The Complete Concept of Striking off a Company

Edited and published by Jeet Sinha

Concept of striking off

When a company cannot continue its business due to various circumstances and has to shut ultimately shut down. There are two ways to shut down a company, firstly through striking off a company, and secondly, winding up of the company.

A striking-off a company means removing the name of the company from the registrar of the company but the company still cease to exist. There are two types of strike off:

1. Voluntary strike off: In this the company is struck off by the directors of the same company by dissolving it.
2. Compulsory strike off: In this case a third party is involved. That party will sign the petition for compulsory striking-off the companies. This is generally done by the registry house of the companies when a company does not comply with the rules and regulations and also does not file annual accounts and financial statements.

Strike off under Companies Act, 1956 (herein referred as “the Act, 1956”)

Section 560 of the Act, 1956 empowers the Registrar of Companies (herein referred as “ROC”) to strike off name of those companies who are not in operation any more or under various circumstances, after following the procedure as prescribed in the section. Following is the procedure under the law:

1. As per Section 560(1) of the Act, 1956, if the ROC can send a letter to the company asking whether the company is carrying out business or not. If no response is received by the ROC one month from the date of sending the letter, then the ROC as per Section 560(2) of the Act, 1956 after 14 days of the expiry of the month shall send a second letter to the company referring the first letter. Even after that there is no response within one month from the date of sending the second letter then the registrar has the power to strike off the company’s name from the register by publishing a public notice in the Official Gazette.
2. As per Section 560(3) of the Act, 1956, if the ROC receives an answer to the first or second letter that they are not operating or there is no response as such, then the Registrar by sending a notice to the company and publishing it in the Official Gazette, can order that three months from the date of notice the company’s name would be struck off from the register.
3. As per Section 560(4) of the Act, 1956, if the Registrar finds that a company has wound up, and the required returns are not forthcoming from the liquidator appointed for a period of six months, then the Registrar can send a notice as prescribed in Section 560(3) of the Act, 1956.

A company struck off under Section 560 of the Act, 1956, can be “revived” under the following procedure:

1. As per Section 560(6) of the Act, 1956, an application of restoration can be made by either the company, member or a creditor. It has to be shown that at the date of the company’s dissolution, that person was member or the creditor, and at the time was not qualified as such to reply to the notice send by the Registrar.
2. The application has to be made before completion of 20 years from the date of the notice published in the Official Gazette by the Registrar.
3. If the court is satisfied by the application that company was in operation or carrying out business, then the court through order or direction or making such provision, to place the name of the company back in the register as if it always existed as given under Section 560(7) of the Act, 1956.

In the case of M.A. Panjwani v. Registrar of Companies, the Delhi High Court passed a judgment allowing the petitioner, who was not a member or creditor per Section 560(6) of the Act, 1956, to file a case. Despite not meeting the specified criteria, the court considered the petitioner a creditor, as shares were allotted and later transferred without consent, deeming it just for the petitioner to seek restoration of the company.

Strike off under Companies Act, 2013 (herein referred as “the Act, 2013”)

As per Section 248(1) of the Act, 2013 if the Registrar has reasonable cause to believe that:

1. the company is not operating, one-year from the date of its incorporation, or
2. 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.

Then the Registrar through sending a notice to the company and its director, containing its intention to remove the company from its register.

As per Section 248(2) of the Act, 2013, the Company can voluntarily strike off themselves from the register by following the procedure as follows:

1. After extinguishing all its liabilities, the company can pass a special resolution with the consent of 75% of its members in terms of paid-up share capital, then file an application for removing their name from the register of the companies to the Registrar.
2. Then the Registrar shall issue a public issue in the Official Gazette in the prescribed manner.

“Revival” of a struck off company can happen as per procedure given in Section 252 of the Act, 2013. Following is the procedure:

1. As per Section 252 of the Act, 2013, any person may file an appeal to the Tribunal for revival of the company, within a period of three years from the date of the order of the Registrar. If the Tribunal is of the opinion that the removal of the company is not justified or is done in the absence of the relevant grounds, then it can direct an order for the restoration of the company’s name in the register of the company.
2. Also, the procedure under Section 252(3) of the Act, 2013can be followed, which is same as Section 560(6) & Section 560(7) of the Act, 1956.

In the case of Vikas Sureshbhai Patel v. Registrar of Companies, a company faced striking off for not filing annual financial reports for three consecutive years. The director requested three months to comply, but the ROC struck off the company without responding. The National Company Law Tribunal (NCLT) upheld the decision, but the National Company Law Appellate Tribunal (NCLAT) overturned it. NCLAT determined that the non-filing was inadvertent, the company was operative, and the default was curable, concluding that it wasn’t sufficient grounds for striking off the company’s name from ROC’s records.

State of property of the struck off company

The state of property of a company after its strike off is still a huge question that is still to be dealt with. Section 352(2) and 352(7) of the Act, 2013, manages the unclaimed or undistributed assets of the company but it is only relevant if the Liquidator is involved in the winding up of the company. Specifically, regarding the state of properties after a company gets strike off, there is as such no specific provision.

However, under Section 354 of the Companies Act, 2006 in England, dissolved company property is considered bona vacantia, implying it is abandoned and without a rightful owner. This term is equivalent to ‘escheat’. In India, while the Companies Act lacks a similar provision, Article 296 of the Constitution of India dictates that property within the country, which would have escheated or become bona vacantia, now vests in the respective State or the Union. Escheat or bona vacantia occurs when property has no lawful heirs, and the government assumes ownership.

The case of In Re: U.N. Mandal’s Estate Private Ltd., addresses the Registrar striking off a company that never operated or possessed assets or liabilities. Although not strongly emphasized by the applicants, an important argument highlighted potential loss if the company had any property. The Calcutta High Court applied the Doctrine of Bona Vacantia, stating that in such situations, the state would take over the assets. The court clarified that dissolved company property, formerly accruing to the Crown in India, now belongs to the Union of India under Article 296 of the Constitution.

While Section 555 of the Act, 1956 covers unclaimed dividends and assets in liquidation, there’s no equivalent provision for dissolved companies under Section 560 of the Act, 1956.

The Supreme Court, recognizing the stance in the In Re U.N. Mandal’s Estate case, has affirmed in Peirce Leslie and Co. Ltd. vs. Violet Ouchterlony Wapshare, that shareholders or creditors of a dissolved company should not be considered its heirs and successors. Upon the dissolution of a company, any properties it may have will become the possession of the Government.

Conclusion

The process of striking off a company from the registrar’s records, whether under the Companies Act, 1956 or the Companies Act, 2013, serves a vital mechanism to close down businesses in India.

Furthermore, recent judicial rulings have highlighted how important it is to have a procedural fairness and the need for careful assessment before striking off a company. Courts have overturned striking off orders where companies have shown unintended non-compliance or where defaults seemed fixable, highlighting out the importance of considering each case on its merits.

It is also to be highlighted the absence of specific provisions under Indian law regarding the state of property after its struck off. While the concept of bona vacantia exists in other jurisdictions, its applicability in India remains in question, pointing out the need for further legislative clarity to address the state of company assets and property post-dissolution.

In conclusion, while striking off facilitates companies to close operations in an orderly manner, it is important for regulators, courts, and policymakers to ensure that the process is fair, transparent, and legally certain. Clear guidelines regarding the treatment of company assets and property post-dissolution are essential to protect stakeholder’s interest and maintain the principles of corporate governance and rule of law.

To read more blogs on similar topics click here.