Can ROC strike off an operational company? - NCLAT sets aside NCLT order and directs restoration of company's name

An interesting rather obvious question came into light in the matter of Vikas Sureshbhai Patel vs. The Registrar of Companies, Gujarat in Company Appeal (AT) No. 148 of 2020 wherein Registrar of Companies (ROC), Gujarat removed the name of an operational company from the Registrar of Companies due to non-filing of financial statements. Section 284 clearly puts up a condition that inter-alia when a company has not carried on any business or operation for two consecutive financial years, only then ROC can strike off its name. This provision undoubtedly empowers ROC to strike off the name of only in-operational companies. This leads us to the question: can ROC strike off an operational company’s name from the Registrar?

This article touch upon facts of the case which become very basis of the final judgement, submissions by both parties, final judgement and the key takeaway from the case.

Factual matrix:

A Company was incorporated in the year 2011 in the State of Gujarat. It filed its financial statements with the ROC, Gujarat up to Financial Year 2015-2016 in compliance with the Companies Act, 2013 from time to time. 

However, due to some lack of knowledge of the Management of the Company and not having any professional guidance, the Company could not file the Annual Accounts and Annual Returns for the Financial Years 2016-2017, 2017-2018 & 2018-2019 in time. 

It is submitted that the Company has been active since incorporation and carrying on its business activities as per the Objects of the Company.

ROC, Gujarat issued show cause notice in form STK-1 and form STK-5 respectively. 

The Director of the Company approached the ROC Gujarat for obtaining three months time for compliance of filing of the Annual Returns for the aforesaid three years. However, no reply was received from the ROC. 

ROC, after issuance of notice in prescribed form, struck off the name of the Company from the Register of Companies, Gujarat.

The Company filed Appeal/Application before the Hon’ble NCLT, Ahmedabad Bench, praying the Hon’ble NCLT to restore the name of the Company to the Register of Companies maintained by ROC, Gujarat and allow the Company to file all outstanding statutory documents i.e. the financial statements and Annual Returns for the year 2016-2017, 2017-2018 & 2018-2019 in completion of Annual filings. 

The Learned NCLT vide order dated 29.01.2020 rejected the Application/Appeal of the Company.

Submissions by the Company

The Company remained continuous functional even during the period 2017-2019 and also disclosed the revenue from operations and other income for the aforesaid Financial Years. Apart from the above, the company has tangible and intangible assets as shown in the Annual Returns. 22 to 25 employees are working with the company and the company has been paying regular salaries to its employees.

Submissions by ROC

ROC submitted that the company failed in filing of its statutory returns for a continuous period of more than two years, the name of the company has been considered for striking off by the ROC, Gujarat in a suo-moto action under the provisions of Section 248(1) (c) of the Companies Act, 2013 and also in pursuance of a circular issued by the Ministry of Corporate Affairs, Government of India from time to time. 

The basis for striking off the name of the Company is continuous non-filing of statutory returns since 2017 and not carrying on any business or operations for a period of two immediate preceding financial years and has not made any Application within such period for obtaining the status of a dormant Company under Section 455 prior to its struck off.

The Office of the ROC had issued STK-1 notice on 17.07.2019 to the Company and its Directors informing the intention of ROC to strike off the name of the Company and requested to submit the cause contrary to the said action within 30 days. Further, the ROC published the name of the company on the website as per Rule 7 of the Companies (Removal of Name) Rules, maintained by the Ministry vide STK-5 notice dated 14.09.2019. The name of the Company was also published in Official Gazette and also public notice was issued in leading English newspaper (Indian Express) and widely circulated vernacular language newspaper (Divya Bhaskar- Gujarati) on 12.09.2019.

In absence of statutory filings for more than two years and in absence of any representation against the proposed strike off, the ROC Gujarat struck off the name of the company on 13.11.2019 and the dissolution order was passed on the website of the Ministry vide STK- 7 notice on 13.11.2019.

NCLT rationale behind striking off the company

The Hon’ble NCLT dismissed the Application on the ground that the Company did not generate any income/revenue from its operations since the financial year ending 31.03.2017 to 31.03.2018 and the company did not show TDS deduction as showing in Annual Accounts and having not provided future plan to revive the company.

As per the order, the Learned NCLT after having considered the pleadings and documents of both the parties, dismissed the Application/Appeal of the company on the following reasons: 

“17. On perusal of the Balance Sheet for the F.Y.2016-17 and 2017-18, it is found that the Company is running in losses and also failed to produce any document with regard to the future prospect of business or any proposal for future business supported with any project report to show their bonafide. 

18. Admittedly, as against Authorized Share Capital of Rs. 2,00,000/- and Issued, Subscribed & Paid Up Capital of Rs. 2,00,000/- , the company is incurring losses for the preceding last few financial years i.e. accumulated loss as on 31.03.2019 is Rs. 1,46,60,340/-. 
19. The Appellant has failed to substantiate/justify the cause of the losses and has miserably failed to show their bonafide with regard to their future plan or prospects which may necessitate to revive the company. 
20. On further perusal of the Income Tax Return Acknowledgment for the 3 years, which reflects ‘NIL’ income continuously, however, they are showing TDS deduction but no supporting documents has been filed to substantiate the TDS deduction when the income is showing as ‘NIL’. Further, why this TDS deduction is made, it is not clarified in the application. 
21. Under the given circumstances, as narrated above, we find no bonafide reason, so as to, allow the application by giving an appropriate direction to the ROC for restoring the Company. 
22. Accordingly, the instant application is dismissed. No order as to the cost.” 

NCLAT’s stand on the matter

After perusal of the financial statements filed by the Company for the years 31.03.2017, 31.03.2018 and 31.03.2019, NCLAT stated that it is evident that the Company was carrying on its business and the revenue generated from operations indicates that the company is in operation. Further, from the record, it is evident that the company is having tangible and intangible assets. Apart from the above the company is having employees working with the company as per the pleadings and the documents filed by the Appellant. 

There is no denial from the ROC that the company is neither in operations nor having any employees. The only objection of the ROC is that the Company has failed to file the statutory returns for a continuous period of more than two years. It is not the case of the ROC that the company is a defunct company.

Power of ROC to strike off

Section 248 of the Companies Act, 2013 deals with the power of ROC to remove the name of a Company from the Register of Companies. Section 248(1) read as under:

“Where the Registrar has reasonable cause to believe that—

(a) a company has failed to commence its business within one year of its incorporation; or

(c) a company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under section 455 he shall send a notice to the company and all the Directors of the company, of his intention to remove the name of the company from the register of companies and requesting them to send their representations along with copies of the relevant documents, if any, within a period of thirty days from the date of the notice.”

From a bare perusal of the above provisions of the Companies Act, 2013 ROC has the powers to remove the name of a company from Register of Companies as per Section 248 but after due compliance of law. The name of the Company would be struck off and published in the Official Gazette showing that the company stands dissolved as per Section 248(5). 

However, Section 252 provides an option for appeal to the NCLT and states that the Company or any Member, Creditor or Workmen may file an Application to the Tribunal and the Tribunal after satisfying the grounds as made by the Appellant/Applicant, order the name of the company to be restored and give such directions and make such provisions as deemed just for placing the company and all other persons in the same position as nearly as may be as if the name of the Company had not been struck off from the Register of Companies.

Judgement

The Appellate Tribunal held that it is evident that the company is carrying on business and it is in operation. However, the admitted fact that the company has not filed the Annual Returns for two preceding years and the same has been admitted by the Appellant and the Company for their default showing that they are ignorant of the law.

The main ground for the removal of the company from the Register of Companies is that if the company is not carrying any business or operation for a period of two immediately preceding years, the ROC may issue notice to the Company calling explanation from the Company and thereafter take action in accordance with law. Non-filing of Annual Return is a default. The said default can be cured/rectified by imposing costs as per the provisions of the Companies Act, 2013. Whilst, the Company is carrying the business and if it is in operation, however, non-filing the Annual Returns and the financial statement as required under law inadvertently may not be a ground for removing the name of the company. 

“In the present case, I am of the view that the company is in operational and as per Section 252 of the Companies Act the Learned NCLT ought to have restored the name of the Company to the Register of Companies.”

NCLAT directed the ROC to restore the name of the Company on the Register of Companies.

It also directed the Company to file all its financial statements, Annual Returns, Balance Sheet for which the company was in default, with the ROC Gujarat. 

Further, it held that ROC Gujarat is at liberty to impose penalty and interest if any for the default in filing Annual Returns, Balance Sheet, Financial Accounts etc. in accordance with law.

Key Takeaway 

In this matter, NCLAT dismissed the contentious observation of two authorities viz. ROC and NCLT on the operations of the company. It emphasised on the working of the company and came to a conclusion that the company is operational.

Hence, from this entire case, one this became quite clear that how and when a company will be said to be “operational” or “inoperational” is of essence. While taking a decision regarding the striking off the name of a company, facts of the case must be carefully examined to come to a conclusion as to the operationality of the company. However, the ultimate onus of proving that the company is operational and carrying on its business will come on the management of the company.