A Company is a legal entity made up of an association of people for carrying on a commercial or industrial enterprise.
A Director of a company is a person responsible for managing the company’s business affairs.
DEFINING COMPANIES ACT:
Companies Act is an act of Parliament which regulates the working of companies, stating the legal limits within which the companies can do their business.
COMPARING COMPANIES ACT 1956 AND 2013:
The newly implemented Companies Act, 2013, which came into effect from 01.04.2014, is much more comprehensive and detailed when compared to the Companies Act, 1956. For example-
|COMPANIES ACT, 1956||COMPANIES ACT, 2013|
|‘Listed Company’ referred to only Public-Sector Companies||‘Listed’ now refers to all kinds of Companies- Public as well as Private|
|‘Officer who is in fault’ put liability only on full-time designators||The scope of ‘Officer who is in fault’ has been broadened greatly|
|‘Charge’ was not defined so no provision for it||‘Charge’ includes interest, lien, property, assets, mortgage, etc.|
|‘One-person Company’ had no mention||‘One-person Company’ finds a mention with definition|
PRETEXT OF GOVT. CRACKDOWN ON COMPANIES:
1# POLITICAL SCENARIO:
- Before the 2014 General Elections, the political environment was in a state of upheaval; the ruling UPA govt. was almost defunct, leading to dissatisfaction amongst all.
- Sensing a golden opportunity, BJP opened an all-out war against the govt; hitting hard on all accounts of failure of UPA govt.
- Mr. Narendra Modi was projected as the PM candidate in a big way, all factions backing him.
- The charisma of Mr. Modi started having an enormous impact on the public during canvassing, mainly due to his unmatched oratory skills.
- Another factor responsible for Mr. Modi’s popularity was the contrasting personality of the then PM, Mr. Manmohan Singh; a polite and meek man.
2# SOCIAL CAUSES:
- The youth of India was dissatisfied and restless on many accounts: the economy, prospects of job, educational reforms, scientific research, etc.
- Social security was another cause of concern.
- The govt’s apathy towards farmers, women and disabled led to an impression of an insensitive govt.
- The public perception was that the UPA govt. lost the aspiration to rule; much before they fought the elections!
- Media played a pivotal role in highlighting the failures of the govt.
3# ECONOMIC ENVIRONMENT:
- The biggest negative factor for the UPA govt. was that the economy had come to a standstill.
- The GDP growth was on decline year over year and jobs had dwindled.
- Inflation as a result was at its peak, creating massive hardships for the common man.
- Decision-making had come to a grinding halt; leading to businesses losses for many.
- Scams, frauds, corrupt practices, etc. led to tarnishing the country’s image in the global markets; foreign investments were withdrawn.
Prior to 2014 general Elections, the overall situation was alarming; the country was on the brink of collapse. Modi Govt. inherited a troubled democracy which needed strict measures in all spheres!
– Isha Malik (Company Secretary, MUDS Management Pvt Ltd)
STRIKE-OFF OF COMPANIES IN 2017:
The general election of 2014 witnessed a vote for change and people voted in huge numbers for the BJP. Modi’s oratory skills, projected while canvassing, convinced people that he may be the ideal leader they were looking for. The biggest draw was his promise to fight against black money and corruption.
Mr. Narendra Modi tried to keep his poll promise of cleaning the financial environment. In this process, he took two major decisions jolted the economic world.
1#: DEMONETIZATION OF 500 & 1000 CURRENCY NOTES IN 2016
2#: MASS STRIKE-OFF OF COMPANIES IN 2017. DEFINING ‘STRIKE-OFF’:
Strike-off means removal of a registered company, by the Registrar of Companies, from the register or roll.
A) CIRCUMSTANCES THAT LED TO THE ACTION:
- Shadow economy was a hurdle in the growth of the economy and development of the country.
- Economic frauds, money laundry, hoarding- were rampant.
- Authorities and Regulators failed miserably in performing their duties.
- Demonetization in November 2016 was the first major step by the present govt. to prove its intention towards cleaning the economy.
- The Income Tax Dept. with the cooperation of the Banks, were able to pinpoint accounts which transacted heavy amounts during demonetization.
- A task force had been formed to identify ‘shell companies’ and which collaborated with all agencies to gather intelligence and act on it.
B) WHY, WHAT & WHEN:
- The Registrar of Companies under section 248 of the Companies Act,2013, was granted the power to ‘strike off ‘companies if they were found to be erring.
- The Registrars of Companies(RoC) in 2017 struck off 2.10 lakh companies, publishing the Notice on its official website.
- A list of disqualified Directors was also released on the official website, impacting more than 3 lakh Directors.
- Most of the companies were deregistered because of non-compliance, as the said companies had not filed the statutory documents of Financial Statements and /or Annual Reports for three years in row.
- Under section 164(2) a person who is a director, cannot be re-appointed in that or any other company, for the next five years if-
– The company has not filed Financial statements and/or Annual Returns for 3 years in continuation
– The company has failed to pay depositors or shareholders their dues; defaulted for more than a year
- Thus, Removal of Directors Disqualification had an exhaustive list from the date of strike-off of companies was published by respective ROCs.
- The companies were struck from the date of the issuance of the notice.
- Disqualified Directors were barred for 5 years since the date of strike off.
- The directors were also removed from the Boards of other companies even if they were legitimate and active.
- All the bank accounts were frozen compounding to their woes.
- The dues and liabilities continued to be in the name of the company and its directors.
- Fines and penalties were levied as per the provisions on the companies and disqualified directors.
- In addition to these, restriction was put on transfer and sale of movable and immovable properties of such companies.
- The state govts. had been alerted and requested to ensure that registration of such properties shall not be done.
The strict action of deregistering companies had sent a clear message to all concerned that govt. means business; any complacency or manipulation will not be tolerated.
– Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)
D) Pros of the Action:
- Public perception in favour of the govt. as it was seen as a strong measure against wrong doers.
- Hype created in the media, specially Newspapers and Tv, communicates that the present Govt. was sincerely trying to tackle this ‘Demon’.
- The international image of the country improved, spreading a sense of confidence among the foreign investors.
- A warning bell rung for those companies which were active but not fully compliant.
- Directors are now aware of their duty as a custodian who must ensure due-diligence at all times.
- Gives a clear signal to all companies to self-regulate themselves.
- The companies will have to keep their check and balances in place, if they want to survive.
- A huge amount of black money was unearthed.
E) Cons of the Action:
- Many Companies were caught unawares as they claim no notice was served to them.
- The aggrieved companies felt the factor of natural justice was denied to them as they were not given a fair chance to clarify.
- The disqualified Directors, specially who were not a full-time director, feel the action was too harsh on them.
- There were several ambiguities in the order which created unrest among stakeholders.
- Abrupt action of the regulators forced the companies and Directors to take a legal course, resulting into numerous Writ Petitions in various courts.
F) THE PROCESS OF STRIKE-OFF:
STEP1# Rule 3(2) specifies that the RoC (Registrar of Companies) sends a Notice of proposed action of strike-off stating the reason in it (if a company was non-operative for long time).
- The Notice sent to the Company and all its Directors by Registered post.
- The company had 30 days’ time to represent their stand.
STEP 2# Under section 248(1), Rule 7, the RoC sends a pre-strike off Notice, form STK-5.
- It was sent to the Company and all its Directors.
- As per section 248(4) it shall also be put on official gazette. Shall be put on the MCA website as well.
- Shall be published in Newspaper- once in English daily and second time in a vernacular daily.
- The Roc was also required to inform the concerned regulatory and tax authorities.
- A 30-day period was granted for objections, if any.
STEP 3# After expiry of thirty days, Roc once again had put the Notice in official gazette, under section 248(5), Rule 9, Form STK-7. This strike-off notice had to be on the MCA website as well.
STEP 4# After this, the company can be officially dissolved.
Underneath is a table to show how the list of disqualified Directors was published on the official website.
REMOVAL OF DIRECTORS BY ROC, AHMEDABAD
|SR No||COMPANY’S NAME||DIN||DIRECTOR’s NAME||FROM||TILL|
|1||KARNAVATI ALFA INTERNATIONAL LTD||19271||HEMANG SHAH||01.11.16||31.10.21|
|2||NATURO-PEST LIMITED||2220159||KISHORBHAI CHOKSHI||01.11.16||31.10.21|
|3||NATURO-PEST LIMITED||5338342||SANJAY KUMAR||01.11.16||31.10.21|
|4||NATURO-PEST LIMITED||5359581||CHAMPALALJAMAD JAIN||01.11.16||31.10.21|
|5||CANVAY CHEMICALS LIMITED||2847747||KETKI PATEL||01.11.16||31.10.21|
|6||CANVAY CHEMICALS LIMITED||2856080||TARUNKUMAR PATEL||01.11.16||31.10.21|
|7||CANVAY CHEMICALS LIMITED||6980058||BHOGILAL PATEL||01.11.16||31.10.21|
|8||SPAN DYESTUFF INDUSTRIES LTD||3205418||CHANDRAKANT MAKWANA||01.11.16||31.10.21|
|9||SPAN DYESTUFF INDUSTRIES LTD||3425285||MEHUL SHAH||01.11.16||31.10.21|
|10||SPAN DYESTUFF INDUSTRIES LTD||3480812||MANISH SHAH||01.11.16||31.10.21|
Source: MCA Official Website
Thus, all the details of disqualified directors were displayed on the site. It is also seen that all directors of a deregistered company were removed from the same date, by the same notification.
G) Solutions to the problem:
- Removal of Directors disqualification was not easy. There were adaptable and amenable ways revival and restoration of DIN of the directors from the list of disqualified directors provided under Companies Act.
- Can appeal to The Tribunal u/s 252(3) of the Companies Act 2013.
- Apply to The National Company Law Tribunal, under rule 27(A), 2017.
- The legal option of filing a Writ Petition in the concerned court was always open. In fact, the mass removal of Directors had seen a spate of petitions in various courts seeking immediate relief.
- In the wake of this stern action, a great uproar was created by the industry. The pressure was created to provide a quick solution to this mammoth problem. Thus, the Central Govt. took a step utilizing its powers under sections 403,459 and 460 and introduced the Condonation of Delay scheme (CODS), 2018.
Condonation of Delay,2018.
This scheme was applicable to all the defaulting companies except those which were removed under section 248(5) of the Act.
- The DINs of the disqualified Directors was reactivated temporarily so that they may file the overdue documents.
- The defaulter company had to pay the filing fee and the additional fee applicable under section 403 of the Companies Act.
- After filing the documents, one seeked for condonation of delay by filing e-CODS, 2018 and paying a fee of 30,000 rupees prescribed under the Companies Rule, 2014.
- Forms to be duly filled:
– Form No. 208/MGT-7
– Form No. 21A/MGT-7
– Form No. 23
– Form No. 66
– Form No. 238/ADT-1
- The DINs of the Directors of the defaulting companies that have not done the needful and their record does not exist on MCA21 portal and if found disqualified at the end of the scheme, were deactivated once again on the expiry of the scheme.
- Those companies removed under section 248 and applied for revival under section 252 of the Act, restoration of DIN was reactivated only after NCLT order of revival.
- Those companies not availed this scheme, the Registrar acted in accordance with the Act.
The govt. and its authorities somewhat conceded that the confusion was over the newly implemented Companies Act, 2013. Mostly companies were ignorant or not able to interpret the complexities u/s 248. Hence, as a quick and easy, one-time solution the COD scheme was introduced to work towards a hassle-free revival.
The confusion over the interpretation of sections was a major reason for strike-off; in future companies shall seek expert opinion in case of ambiguity.
– Shweta Gupta (Founder and CEO, MUDS)
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