Section 12(9).
The features of the Form INC-22A has its roots in Section 203 of the Act, which provides for the optimum combination of KMPs like all companies governed by Section 203 read with the connected Rules 8 & 8A must have minimum one MD/Manager/CEO/WTD, one CFO and one CS. Now, this created a lot of hue and cry which also forced the MCA to increase the threshold limit of paid-up capital which trigger appointment of Company Secretaries on a whole time basis. Earlier limit was Rupees five crores and now it is Rupees ten crores. There were reports that we have a wide gap in the number of companies who are required to have Company Secretaries on whole time basis and the number of Company Secretaries, one constraint in filing Form INC-22A was unavailability of Company Secretaries and soon it became a controversial debate, even in the Parliament, several legislators have raised concerns over the non filings of Form INC-22A.
Without commenting much on the availability of the Company Secretaries, several questions of law arise here as below:
The first question is, how far Form INC-22A fits in the letter and spirit of Section 12(9)?
The essence of Section 12(9) is physical verification, it’s a serious debate whether the filing of Form INC-22A fits in the expression “physical verification” or not? One can argue that despite Form INC-22A contains the longitude and latitude of the location, with photographs there are chances of manipulation and certainly the literal intent of Section 12(9) is still “incomplete” despite the filings of Form INC-22A has been done according to the Rule 25A.
The second question is, even after a company has filed Form INC-22A, does the Registrar still have power to cause physical verification?
Well, it seems that Form INC-22A is merely an indicative compliance and not to be understood in any case as full and final evidence of functioning of a company from the address which it has registered as its registered office. This psychology will render Section 12(9) inoperative and ineffectual which is not intended by the drafters of Section 12(9). This kind of a contention will cause “death” to the provision. However, the filings under Rule 25A can be taken as an indication of forming an opinion by the Registrar to base the reasonability of physical verification. The powers of Registrars, for causing physical verifications, are not taken away on filing of Form INC-22A.
The third question and the most relevant is, non-appointment of Company Secretaries causing the non-filing of Form INC-22A can be a ground for strike off action by ROC and its effects?
The provisions governing the appointments of Company Secretaries and Section 12 are mutually exclusive, therefore, ROC cannot initiate action of Strike Off if any company does not have optimum combination of KMPs causing the delay in filing of Form INC-22A and this action is not “just and equitable” under the law. ROC before initiating Strike off action under Section 12(9) read with Section 248, must have clear evidence that the company is de-facto not operating from the registered office as there in the records of the ROC and not on any other ground. Non-appointment of Company Secretaries, does not empower the ROC to strike off any company. In today’s date, there are several companies which are making proper compliances under the Act, and genuinely working from the registered office, but because of the reason of not having Company Secretaries or other KMPs stands “ACTIVE Non-compliant” causing them the embarrassment of defaulter. As a suggestion to the MCA, a suitable updation in the Form INC-22A, where the names of KMPs appear, a simple question can be placed as “whether company has appointed optimum combination of KMPs under Section 203 and the rules made thereunder? Yes or No, If No, give reasons”. This could actually help the companies to file Form INC-22A with actual disclosure of non-compliance, with professional certification, and also enable the ROC to take appropriate actions for imposition of penalty under Section 203. Moreover, this is the reason, which deprived the companies to get benefit of CFSS for filings of Form INC-22A without any fees but still liability of paying an additional fee Rs. 10,000/- stands to the defaulters, despite bonafide default.
Since its introduction, there was a series of controversies between the MCA and the stakeholders, somewhere, there was mishandling of delegated legislation by MCA and somewhere it helped in revealing the real culprits who have malafide intentions of running a Company and somewhere, genuine stakeholders has suffered due to this. We hope that there will be suitable changes in the regime of filing Form INC-22A. Undoubtedly, the intentions of Section 12(9) are unquestionable and a must need of the time and we thank our legislators enough for making the Companies Act, 2013 more and more stronger.
Thanks for reading.
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Disclaimer: The views expressed here are personal and not to be construed as views of ICSI, MCA, or any other organisation or individual. The author can be contacted at pcstejas@gmail.com.
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