Compounding under FEMA even after Dissolution?

21 July 2022 • Kirti Arora

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Compounding under FEMA even after Dissolution?

21 July 2022 • Kirti Arora

Have you ever come across a case where a notice has been issued by the Enforcement Directorate or any regulatory authority for violation of foreign exchange laws or any other law(s) to a Company that has been struck off or dissolved?  Can any inquiry or investigation be initiated against a company that has been dissolved? We came across this interesting case where the company had to bear the consequences and undergo compounding for FEMA contravention in spite of having been dissolved.

Facts of the case:

The relevant facts of the case are as follows:

  • The Applicant Company was incorporated on 21st November, 2011 under the provisions of the Companies Act, 1956, and was engaged in the business of wholesale trading in branded electrical appliances.

  • The Applicant had received a foreign inward remittance of INR 6,15,395/- from its subscribers towards subscription to capital instruments. However, the applicant failed to report the said inward remittance to the Reserve Bank of India (hereinafter to be referred as “the RBI”) within the due timelines.

  • The Applicant was referred to the Directorate of Enforcement (DoE) on 9th June, 2016 owing to non-filing of Form FC-GPR (could this mean that the Company was under enquiry/investigation/adjudication by DoE as on the date of filing of strike-off application and compounding application when there were no developments for more than 2 (two) years).

  • The Applicant Company filed an application for striking off under Section 248 of the Companies Act, 2013 to the Registrar of Companies, Chennai. The same was allowed and the Company was struck-off on 18th February, 2019.

  • The Applicant Company, then finally filed the Form FC-GPR on 11th July, 2019 with the delay of seven years approximately and post dissolution of the Applicant Company.

  • The Applicant was informed about the contravention of FEMA provisions for delayed filing of Form FC-GPR on 09th August, 2019, and was advised to file a compounding application.

  • The Applicant filed an application on 16th September, 2019 with the Reserve Bank of India for compounding of contravention Para 9(1)B of Schedule I to Notification No. FEMA 20/2000-RB, i.e., for delay in filing of Form FC-GPR within 30 days from the date of issue of shares.

  • The application for compounding was considered, and the contravention was compounded on payment of INR 24,410/- (Rupees Twenty-Four Thousand Four Hundred and Ten Only).

Now, we would be analyzing the above case with the help of a few questions.

1. What is the legal status of the Company whose name has been Struck-Off from the Registrar of Companies?

Strike-off is one of the modes for closure of business operations of the Company applied in cases when the Company has nil assets and liabilities. A Company can voluntarily file an application for a strike-off in accordance with the provisions of Section 248 of the Companies Act, 2013 (“the Act”).

The Registrar of Company after complying with the procedure as prescribed under the Act, if satisfied, approves the application and struck-off the name of the Company from the Register of Companies. The Company then stands dissolved; meaning thereby that the business of the Company shall be closed and the Company will lose its existence.

2. Can a company which is under investigation or inspection by any authority file an application for strike-off?

To answer this query, let’s have a look at the corresponding provisions under the Act:

  • Rule 3 of the Companies (Removal of Name of Companies from the Registrar of Companies) Rules, 2016: The said rule lists out the categories of companies that cannot be removed from the Register of Companies which includes a company against which any investigation or inspection is ordered and being carried out or any prosecution for an offence is pending in any court;

  • Form STK-2: The applicant company is required to declare in the strike-off application, which is filed in Form STK-2 that no inspection or investigation is ordered against the company and it does not have any dues payable to income tax, excise duty or any statutory authority.

Thus one can opine that a company that is under investigation of inspection by any authority is not eligible to file an application for strike-off.

In the present case, the Company was under investigation/enquiry by DoE, though the Company was able to get itself struck off. Though Rule 7(2) of the Companies (Removal of Name of Companies from the Registrar of Companies) Rules, 2014, prescribes that the Registrar shall intimate the concerned regulatory authorities regulating the company, viz, the Income-tax authorities, central excise authorities and service-tax authorities having jurisdiction over the company, about the proposed action of removal or striking off the names of such company and seek objections, if any.

Food for Thought: Is it possible to get the company struck off if it is under any investigation or inspection by any authority? Is the Reserve Bank of India or Directorate of Enforcement fall under the purview of Rule 7(2) as stated above or does it include only tax authorities?

3. Can any inquiry or proceeding be initiated against a Struck-Off Company?

The provisions of Section 248(7) of the Act, provide that the liability of the directors and officers shall remain unaltered and enforceable notwithstanding the Company’s dissolution.

Though, the company from the date of publication of notice in the official gazette stands dissolved. However, per the aforesaid provisions, the directors are not secured from any future liability such as any tax demands, or outstanding dues.

4. Who would be liable to pay if any tax demand is raised or a penalty is imposed on a struck-off company?

As mentioned in the above question, the directors are not secured from any future liability.

Also, the directors of the company are required to submit an indemnity bond in Form STK-3 along with the strike-off application to undertake and indemnify the claims and liabilities that may arise in the future after the company is struck-off. Thus, the Company can be revived and the directors can be held personally liable to pay off the liability, if any, that arise after the Company is struck-off.

The provisions of Section 252 of the Act provide for the revival of the struck-off company on an appeal filed by any aggrieved person or any member or creditor or workman to the Tribunal before the expiry of twenty years. Thus, the Act itself has provided the grace period of twenty years and has kept the option open for the restoration of a company in case of any material event. There have been several such instances where a company was restored on account of the demand raised by the income tax authority; one such case is Commissioner of Income Tax-8, Mumbai vs Registrar of Companies, Mumbai, MoTech Software Private Limited.

5. Who would be representing the Company whose name has been struck-off if any inquiry or notice is issued against such Company?

The Board of Directors of the Company is empowered to manage the affairs of the company during its lifetime. Thus, even after the company is struck-off, the directors shall be held responsible for the acts done by them during their tenure in the company as director.

 In the present case, the compounding application was filed by the erstwhile director of the Company.

6. Is there any requirement to intimate the Reserve Bank of India about the filing of strike-off application for a Company which had foreign direct investment?

The Act does not stipulate any specific requirement to intimate other statutory authorities viz. Income Tax Department, Reserve Bank of India, Goods and Service Tax (GST) Department, etc. about the filing of strike-off application or obtain No-Objection Certificate (unlike in the case of voluntary liquidation which requirement has also now been dispensed off vide Circular No. IBBI/LIQ/45/2021 dated 15th November, 2021).

However, the directors of the company are duty-bound to act in the best interest of the company and thus it is always advisable to proceed with the filing of application after complying with all the applicable laws or pending filings and meeting all the liabilities.

7. Is compliance to Foreign Exchange Management Act (FEMA) provisions not a pre-requisite to file an application for Strike off?

Per the provisions of the Act, any company can file an application for strike-off:

  • on satisfaction of any of the grounds as provided under Section 248 of the Act;
  • having a nil assets and nil liabilities statement; and
  • by passing a special resolution.

Thus, it can be safely inferred that non-compliance with the FEMA provisions will not restrict a company from filing strike-off application as there is no system in place to track the status of compliances with other acts in case of strike-off (whereas in the case of voluntary liquidation, the companies are under obligation to seek a no-objection certificate from authorities).

It is pertinent to note that in case of voluntary liquidations, the Reserve Bank of India restricts a company from repatriating surplus balance to the stakeholders if any filings like FCGPRs are pending.

8. Is there any means to get the status of the company updated on the various portals once it has been struck off?

Once the strike-off application is approved, the status of the company on the master data as available on the Ministry of Corporate Affairs website gets updated as “Dissolved”.

However, in other portals viz. FIRMS, FLAIR, GST, Income Tax, etc., there is no means available to check or update the status of the Company on portal for filing purpose. Thus, it has been observed that the accounts of the company remain in existence even after the company is dissolved and can be accessed.

In the FIRMS portal, the companies which have been dissolved (including the companies which have been dissolved through liquidation) are still appearing on the search while obtaining for registration as Business User.

9. Is it possible to file pending forms with the Reserve Bank of India after the company has been struck off?

Filing forms on the FIRMS portal requires registration of the company as entity user and business user. Entity User is only with respect to an entity which has received foreign investment whereas Business User is the one who would be making the necessary filings in Single Master Form.

There is no such procedure defined or requirement prescribed under the FEMA provisions, to deactivate the entity user after its dissolution. Therefore, the entity user remains in existence even after the company is dissolved (unlike the case of the Companies Act, where no further filings can be made with the Ministry once the Company is dissolved).

Thus, any person can make the necessary filings by obtaining business user registration in respect of the struck-off entity.

In our opinion, the company would be required to approach the Reserve Bank of India through its authorized dealer bank to get its account de-activated on the portal.

Takeaway:

In view of the above case and other similar cases where the Government has been seen safeguarding its interest and revenue, it is always advisable to have all the compliances in place prior to making any application for dissolution (either through strike-off or voluntary liquidation).

It has been noticed in the no-objection certificate, which is issued by the Income Tax or any other authority, that the department only provides confirmation of no liability only as on the date of issuance of the certificate, uncertain of any future liability, thereby protecting its interest and leaving a space for any future claim(s).

References:

    • Compounding order passed in the matter of Orbitronics Enterprises Private Limited dated 30th December, 2019;
    • Chapter XVIII Removal of Names of Companies from the Register of Companies;
    • The Companies (Removal of Name of Companies from the Register of Companies) Rules, 2016

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