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:
Now, we would be analyzing the above case with the help of a few questions.
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.
To answer this query, let’s have a look at the corresponding provisions under the Act:
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?
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.
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.
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.
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.
Per the provisions of the Act, any company can file an application for strike-off:
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.
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.
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.
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).
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Dear Sir/Ma’am,
Our Company received the foreign investment in the year Feb 2016 for which we have duly filed the FCGPR form and completed all the required procedure. Company also filed the FLA return every year with the RBI. Now Company wants to close down its business by applying for strike off with the ROC. From the past 2 years our company trying to contact the foreign entity which has made investment in our company but we came to know that foreign entity which has made the investment got dissolved and contacting person is also not traceble by any means (Company tried to contact them on mail id provided in the share agreement and also they were not reachable on contact number provided by them). We also visited RBI office for the above query, but appropriate solution is not provided to us. In this scenario, can Company go for the strike off?
Dear Reader,
As per the provision of Section 248(2) of the Companies Act 2013, a company can apply for removing the name of the company from register of companies after extinguishing all its liabilities by a special resolution or consent of 75% members in terms of paid-up share capital.
In case the liability is not extinguished, a company can apply for voluntary liquidation.
Further to form our opinion on your case we require other information as well like the shareholding of the company which gave foreign direct investment, the shareholding pattern of your company, the liability in your books is pending or is eroded.
You may connect with us on [email protected] and share details to seek our professional assistance in this matter