whether company – white elephant

whether company – white elephant

Short Summary:

As this is the epoch of “ease of doing business” subsequent to amendments in the Companies Act, 2013, it is trouble-free to Incorporate Companies. A Company may be incorporate within a day or two, however difficult to strike off/ closure of Company. It is quite common for entities to form companies that were formed for a once-conceive business, startups etc. but business doesn’t start and the company remains unused or it may be like that the Company close the business a long back and the company is ongoing like a non-working company over the years. This is what is known as “defunct company”.

In this Flash editorial, the novelist begins by referring the provisions of section 248 – Strike off of Company and Section 455 of Dormant Company. Author has tried to give comparison in provisiosn of strike off and dormant company through Provisions, FAQ’S Process etc. Why Company should adopt to go for Dormant and why company should adopt to go for strike off of Companies etc.

After commencement of Companies Act, 2013 from 01st April, 2014 compliance requirement of Companies has been increased. Therefore it’s difficult for the Non-working Private Company to continue with Status of Active Company, because maintenance of company is expensive (like to Maintain a White Elephant) under companies Act, 2013 comparison to Companies Act, 1956

If the companies are non-working than Companies two options to save cost:
1.        Strike off Company (Under Section-248 of Companies Act, 2013)
2.       Get Dormant Status of Company (Under Section- 455 of Companies Act-2013).

Definitions:  

Strike off: This concept is an opportunity to non-operating companies for getting their names struck off from the records of Ministry of Corporate Affairs. Strike off mode is an easy mode of closing non-operating companies at cheaper cost with lesser formalities under section 248. This is alternative to winding up of a Company subject to statutory criterion specified under the section.

Dormant Company: Section-455 of Companies Act, 2013 talks about a New Provision Calls “DORMANT COMPANY”. This concept was not there in Companies Act, 2013. Another Name of this concept by Professionals is “ASSET SHIELDING CONCEPT UNDER COMPANIES ACT 2013”. A Dormant Company offers excellent advantage to the promoters who want to hold an asset or intellectual property under the corporate shield for its usage at a later stage.

Note:
There is only one major difference between both the modes. If Company is not in working positions and promoters don’t want to continue the Company then they can close the Company by Strike off, But if company is not working at present but promoters have plans and hope to active it in future they can adopt the method of Dormant status of Company.

Situation for Dormant & Strike off Voluntary by Company:

Dormant:
Where a company is formed and registered under this Act
·         For a future projector to hold an asset or intellectual property and
·         Has no significant accounting transaction”, such a company or
·         An Inactive Company 
may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

Inactive Company:  “Inactive Company” means a company which,
Ø  has not been Carrying on Any Business or operation during the last two financial years; or
Ø  has not made any Significant Accounting Transaction during the last two financial years, 
Ø  has not filed Financial Statements and Annual Returns during the LAST TWO FINANCIAL YEARS.

Significant Accounting Transaction:  “Significant Accounting Transaction” means any transaction other than-
o   Payment of Fees by a company to the Registrar;
o   Payments made by it to fulfill the requirements of this Act or any other law;
o   Allotment of shares to fulfill the requirements of this Act; and
o   Payments for maintenance of its office and records.

Strike Off:
Grounds of Strike off of Companies:

i.            A company has failed to commence its business within one year of its incorporation. OR
ii.            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.

 Checks for Dormant Company:

1.        Company incorporates for a future project or to hold an asset or intellectual property and has no significant accounting transaction. Or;
2.       A Company is inactive company (as per Definition given above)
3.       Documents require for Dormant & require to attach in form:
a.       CTC of Board Resolution.
b.      CTC of Special Resolution.
c.       Auditor’s Certificate.
d.      Statement of Affairs duly certified by Chartered Accountant or Auditor(s) of the company.
e.       Latest Financial Statement and Annual Return of the Company is mandatory to attach In Case The Same Is Filed To Registrar.
f.       Certificate regarding no dispute in the management or ownership
g.      Consent of lender, if any loan is outstanding.

4.      As per Sub- Section 4 Section- 455:  Where a company Not Filed or Fails to File Financial Statements or Annual Return for TWO (2) Financial Year consecutively, The Registrar of Company (ROC) shall issue a notice to that company and enter the name of such company in register maintain for Dormant Company.
5.       As per CLLS Scheme: The defaulting inactive companies, while filing due documents under CLLS-2014 can, simultaneously apply to get themselves declared as Dormant Company under Section- 455 of the Companies Act 2013 by filling e-form MSC-1 at 25% of the fee payable on form FTE.

Few other Checks for Dormant Status:  As per Section 455(1) Explanation (ii).   This Section comes into effect from 01st April, 2014.
Ø  No inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
Ø  The company is neither having any public deposits which are outstanding nor is the company in default in payment thereof or interest thereon;
Ø  No prosecution has been initiated or pending against the company under any law;
Ø  The company has not defaulted in the payment of workmen’s dues;
Ø  The company does not have any outstanding statutory taxes, dues, duties etc.  payable to the Central Government or any State Government or local authorities etc.;
Ø  The application has not been made with an objective to deceive the creditors or to defraud any other person;
Ø  The securities of the company are not listed on any stock exchange within or outside India;
Ø  The company is not having any outstanding loan, whether Secured and Unsecured- But if company has any Outstanding Unsecured Loan then the company may apply for status of DORMANT only after obtaining NOC from the lender. Such NOC required to be attached in the Form which requires filing with ROC.
Ø  There is No Dispute in the Management or Ownership of The Company; A certificate in this regard required to taken from Management. Such Certificate required to be attached in the Form which requires filing with ROC.

FAQ’S of Dormant Company:
A.   A company which is in existence from the period less than 2 year can go for Status of Dormant?
Yes As per Definition of Inactive Company given above [Section 455(1) explanation (I)           Means a company which not carrying any business or operation.
B.    What is the procedure to get Status of Active Company.
If company wants to get Active status to be file e-form MSC-4 with ROC, then gets active company status.
C.    Transaction which a company can do during Dormant Status.
View:
        i.      Payment of fees by a company to the Registrar;
     ii.      Payments made by it to fulfill the requirements of this Act or any other Law;
   iii.      Allotment of shares to fulfill the requirements of this Act; and
   iv.      Payments for maintenance of its office and records.


Checks for FTE:   The provisions of Section 248 come into effect from 26th December, 2016.
A.    Company has not commenced any business activity or operation since incorporation; or
B.     Company is not carrying over any business activity or operation for a period of two immediately preceding financial year.
C.    Assets & Liabilities of company are nil.
D.    Documents require for Strike off & require to attach in form:
a.       NOC from the appropriate concerned authority, if required (RBI, IRDA, Housing Finance, SEBI etc.) Rule 4(2)
b.      [1]Indemnity Bond from Every Director in Form STK-3
c.       Statement of Accounts certified by CA. Statement should not be older than 30 days from the date of application.
d.      An Affidavit from every Director in Form STK-4
e.       CTC of Special Resolution duly signed by each Director
f.       Statement regarding pending litigations, if any, involving Company. (Better to give in affidavit format)

Procedure for strike Off: After above mention checks and preparation of above mentioned documents company can apply for FTE with ROC.

Calling of Board Meeting:
Company will call the Board Meeting as per Secretarial Standard 1 to pass a Board resolution for the purpose of Strike off of Company and to authorize any director of the Company to file application with Registrar of Companies.

Extinguishment of the Liabilities:
After passing of Board resolution if there is any liabilities in the Company. Company will set off all the liabilities before next step.

Calling of General Meeting:
Company will hold the general meeting of members of the Company and pass a resolution for strike off of Companies with the approval of 75% of members as per paid up share capital of the Company. After passing of Special resolution company will file MGT-14 within 30 days.

Application to ROC by Company:
Application shall be made in eform STK-2 (fee Rs. 5,000/-). Following below mentioned documents will be attached in the Form STK-2. Rule 4(1)
FAQ’S of FTE:

A.    Whether u/s 248 a Company can apply for strike off without completion of pending statutory returns.

As per section 560 of the Companies Act, 1956, Registrar of Companies may strike off the name of companies on satisfying the conditions therein. As per Section 560, a company desirous of getting its name struck off, has to apply to Registrar of companies in e-form 61. All pending statutory returns are required to be filed along with e-form 61.

In order to give an opportunity for fast track exit by a defunct company, for getting its name struck off from the register of companies the Ministry has decided to modify the existing route through e-form – 61 and has prescribed the new Guidelines. The Guidelines for “Fast Track Exit mode” for defunct companies.

Therefore, from the above provisions it is clear that before 7th June, 2011 (FTE Scheme) if company desired to go for strike off it was mandatory to file all pending statutory returns (Annual Filing Form). But then w.e.f. 7th June, 2011 by FTE scheme a company can go for Fast Track Exit without completion of pending statutory returns, even a dormant company could apply for FTE as discussed in above question.

Latest Provisions: In the latest provisions of Section 248 and in respective rules language are same as was in section 560 of Companies Act, 1956. Section 248 states the provisions of strike off of the Company not for Fast Track Exit of the Company.

One can interpret that if a Company wants to apply for Strike off u/s 248 first its have to file all the pending statutory returns.

B.    Which Companies cannot apply under fast track exit mode?
Following Companies cannot apply under fast track exit mode:-
        i.      Listed Companies
     ii.      Companies registered under section 8
   iii.      Companies having charges which are pending for satisfaction
   iv.      Companies whose application for Compounding is pending
      v.      Companies against which any prosecution for an offence is pending in any court
   vi.      [2]Vanishing Companies
 vii.      Companies that have been delisted due to non-compliance of listing regulations or listing agreement or any other statutory laws;
viii.      Companies where inspection or investigation is ordered and being carried out or actions or such order are yet to be taken up or were complete but prosecutions arising out of such inspection or investigation are pending in the court.
   ix.      Companies which have accepted public deposits which are either outstanding or the company is in default in repayment of the same;
      x.      Companies where notices under section 234 of CA 1956 or 206 or 207 of the Act, 2016 have been issued by the Registrar or Inspector and reply thereto is pending or report under section 208 is pending or where any prosecution arising out of such inquiry or scrutiny, if any, is pending with the court.

(Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at csdiveshgoyal@gmail.com)
Disclaimer: The entire contents of this document have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information. IN NO EVENT SHALL I SHALL BE LIABLE FOR ANY DIRECT, INDIRECT, SPECIAL OR INCIDENTAL DAMAGE RESULTING FROM, ARISING OUT OF OR IN CONNECTION WITH THE USE OF THE INFORMATION. This is only a knowledge sharing initiative and author do not intend to solicit any business or profession.
  







[1] If the person is foreign national or non-resident Indian, the indemnity bond, and declaration shall be notarized or apostillised or consularised.
[2] Means a Company registered under this act, listed on stock exchange which has failed to file its returns with the Registrar of Companies and Stock Exchange for a consecutive period of 2 years, and not maintaining its registered office at the address notified with the Registrar of Companies or Stock Exchange, and none of its directors are traceable

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