Mumbai: Companies will find it easier to shut shop by getting their names removed from the corporate register. As not all startups take off, the new provisions are expected to help entrepreneurs. Once this quick process is carried out, inoperative companies do not have to go through the tedious and time-consuming process of a voluntary winding up.

While removal of a name entails an application fee of Rs 5,000 plus ancillary allied costs, the entire process of a voluntary winding up — which requires a shareholder and creditor meeting, and the appointment of a liquidator — could cost multiple times more.

The relevant sections in the Companies Act, 2016 and the rules, viz. Companies (Removal of Names of Companies from the Register of Companies) Rules, were notified in late December.

The Registrar of Companies (RoC) can strike off a company from the register if it has failed to commence business operations within a year of incorporation, or it has not been carrying on business for two years and has not applied for being treated as a dormant company. A company can also on these grounds approach the RoC for removal of its name after having clearing its liabilities and obtaining consent of at least 75% of its shareholders.

The earlier Fast Track Exit (FTE) Scheme, under the old Companies Act, enabled inoperative companies to approach the RoC, from time to time, for striking off their names. “However, the new provisions offer more clarity and an easier exit process,” says Anita P Basrur, Partner, Sudit K Parekh & Co.

“FTE had been introduced only by way of a circular and thus lacked the requisite binding force. Since sections 248 to 252, which deal with removal of names from the register of companies, are now notified to be part of the Companies Act, 2013, thus they carry more authority or weight before other authorities, say the central or state tax authorities,” explains Basrur.

Sharda Balaji, founder of NovoJuris Legal, a law firm, says, “The timelines are now defined for statutory bodies to respond.” On receipt of the application, the RoC issues a public notice and also notifies the central and state tax authorities to check for objections. If no objection is received within 30 days, the RoC then proceeds with striking off of the name. “However, it would have been better if timelines were also set down for disposal of the application by the RoC,” adds Balaji.

Basrur states, “Earlier, aggrieved members or creditors of the concerned company had a 20-year window within which they could approach the court for reinstating the name of the company. While this remains, in addition, now any aggrieved person also has a limited window of three years to apply to the National Company Law Tribunal for reinstating the name.”

Winding up vs striking off name:

Even if a company’s name has been removed from the RoC’s register, liabilities, if any, of creditors and tax authorities, continue on every director, key officers and members of the company and may be enforced as if the company has not dissolved.

“Whereas, in case of a winding up or liquidation under court supervision, there is no such devolvement of liability,” explains Balaji. Basrur adds, “Further, there is no time limit prescribed for the liability claim.”

Thus, if a startup is sure that there are no outstanding liabilities, then striking off the name could be a better alternative, say experts.

Option to continue as a dormant co:

The Companies Act, 2013, has introduced a new class of companies called ‘dormant’ companies. A company that has not carried out business for the past two years or has not filed any financial statements and annual returns for the past two years can be regarded as a dormant company. Thus, a startup, instead of applying for striking off its name, can instead apply to be a dormant company.

“However, a dormant company is still required to have minimum directors, hold at least two board meetings and file its annual financial statements and returns with the RoC. It carries a compliance cost,” explains Basrur.

Balaji sums up, “The ultimate decision is that of an entrepreneur who may wish to retain the company in order to start another initiative in the near future.”

Source: Times of India