Running a company is no cakewalk, sometimes the founders of the company take tough decisions to close down the company. In the last 3 years, nearly 3.8 lakh companies are struck off under the Companies Act, 2013. Many companies are finding it difficult to function during the pandemic. There are two ways for closing a company, strike off and winding up of the company. Additionally, some businesses opt for termination and removal of name from the ROC as it is a viable option. The Companies Act provides the process of striking off under Companies Act, 2013 in section 248.
Here in this article, we will be specifically looking into the striking off companies under section 248, the process of Striking off under Companies Act, 2013, and the documents required for strike off.
Concept of Strike Off
In a layman’s language, it can be said that strike off is withdrawing companies name from the Register of the Company. The process of striking off under Companies Act, 2013 is more like the closure or winding up of a company. The company no longer exists after striking off and it cannot operate thereafter.
Law in relation to Process of Striking off under Companies Act, 2013
Section 248 of the Companies Act prescribes power to Registrar for removing the name of the company from the ROC. As per the section the Registrar has the right to remove the company’s name. Firstly, on failure to commence the business within 1 year of incorporation.
Secondly, the Registrar can remove the name if the company fails to carry business for two financial years and has not made an application for the status of a dormant company under section 455 of the Companies Act, 2013.
A dormant company is a company which is inactive. There are no accounting transactions irrespective of the registration under the Companies Act.
Furthermore, Section 248 in clause 2 states that the company can on its own by special resolution file an application for removal of the name of the company from the ROC.
Companies also have to comply with Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 for the process of striking off under the Companies Act, 2013.
Rule 4 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016
Before the 2019 Amendment, there was a rule that a company can file an application for strike off in Form STK-2 only if it has filed an overdue return form AOC-4 or AOC-4 XBRL along with Form MGT-7. The ROC was asking some companies to submit overdue returns and in some cases was accepting the strike-off without the overdue returns. Moreover, there was some sort of discrepancy in the system, but after the 2019 amendment, the position is much clear.
According to the amendment in Rule 4 of the Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 in May 2019, companies cannot file the application in form STK-2 unless the company has submitted the overdue returns in form AOC-4 or AOC-4 CBRL and Form MGT-7 up to the end of the financial year. The AOC-4 is the financial statement and the MGT-7 is the annual return of the company.
So this means that the company has to file the annual return till the company conducted its business. It is not mandatory to submit annual pending returns before striking off and the company can proceed further without filing the annual return for the year in which they did not conduct business.
Furthermore, the Ministry has also increased the fees for striking off the application to Rs. 10,000. This move was highly criticized as the Ministry has turned the incorporation fee to zero but the fee to exit has nearly doubled.
What is the process of striking off under Companies Act, 2013?
There are two modes for striking off a company in India under the Companies Act-
- Strike-off by Registrar of the Company under section 248(1): This section gives power to the Registrar to strike off a company from the register of companies. This is also the suo-moto action on the part of Registrar. The Registrar can issue notice to the Companies in form STK-1, intimating about the withdrawal of the name of the company from the Register of the company. This notice will inform the companies about the removal. We can also call this process as compulsory removal of the name from the ROC.
Some of the grounds of striking off a company include failure to commence business within one year of incorporation and not carrying business for two financial years and has not made an application for attaining a dormant company status.
- Striking off Company under Section 248(2): Now Companies can themselves strike off the name of their company from the ROC by filing an application. In form STK-2 after the closure of their liabilities. They can do so if they fail to commence business or have not done any business for the last two financial years. This process can start by passing special resolution along with consent of 75% of the members.
Procedure to be followed by ROC under section 248(1)
The ROC follows the following process of striking off under the Companies Act-
- Firstly, the Registrar shall send notice to the company in form STK-1 for notifying about the withdrawal of the name from the ROC.
- Secondly, the ROC shall look into the representation of the company. If the ROC is not satisfied with the representations, it can proceed further.
- There should be a publication of the said notice and the same shall be available on the official MCA website, the official gazette. Finally, it should also be printed in the newspapers in English and a vernacular language.
- The ROC also has to intimate the regulatory authorities having jurisdiction about the removal or striking off the company name. If the authorities want, they can raise an objection or issue within 30 days of the said notice.
- According to section 248(5) the ROC after the expiry of the time strike off the name and publish the notice in the Official Gazette. Then the company will stand dissolved on the publication of the notice in the Official Gazette.
- Before striking off the company, the Registrar shall make sure that the company has discharged all its liabilities and payments.
Process of Strike-off by Registrar of the Company under section 248(2)
- The company has to hold a board meeting and passes a resolution. After this, the company can make an application for strike off and the process of striking off under the Companies Act will start.
- In the next step, the company has to necessarily close all the liabilities.
- Lastly, the company conducts a general meeting of the shareholders by passing a resolution backed by 75% of the members. Thereafter the company can file form MGT-14 within 30 days.
Furnishing Documents under Strike off
Companies have to submit the following documents along with the application for starting the process of striking off under the Companies Act-
- A duly notarized Indemnity bond in Form STK-3.
- Statement of liabilities or accounts consisting of the assets of the company along with the liabilities in form STK-8.
- An affidavit in Form STK 4.
- A CTC of Special Resolution which is duly signed by the directors.
- The statement stating about pending litigations of the company.
After-Effects of Dissolution
According to section 250 of the Companies Act, if a company dissolves under section 248, they need to stop function immediately on the date mentioned in the notice of dissolution. Additionally, the certificate of incorporation will also stand canceled.
Liabilities of directors to continue
The obligations of the directors and other authoritative officers shall proceed and it might be enforced as if the company is not dissolved.
Which companies are prohibited from striking off?
According to Section 249 of the Act, no company can make an application under section 248(2) if it has changed the name, shifted registered office from one state to another, has made disposal of property, engaged in any other activity other than necessary in the past three months. In addition to this companies cannot file an application if they have made an application for sanctioning a compromise or arrangement and the matter is not yet decided. Lastly, if the company is wound up either under the Companies Act or the Insolvency and Bankruptcy Code, 2016.
Following are some of the companies which cannot strike off under Section 248-
- Listed companies and companies which are delisted because of non-compliance of the listing regulations or agreements.
- Vanishing companies and companies in which investigation is going on or pending and the proceedings are pending in Court.
- Companies which have failed to respond to the notice under section 248.
- Companies which have not furnished the follow-up instructions on the reports under section 208.
- Lastly, section 8 companies.
Consequences of Non-Compliance with Companies Act
If a company fails to comply with Section 455 of the Act and Companies (Miscellaneous) Rules, 2014 i.e. filing of annual return within 30 days from the financial year ending, the ROC will strike off the name of the company.
Moreover, there is punishment under section 450 if the company defaults to comply with the requirements. Additionally, there is a punishment for company, as well as the directors, for violation of the Companies Act.
The process of striking off under Companies Act, 2013 is a viable alternative for companies. It is the simplest option for company looking for a mode for bringing the company to an end. The company and the ROC both have the right to start the process. Striking off a company was brought in force to encourage ease of doing business along with ease in closure.