One of the quick ways to shut down a company, when non-operational over a period of time, was through a process called Fast Track Exit (FTE). In its place, under the Companies Act, 2013 has brought in a process called Removal of Names of Companies from Register (Section 248 of Companies Act, 2013), with effect from 26 December 2016.
On 26 December 2016, Ministry of Corporate Affairs (MCA) issued a Notification notifying Section 248, 249, 250, 251 and 252 of Companies Act, 2013 (Chapter XVIII). This chapter deals with Removal of Names of Companies from Register of Companies.
A company can apply for a shut down under the new process when:
- A company has failed commence business within one year of incorporation,
- The subscribers to MOA have not paid the subscription amount within 180 days and no declaration filed to this effect,
- Not carrying any business or operation for a period of two years (earlier it was one year) and has not sought to call itself a dormant company,
- When a company voluntarily wants to shutdown, it can, after clearing all its liabilities, by obtaining consent of atleast 75% of shareholders in terms of paidup capital.
Non-eligibility of companies to shut down under the new process:
- Listed companies, not for profit (section 8) companies, vanishing companies, non-compliant companies under various statutory laws, where investigation or inspection or enquiry is ordered, where prosecution or application for compounding is pending, where the assets of the company still have a charge on them.
- If three months prior to such application, a company had changed its name, shifted registered office, has disposed property or rights for value, made an application to National Company Law Tribunal (NCLT) for any compromise or arrangement or is under a winding up process.
These are some measures to ensure that there are no fraudulent applications for removal of name, including ensuring there is no intention to deceive creditors or defraud any person.
The new Rules, Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 at a high level:
- Removal of name of company from Register by ROC on suo-moto basis.
- Forms for making an application by the Company (Form-STK2) is notified, along with a fee of INR 5000, along with an Indemnity Bond from directors, Statement of Accounts certified by a chartered accountant, Affidavit from directors, Shareholders special resolution signed by every director, a statement that there are no pending litigations involving the company.
- An application filed, will be cross-verified by ROC, by giving a notice to all the directors at the address on record, along with reason cited by company for shutting down and if the directors have any representation to make/seek.
- ROC will further intimate and seek objections if any, from income tax, central excise, service tax authorities. There is a time line of 30 days within which such authorities have to respond and if no response is received, then it is presumed that such authorities do not have any objection.
- Based on the company’s business, such as NBFC, insurance, housing finance, collective investment schemes, asset management companies, then ROC requires a no-objection certificate from the applicable regulatory bodies.
- ROC on receipt of application, issues a public notice, by notifying on MCA’s website. It appears that MCA will provide for a separate webpage for notifying public for all applications received by them in this regard.
- Publish in Official Gazette
- Publish in newspaper (English and vernacular) having wide circulation in the State where the registered office of the company is located
- If a company has applied for shutdown, then the company will have to notify on its own website
Effect of company notified as dissolved:
Though the company has been dissolved and its name removed from the ROC’s registers and intimation provided to tax authorities, it has to be noted that liabilities, if any, continues on every director, key officer, members of the company continues and may be enforced as if the company had not been dissolved.
This is the major difference between the process as described above and winding up through NCLT.
With detailed rules, process, forms and guidance, the Government has provided much clarity. The rules also provides for clear timelines for statutory bodies to respond. It would have been nice if timelines were established for disposal of application by the ROC as well. The expenses of opting this route of shutdown has marginally gone up, due to newspaper notification to be published.