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This article highlights the provisions of section 248(1) of the Companies Act, 2013 relating to Power of Registrar to remove name of company from register of companies. Its main thrust however, is on the effects of 'Show Cause Notices' (here after read as "SCN") issued by the Registrar of Companies (hereafter read as "ROC") to the companies for violation u/s. 248(1) (not carrying on any business or operation for a period of two immediately preceding financial years)
1. Thus Far all ROC's issued show cause notices to the Companies u/s. 248(1) (c). As per notice ROC shall strike off the Company if appropriate reply is not filed within 30 days and ROC will take appropriate action against the Directors. Many professionals have been raising questions on interpretation/provisions relating to strike off through Show Cause Notice, liability of director, etc.
Extract of Show Cause Notice
2. Extracts of the show cause notice, to the extent relevant for our discussion, are stated as under (with necessary comments and modifications, wherever felt necessary).
Statutory Provisions Contained Under the Act
3. Provisions of the Companies Act, 2013, to the extent relevant for our discussion, are stated as under (with necessary comments and modifications, wherever felt necessary).
248 (1) Where the Registrar has reasonable cause to believe that—
4.1 First Question that comes to mind after going through the content of the "SCN" is "What should be the First step of the Company after receipt of Show Cause Notice"?
Ans: As mentioned in notice Company has to reply within 30 days, otherwise name of company shall be removed from the record of the MCA data base and appropriate action shall be taken against the directors of the Company.
As a result, First step after receipt of notice should be filing of an appropriate reply with concerned ROC by pointing out the facts of non-operational or non-filing of ROC forms, intent of the Company, either closure of the Company or to continue the business of the Company, etc.
While replying the show causes notice one should be cautious as regards provisions of the Act and legal responsibility of the promoters/directors after removal of name of the Company.
4.2 Second Question: What steps should be taken if Company wants to continue its business operation?
Ans: If Company wants to continue its business and revive itself then it should take the following steps:
4.3 Third Question: What steps should be taken if Company wants to close in other Words, Company doesn't want to continue its business?
Ans: Many professionals have been raising question on Consequences' of closure of Company u/s. 248(1). If considering the provisions under the Companies Act subsequent questions come up in mind on the subject of consequences of striking off of Company u/s. 248(1) by SCN.
4.3.1 Whether Director will be disqualified u/s. 164(2) of the Companies Act, 2013?
Extract of relevant portion of section 164(2): No person (who is or has been a director of a company) shall be eligible to be re-appointed as a director of that company or appointed in other company for a period of five years from the date on which the said company fails to file financial statements or annual returns for continuous period of three financial years.
As per the language of section 164(2). If the Company fails to file annual forms for a continue period of 3 years or more then directors are disqualified for appointment in another company.
One can opine that, even if company strikes, off by SCN u/s. 248(1) directors turn out to be disqualified for appointment and appropriate action against the director can be taken.
4.3.2 Whether office of director can be vacant u/s. 167(1) (a) of the CA, 2013?
Ans. Extract of relevant portion of section 167(1) (a): The office of a director shall become vacant in case he incurs any of the disqualifications specified in section 164.
As per the language of section 167(1) (a) if a director become, disqualifies u/s. 164 then his office as director in all the companies simultaneously is vacant.
Consequently, One can opine that due to disqualification as per question 4.3.1 discussed above the office of such director in another companies also shall be considered as vacant and he shall cease to continue as director in all the Companies.
4.3.3 Whether there is any the levy of penalty on the directors of the Company u/s. 166 of Companies Act, 2013 due to non-compliance of their duties?
Ans. Extract of relevant portion of section 166: (1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company. (2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.
As it is duty of the directors of the company to act in best interests of the Company, shareholders, etc., it is duty of the directors to follow and comply with the provisions of the Companies Act and other legal compliances.
Consequently, one can opine that if a director fails to comply with his duties then he is liable for penalty u/s. 166(7), i.e., 'fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.'
4.3.4 What will be liabilities of members and directors as mentioned in the SCN?
Ans. As mentioned in the Notice, "This dissolution is subject to the provisions that the liability of every director and members of the Company shall continue and may be enforced as if the company has not been dissolved"
Liabilities of Members:
188.8.131.52 Extract of relevant portion of Section 2(22): "company limited by shares" means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them;
Consequently, it is clear that liability of members is limited upto unpaid amount of share capital only. They can't be liable for any amount above the paid-up capital.
Liability of Directors:
184.108.40.206 Liability of Director already is discussed above in question 4.3.3. However, the liability of director is not restricted upto Section 166. As Director and an 'Officer who is in default' he is responsible for all the non-compliances under the Companies Act, 2013.
Example: As per Section 129(2) 'At every annual general meeting of a company, the Board of Directors of the company shall lay before such meeting financial statements for the financial year" if director contravenes these provisions he is answerable for the penalty under section 129(7). There are many more sections under the Act where specific penalties are given for the Directors.
In case of Viavi Solutions India (P.) Ltd. v. Registrar of Companies, NCT Delhi & Haryana,  80 taxmann.com 8 (NCL-AT) NCLT imposed penalty on directors of the Company for non-compliance u/s. 137 Copy of financial statement to be filed with ROC in e-form AOC-4 and u/s. 92 copy of annual return to be filed with ROC in e-form MGT-7
5. Bearing in mind the provisions of Section 248, read with other relevant provisions of the Companies Act, 2013 and Show Cause Notices issued u/s. 248(1), one can opine that in case of closure of Company by ROC on Suo Motto through this Notice directors of the company shall be legally responsible for the non-compliances, any unpaid debts of the Company, etc.
In this article it has learn endeavoured to discuss the consequences of show cause notice issues under section 248(1). Still several questions are unanswered like: (a) Whether director will be ceased to be appoint in any other companies' u/s. 164(2) if yes upto what time? (B) Whether ROC can issue show cause notice to director for compounding under various provisions of the Act, Etc.
It is worthwhile that while preparation of reply of the show cause notice one should be cautious as regards provisions of the Act and legal responsibility of the promoters/directors after striking off of the Company from register.
Any other opinion is also welcome for further clarity of the provision of the Companies Act.