Striking Off Names of Inoperative Companies

Collins English Dictionary defines the word “company” as a business organization that makes money by selling goods or services. ¹A company can be construed as a legal entity formed by a group of individuals to engage in and operate a business. To obtain legal recognition and enjoy the benefits of limited liability, perpetual succession, and easy transferability of shares, companies must register in the Register of Registrar of Companies (‘RoC’), which is a public record of all the companies in a country. However, not all companies remain in the register forever. Some companies may be struck off from the register for various reasons, such as failing to commence or carry on business, voluntarily applying for removal, or being involved in fraudulent or unlawful activities. The process and consequences of striking off a company depend on whether it is initiated by the RoC or by the company itself.

Meaning of Inoperative Companies

The word ‘inoperative’ refers to something which is not working or taking effect.² Hence, an inoperative company means a company not carrying on business. There are several terms used to refer the inoperative companies such as– defunct companies, shell companies, dormant companies etc. ‘Defunct company’ refers to a company which is not carrying over any business or operation.³ ‘Dormant company’ means a company formed and registered for a future project or to hold an asset or intellectual property and has no significant accounting transaction, or is an inactive company.⁴ A company can obtain the status of a dormant company only upon making an application to the RoC and subsequent issuance of the required certificate by him.⁵ ‘Inactive company’ is a company which has not been carrying on any business or operation or has not made any significant accounting transaction during the last two financial years.⁶

‘Shell company’, a term commonly used in tax matters, is a company acting as a shell, i.e., hiding the identity of the real owners.⁷

The Striking off Names of Inoperative Companies

‘Striking Off’ is the process of withdrawing a company's name from the Register of Companies, maintained by the RoC. This procedure is similar to the closure or an alternative to the winding up of a company. ⁸ After being struck off, the company no longer exists, and all operations come to a halt.

There are 2 modes of striking off a company:

1. By Registrar of Companies: The RoC has the power to strike off a company’s name from the register of companies on the grounds where:⁹
   1. A company has failed to commence its business within one year of its incorporation.
   2. A company has not carried on any business or operation for the 2 preceding financial years and has not made any application within such period for obtaining the status of a dormant company.
   3. The subscribers to the Memorandum of Association (‘MoA’) have not paid the subscription required at the time of incorporation of the company and a declaration to this effect has not been filed within 180 days of incorporation.
   4. A physical verification revealed that a company is not carrying on any business or operation.
2. 2) By the company itself: The company can file an application with the RoC to have its name struck off.
   1. However, the company must comply with the prescribed procedure and satisfy the eligibility criteria, which is the same as the first approach.
   2. The company must extinguish all its liabilities before filing the application and the resolution to file must be with the consent of at least 75% of members of the company in terms of paid-up share capital.¹⁰

Procedure

When the RoC decides to strike off a company's name from the register of companies:

• He must send a written notice in Form STK-1 to the company, all directors, and relevant authorities.¹¹
• The notice must be sent by registered post with acknowledgement due or by speed post and should state the reasons for the decision.¹²
• The company and all its directors have 30 days from the date of the notice to provide their representations and relevant documents.¹³

If a company wishes to remove its name from the register of companies:

• It is required to submit Form STK-2 along with a fee of Rs. 5000.¹⁴
• Form STK 2 must be certified by a Chartered Accountant, Company Secretary, or Cost Accountant, provided they are in full-time practice.¹⁵

Upon completion of the either of above processes:

• A notice for the removal of the name shall be published in Form STK 5, which must be displayed on the official website of the Ministry of Corporate Affairs on a separate link established for this purpose.¹⁶
• The notice should be further published in the Official Gazette, as well as in a leading English newspaper and at least once in a vernacular language newspaper, both with a wide circulation in the State where the registered office of the company is situated.¹⁷
• The RoC must immediately and simultaneously inform the relevant authorities that have jurisdiction and regulate the company, such as the Income-tax authorities, central excise authorities, and service-tax authorities about the proposed action of removal or striking off the names.¹⁸
• If any of these authorities have any concerns or objections, they must be raised within 30 days of notice.¹⁹

Effect of a company notified as dissolved.

When a company undergoes dissolution,²⁰ its operations as a corporate entity are terminated immediately from the date mentioned in the notice of dissolution. The certificate of incorporation previously granted to the company is deemed null and void. However, the company is permitted to recover any outstanding amounts owed and settle its outstanding obligations before being dissolved.

Effect on Members and Other Authorities

The liabilities and obligations of directors, managers, officers, and members will persist even after the company has been dissolved. This means that any person who was in a position of authority and carrying out management responsibilities will continue to be liable for any actions or decisions made during that time. These liabilities can remain enforceable even though the company ceases to exist.²¹

Conclusion

The option to strike off a company is a viable way for dissolution that ensures legal compliance while protecting the interests of all parties involved. This method is particularly useful when a company has stopped its business or operation. The ROC can begin the dissolution process, which includes removing the company’s name from the register and publishing a notice confirming the same. This process ensures that the company is formally dissolved, and all legal obligations are met without the need for lengthy and expensive liquidation proceedings.

Article is authored by Anhad Bawa is a student of law at Guru Nanak Dev University Regional Campus, Jalandhar, Punjab