The Registrar of Companies has the power to strike off the name of a defunct company from the register of companies under Section 560(6) of the Companies Act,1956. Consequently, the company is then dissolved. The company may, however, be restored to the register under certain circumstances.
Topics Covered in this article
Introduction
The case of M.A. Panjwani vs. Registrar of Companies & Anr., decided on December 02, 2013,a petition seeking the restoration of a company to the register of companies in view of a pending suit against the company. The petitioner was declared to be a “creditor” on the fact that the pending suit was for recovery of losses and hence, he had locus standi to seek relief under Section 560(6) of the Companies Act, 1956 (“the Act”).
Facts
This petition was filed by the petitioner in Madras High Court (“the Court”) under Section 560(6) of the Act read with Rules 91 & 92 of the Company Court Rules, 1959. The petitioner prayed for directions to the Registrar of Companies (“ROC”) for restoring the name of respondent No.2, i.e., M/s Alfa Impex Pvt. Ltd. (“the Company”) to the register of companies.
- The petitioner was residing in the UK. In 1979, he engaged the services of respondent No.3 to find a suitable property in New Delhi as the petitioner wanted to settle in India. Respondent No.3 identified a property and, on his request, the petitioner remitted a sum of Rs. 3,00,000/- in November 1979 in favour of respondent No.3 for purchasing the property. In January 1980, the petitioner remitted the remaining balance of the purchase price of the property to respondent No.3.
- In January 1980, the petitioner, along with his family, came to Delhi and stayed in the property. During this time, he requested respondent No.3 to give him the conveyance deed of the property but was told that it would take some time to obtain the original document. Trusting respondent No.3’s word, the petitioner went back to the UK. Between the years 1981 and 1986, the petitioner repeatedly requested for the conveyance deed but respondent No.3 kept deferring it on some pretext or another and gave evasive answers.
- The petitioner’s suspicion arose and he made enquiries into the property and found that the property was in possession and personal use of respondent No.3 since January 1980. The petitioner filed a suit for declaration, mandatory injunction and damages. On November 16, 1989, the Civil Court granted the suit in favour of the petitioner and restrained the defendants from alienating the property in any manner. In the written statement of the suit, respondent No.3 stated that the total amount of Rs. 4,50,000/- remitted by the petitioner was used to allot shares in the company (i.e., respondent No. 2) in favour of the petitioner.
- Pursuant to this, while the petitioner was away from the UK, one Mr. S.A. Quli, a former employee of the petitioner who was dismissed for misconduct in 1981, obtained an ex-parte order from the Chancery Division of the High Court of Justice in London claiming a sum of money for work he claimed to have done for the petitioner. Mr. Quli filed Execution Proceedings No.40/1989 to execute this order against the petitioner in India. The Court was informed the matter was settled between the parties and the shares allotted to the petitioner in the company were transferred to Mr. Quli. This settlement was also confirmed by one Mr. J.K. Gupta, who claimed to be a director of the company.
- In March 1988, the Additional District Judge directed that the shares which were transferred to Mr. Quli be released in favour of the petitioner, as a consequence of the ex-parte order being set aside.
- On May 14, 2003, the suit was listed before the Civil Court for leading the plaintiff’s evidence. The counsel (the petitioner in this case) sought time to lead the evidence but the trial court rejected the request and closed the plaintiff’s evidence. The suit was dismissed. The petitioner preferred an appeal before the Court in RFA No.42/2004 on February 15, 2012. The Court set aside the judgement and decree of the trial court and remanded the suit for trial. When the suit was taken up on May 07, 2012, the counsel for the company informed the trial court that the name of the company has been struck off the records by the Registrar of Companies and therefore, the suit cannot proceed.
Thus, the petitioner, having been deprived of both property and the shares allotted to him, had filed this petition praying for restoration of the name of the company.
Issue
- Whether the petitioner had locus standi to seek relief under Section 560(6) of the Companies Act, 1956?
Arguments
Arguments of the Petitioner
The petitioner sought restoration of the name of the company on the ground that it was “just” to do so based on the narrated facts. It was pointed out that if the name of the company was not restored, the suit filed by the petitioner in the Civil Court will be rendered meaningless or infructuous and there will be no effective remedy available to the petitioner to proceed against the company which caused loss to him. The respondents would get away with the property which rightfully belongs to the petitioner.
According to Section 560(6) of the Act, if a company, or any member or creditor of such company, feels aggrieved by the company having been struck off the register, may make an application to the Court before the expiry of 20 years from the publication in the Official Gazette of the notice of the name being struck off. The Court may order the name of the company to be restored to the register in the following circumstances;
- If it is satisfied that the company was carrying on business or operation at the time of the striking off, or
- That it is just that the company be restored to the register.
The Court may, by order, give such directions and make such provision as seem just 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.
[Note: The word “Court” was substituted by “Tribunal” by the Companies (Second Amendment) Act, 2002. However, it was not notified at the time of institution and final disposal of this petition for restoration of the name of the company.]
Arguments of the Respondent
The respondent No.1 (i.e., the ROC) drew the Court’s attention to various documents that the company had filed with the ROC. The annual return, dated September 30, 2014, filed by the company with the ROC showed only two shareholders –
- Singhania Education Foundation Trust holding 29,999 shares, and
- Sameer Rastogi holding 1 share.
The director’s report, for the year ended on March 31, 2004, stated that the company had not carried on any business. This statement was confirmed by the auditors’ report and the annexure appended thereto.
It was concluded by the ROC that it was well within his right to strike off the name of the company on the grounds of not carrying out any business.
Section 560 of the Act gives power to the Registrar to strike defunct company off the register in the following circumstances;
- Where the Registrar has reasonable cause to believe that a company is not carrying on business or in operation. [Clause (1)]
- If, in any case where a company is being wound up, the Registrar has reasonable cause to believe either that no liquidator is acting, or that the affairs of the company have been completely wound up, and any returns required to be made by the liquidator have not been made for a period of 6 consecutive months. [Clause (4)]
In both cases, procedure as stipulated Section 560 must be followed before the name of the company is struck off.
The respondent contended that the petitioner did not fall into any of the categories of “the company, or any member or creditor thereof” stipulated in Section 560(6) of the Act. Thus, the petitioner had no locus standi to seek relief under Section 560(6).
Regarding the argument of the petitioner that it was “just” that the company be restored to the register on the basis of the narrated facts, the respondent submitted that the word “just” appearing in Section 560(6) has to be construed ejusdem generis with the requirement that the company should be carrying on business and should be in operation. The word cannot be given a broader meaning.
Judgement
The company petition was allowed and the ROC was directed to restore the name of the company to the register.
The Court observed that prima facie a member of the company is a person who holds shares in the company on the date on which the petition is filed. The Court accepted that the petitioner did not hold any share certificate of the company. However, the petitioner was allotted 5,150 equity shares in 1989-90 for the amount of Rs. 4,50,000/- remitted by him to respondent No.3. The annual report, dated December 30, 1987, filed by the company with the ROC did show that the petitioner held 40% of the shares.
Further, the direction in the order passed by the Additional District Judge, dated March 18, 1998, to release the shares transferred in the name of Mr. Quli in favour of the petitioner was not given effect by respondent No.3. Instead, respondent No.3 resorted to deleting the name of the petitioner from the shareholders’ list on the annual return of the company. In the order passed by the Court in Suit No.3340/1989 on March 27, 2000, it was observed that the Court and the trial court were misled to believe that there was a settlement between the plaintiff and Mr. Quli. The transfer of shares from the petitioner to Mr. Quli was held to be collusive and the order under which it was done to be null . The Court, in this petition, concluded that the petitioner never ceased to be a member of the company.
The Court further stated that even if the petitioner could not be considered as a “member”, he was certainly a “creditor” of the company. The Court relied on the decision of the Karnataka High Court in Velu B. Pethi v. Kayesess Constructions Pvt. Ltd. & Ors. (2011) 163 Comp Cas 176, where it was held that the petitioner was entitled to recover damages from the respondent-company since the latter had no title to the property which it sought to sell to the petitioner. The court noticed that the petitioner intended to initiate proceedings against the company for recovery of damages and it was just and proper to restore the name of the respondent-company to the register maintained by the ROC.
The Court rejected the contention of the respondent that the word “just” as appearing in Section 560(6) must be read ejusdem generis. The presence of the words “or otherwise” between the two circumstances in which the name of the company may be restored indicate that even if the company was not carrying out business or was not in operation at the time of striking off, it was still open to the company court to order restoration if it appears to the court to be “otherwise just.” The Court relied on several decisions of High Courts and the Supreme Court for the interpretation of the word “just,” that it denotes equitability, fairness and reasonableness having a large peripheral field. The Court stated that the particulars of the present case attracted the principle in the case of Sidhant Garg and Anr. vs. Registrar of Companies & Ors. (2012) 171 Comp. Cas. 326.
In this case, it was held that the word “just” would mean that it is fair and prudent from a commercial point of view to restore the company and that the court has to examine the concept of “justness” not exclusively from the perspective of a creditor or a member or a debtor but from the perspective of the society as a whole.
The company in this petition is the defendant in a suit pending in the trial court. If the name of the company is not restored, it would cause injustice to the petitioner and also cause prejudice to the trial as a whole. If the name of the company is not restored to the register, the message sent to the society as a whole would be quite disturbing. The petitioner has to be protected in the litigation pending before the trial court.
ANALYSIS of Section 560(6)
The Court was correct in allowing the petition and directing the ROC to restore the name of the company. The Court has prevented grave injustice to the petitioner. Respondent No.3 had fraudulently extracted monies from the petitioner for purchasing the property and had allotted shares, of which the petitioner had no knowledge of. He further colluded with Mr. Quli for transferring those shares without the knowledge or consent of the petitioner. It would have been impossible for the petitioner to recover his losses if the name of the company is not restored. The Court established the status of the petitioner as a “creditor” of the company on the basis of recovery of losses. The Court has upheld the interests of the society in broadly interpreting the word “just” appearing in Section 560(6) of the Act.
CONCLUSION
A company cannot avoid being held accountable on account of being struck off from the register. The company court is at liberty to decide, on the basis of facts of the case, whether the name of the company should be restored to the register under Section 560(6) of the Act. Additionally, a person who institutes a suit for recovery of losses/damages from a company has been treated as a “creditor” of the company by courts and hence, has locus standi to seek relief under Section 560(6).
