Short Summary:
In this Flash editorial, the auditor begins by referring the provisions of section 248(1) of Companies Act, 2013 relating to Power of Registrar to remove name of company from register of companies. The main thrust of the article, however, is upon the effects of 'Show Cause Notices' (hereafter read as 'SCN') issued by the Registrar of Companies (hereafter read as "ROC") to the companies for violation u/s 248(1) (not carrying on any business or operation for a period of two immediately preceding financial years).
Introduction:
Thus Far, all ROC's has issued show cause notices to the Companies fallen u/s 248(1) (c). As extracts are of the notice are given below. As per notice ROC shall strike off the Company if appropriate reply not filed within 30 days and ROC will take appropriate action against the Directors. Many professionals have been raising question on interpretation/ provisions relating to strike off through Show Cause Notice, liability of director etc.
Extract of Show Cause Notice:
Extract of the show cause notice to the extent relevant for our discussion, are stated as under (with necessary comments and modifications, wherever felt necessary).
i. Notice is hereby given that as per available records the company is not carrying on any business or operation for a period of 2 immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company u/s 455.
ii. WHEREAS if the company fails to submit the reply along with copies of the relevant documents, if any within a period of 30 days from the date of the notice, shall be published in the Gazette of India within a view to striking the name of the Company from the Registry. "However the directors of the Company shall be liable for appropriate action under the act.'"
iii. This dissolution is subject to the provisions that the liability of every director and members of the Company shall continue and may be enforced as if the company has not been dissolved.
Statutory Provisions Contained Under the Act: Provisions of the Companies Act, 2013 to the extent relevant for our discussion, are stated as under (with necessary comments and modifications, wherever felt necessary).
248 (1) Where the Registrar 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, 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 and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.
Questions occur by the Notice:
A. First Question came into mind after gone through the content of the 'SCN' is "What should be the First step of the Company after receipt of Show Cause Notice'?
Solution: As mention in notice Company have to reply within 30 days otherwise name of the company shall be removed from the record of the MCA database and appropriate action shall be taken against the directors of the Company.
As a result, the First step after receipt of notice should be, the filing of an appropriate reply with concerned ROC by pointing out the facts of non-operational or non-filing of ROC forms, the intent of the Company either closure of the Company or continue the business of the Company etc.
While preparation of reply of the show causes notice one should be cautious as regards provisions of the Act and legal responsibility of the promoters/ directors after removal of name of the Company.
B. Second Question: What should be the steps if Company wants to continue its business oppression?
Solution: If Company wants to continue is business and revive itself then take the following steps:
i. File the suitable reply with the ROC by affirm the particulars for non filing of ROC forms for the period of (No. of years) years.
ii. Get ready and file the pending ROC forms with additional fees.
iii. Submit applications for the condonation of delay in filing of e-forms where ever mandatory.
C. Third Question: What should be the steps if Company wants to close the Company in other Words Company doesn't want to continue its business?
Solution: Many professionals have been raising question on Consequences' of closure of Company u/s 248(1). If considering the provisions under Companies Act subsequent below state questions come up in mind on the subject of consequences of strike off of Company u/s 248(1) by SCN.
a) Whether Director will be disqualified u/s 164 of Companies Act, 2013?
b) Whether office of director vacant u/s 167(1) of Companies Act, 2013?
c) Whether there is any penalty levy on the directors of the Company u/s 166 of Companies Act, 2013 due to non compliance of their duties?
d) What will be liabilities of members and directors as mention in the SCN?
A. Whether Director will be disqualified u/s 164(2) of Companies Act, 2013?
Extract of relevant portion of section 164(2): No person (who is or has been a director of a company) shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to filed financial statements or annual returns for any continuous period of three financial years.
Yes, as per the language of section 164(2) If Company fails to file annual forms for continue period of 3 years or more then directors become disqualify for appointment in another company.
One can opine that, even if company strike off by SCN u/s 248(1) directors turn out to be disqualifying for appointment and appropriate action against the director can be taken.
B. Whether office of director vacant u/s 167(1) (a) of CA, 2013?
Extract of relevant portion of section 167(1) (a): The office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164.
As per the language of section 167(1) (a) if a director disqualifies u/s 164 then his office as director in all the companies simultaneously vacant.
Consequently, One can opine that due to disqualification as per question 'A' discussed above the office of such director in another company also shall be considered as vacant and he shall cease to continue as director of all the Companies.
C. Whether there is any penalty levy on the directors of the Company u/s 166 of Companies Act, 2013 due to non compliance of their duties?
Extract of relevant portion of section 166:
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
As it is duties of the directors of the company to act in best interest of the Company, shareholders etc. It is the duty of the directors to follow and comply with the provisions of Companies Act and other legal compliances.
Consequently, one can opine that, if a director fails to comply with his duties then he is liable for penalty u/s 166(7) i.e. 'fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.'
D. What will be liabilities of members and directors as mention in the SCN?
As mentioned in the Notice that "This dissolution is subject to the provisions that the liability of every director and members of the Company shall continue and may be enforced as if the company has not been dissolved'
Liability of Member:
Extract of relevant portion of Section 2(22): 'company limited by shares' means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them;
Consequently, it is clear that liability of the member is limited upto unpaid amount of share capital only. They can't be liable for any amount above then paid up capital.
Liability of Director:
Liability of Director already discussed above in question 'C'. However the liability of director is not restricted upto Section 166. As Director and an 'Officer who is in default' he is responsible for all the non compliances under the Companies Act, 2013.
Example: As per Section 129(2) - At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year' if director contravene these provisions he is answerable for the penalty under section 129(7). There are many more sections under the Act where specific penalties are given for the Directors.
In case of Viavi Solutions India (P.) Ltd. v/s Registrar of Companies, NCT Delhi & Haryana, NCLT has imposed penalty on directors of the Company for non compliance u/s 137 Copy of financial statement to be filed with ROC in e-form AOC-4 and u/s 92 copy of annual return to be filed with ROC in e-form MGT-7.
CONCLUSION:
Hence, bearing in mind the provisions of Section 248 and read with other relevant provisions of Companies Act, 2013 and Show Cause Notices issued u/s 248(1), one can opine that in case of closure of Company by ROC on Suo Motto through this Notice then directors of the company shall be legally responsible for the non-compliances, any unpaid debts of the Company etc.
In this editorial, I have endeavored to discuss the consequences of show cause notice issues under section 248(1). Although still there are several questions are unanswered like:
A) Whether director will be ceases to appoint in any other companies' u/s 164(2) if yes upto what time?
B) Whether Roc can issue show cause notice to director for compounding under various provisions of the Act. Etc.
Thus, it is worthwhile that, while preparation of reply of the show causes notice one should be cautious as regards provisions of the Act and legal responsibility of the promoters/ directors after struck off of the Company.
Any other opinion is also welcome for further clarity of the provision of the Companies Act.
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