Default in filing of balance sheet, profit & loss account, and annual returns can be grounds for striking off the name of the company from the register of companies under Section 560 of the Companies Act, 1956. Restoration of the company’s name to the register of companies can be sought under Section 560(6).
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The case of M/S Bhavani Boards Pvt. Ltd. vs. The Registrar of Companies (Karnataka) (CO. PET. No.156/2021) in the High Court of Karnataka (“the Court”), decided on March 01, 2013, the plea for restoration of the name of the petitioner to the register of the Registrar of Companies (Karnataka) (“ROC”). The petitioner’s name had been struck off due to default in filing of statutory documents. Striking off results in dissolution of the company.
- The petitioner was incorporated on June 12, 1986 under the Companies Act, 1956 (“the Act”). The Memorandum of Association and Articles of Association of the petitioner showed that it was incorporated to carry on business as manufacturers, processors, dealers, distributors, merchants, exporters, stockists, agents of all kinds of paper and paper boards and allied products whether in raw form, semi-finished or finished form whether in India or abroad.
- The averments made in the petition indicated that the petitioner was carrying on business till date and its accounts have been regularly audited up to the year ending March 31, 2002.
- In the year 2007, the Board of Directors of the petitioner was informed by the Chartered Accountants, newly appointed in the petitioner’s 23rd Annual General Meeting, that name of the petitioner was struck off from the register of companies on account of non-filing of annual returns and balance sheets in exercise of powers conferred under Section 560 of the Act. On inquiry with the Office of the ROC, the petitioner was informed of the above fact and the Gazette having been published in this regard on February 23, 2008-Part III-Section 1.
- The petitioner contended that it was carrying on its business in the regular course and on account of its name being struck off, they were unable to carry on the business. Thus, the petitioner filed this petition under Section 560(6) of the Act, read with Rule 9 of the Companies (Court) Rules, 1959, praying to direct the respondent to restore the name of the petitioner in the register of companies.
Whether the name of the petitioner-company is to be restored by setting aside the order of the ROC and consequential Gazette Notification issued on February, 23, 2008 published in Part III – Section 1?
Arguments of the Petitioner
The petitioner contended that no notice, as stipulated by Section 560 of the Act, was issued by the ROC to the petitioner before the name of the petitioner was struck off.
The procedure of striking off the name of a defunct company from the register of companies under Section 560 of the Act is as follows;
- Where the Registrar has reasonable cause to believe that a company is not carrying on business or in operation, he shall send to the company by post a letter inquiring whether the company is carrying on business or in operation.
- If the Registrar does not receive any answer within 1 month of sending the letter, he shall, within 14 days after the expiry of the month, send to the company registered letter by post, referring to the 1st letter, and stating that no answer has been received and that, if an answer is not received to the 2nd letter within 1 month from the date thereof, a notice will be published in the Official Gazette with a view to striking the name of the company off the register.
- If the Registrar either receives an answer from the company to the effect that it is not carrying on business or in operation, or does not within 1 month after sending the second letter receive any answer, he may publish in the Official Gazette, and send to the company by registered post, a notice that, at the expiration of 3 months from the date of that notice, the name of the company mentioned therein will, unless cause is shown to the contrary, be struck off the register and the company will be dissolved.
The petitioner stated that annual returns and balance sheet for the financial year 2001-02 were filed under receipt No. 278349 dated April 24, 2002 issued by the ROC and said records are not available in the Office of ROC.
The petitioner further stated that on account of the petitioner embarking upon a research program for manufacturing of a special type of paper, the Board of Directors were concentrating on research work and had reduced their regular work activities to a considerable extent. It was admitted by the petitioner that its Board of Directors failed to verify whether the statutory auditors had complied/adhered to the laws in general and, in particular, the Companies Act, 1956.
It was further contended that the petitioner had not filed its annual reports and statutory reports with the ROC for 10 years and efforts made by the Directors of the petitioner to secure the file from the Office of Late D. Swamy Reddy, who was the petitioner’s previous Chartered Accountant, were not fruitful.
Arguments of the Respondent
The ROC filed a statement of objections stating inter alia that the petitioner had filed its annual returns, profit & loss account and balance sheet for the year ending 1991-92 and 2001 since its incorporation on June 12, 1987. Therefore, the ROC was not able to determine whether the petitioner was in operation.
The ROC had stated that the petitioner had filed balance sheets, profit & loss account and annual returns for 8 financial years till date. Accordingly, the petitioner may be directed to produce the documents for 10 financial years.
The ROC contended that the petitioner is liable to pay a penalty of Rs. 500/- per day which would amount to a total of Rs. 36,50,000/- till date, in addition to the fees required to be paid under Section 611.
Under Section 159, every company having a share capital is required to file annual returns with its respective ROC. If a company fails to comply with Section 159, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rs. 500/- for every day during which the default continues [Section 162]. Further, under Section 220, a company is required to file copies of its balance sheet and profit & loss account with the respective ROC. If there is any default in this regard, the company and every officer of the company who is in default is liable to punishment as provided by Section 162. [Section 220(3)]
It was further contended that the petitioner be imposed with exemplary costs as held by the High Court of Delhi in the case of Model Machinery Company Pvt. Ltd. vs. ROC, Delhi (CO. P. No.170/2009) dated June 04, 2010.
The ROC had no objection to the restoration of the petitioner company under Section 560(6) of the Act, subject to the production of relevant documents and payment of fine and additional fee.
Section 560(6) reads as follows;
“560. POWER OF REGISTRAR TO STRIKE DEFUNCT COMPANY OFF REGISTER – (6) If a company, or any member or creditor thereof, feels aggrieved by the company having been struck off the register, the Court, on an application made by the company, member or creditor before the expiry of twenty years from the publication in the Official Gazette of the notice aforesaid, may, if satisfied that the company was, at the time of the striking off, carrying on business or in operation or otherwise that it is just that the company be restored to the register, order the name of the company to be restored to the register ; and the Court may, by the order, give such directions and make such provisions as seem 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.”
[Note: The word “Court” was replaced by “Tribunal” by the Companies (Second Amendment) Act, 2002 but it has not been notified.]
The order of striking off the petitioner’s name as published in the Official Gazette of India dated February 23, 2008-Part III-Section 1, insofar as it related to the petitioner, was set aside and the ROC was directed to restore the petitioner’s name to the register of companies.
The Statements of Objections of the ROC had not indicated that notice, under Section 560(1), was given to the petitioner before its name was struck off. However, the petitioner had admitted to default in filing the statutory documents.
The Court stated that by virtue of this order of restoration of the name of the petitioner, the order of striking off would get extinguished and the petitioner would be deemed to have been in existence from the date of incorporation. Thus, the petitioner is required to file statutory documents under Sections 159 and 220. The Court noted that the petitioner had undertaken to file the documents for the periods for which they had not been filed within the upper limit of 6 weeks from the date of receipt of a copy of this order. On such documents being filed, the ROC shall determine the fee payable as contemplated under Section 611(2) read with Schedule X of the Act. It was also made clear that on non-filing of the documents, the benefits of this order will not be available to the petitioner.
In view of the fact that the petitioner would not have the benefit of filing the returns for a period of 10 years and the petitioner is sought to be revived and also in view of the fact that the ROC had entered appearance and spent considerable time by filing a detailed statement of objections, the Court awarded costs amounting to Rs. 10,000/- to the ROC, apart from the fee that would be determined by the ROC. It was accepted by the Court that the statutory documents would be filed within 6 weeks as undertaken by the petitioner-counsel.
The Court also ordered that the amount of Rs. 10,000/- was a condition precedent for examining and scrutiny of the statutory documents by the Official Liquidator.
The Court had shown leniency towards the petitioner despite the fact that the petitioner was completely at fault. The Board of Directors are at the helm of a company and the petitioner itself had admitted that the Board had withdrawn from regular working activities and had not checked whether statutory laws and compliances were being adhered to. Such behaviour was a grave irresponsibility on part of the Board. The petitioner had benefited by being ordered to pay fees as per Section 611(2) against the undertaking that the statutory documents would be filed within 6 weeks from the date of receipt of a copy of the order.
Under the Act, time limits have been fixed for filing the statutory documents. Section 611(2) states that any document required to be filed with the ROC on payment of fee specified in Schedule X of the Act may be filed after the time specified by the Act on payment of such additional fee not exceeding 10 times the amount of fee so specified as the ROC may determine.
The Court had not made any comments on the fact that the ROC had not followed the procedure of giving notice under Section 560(1) of the Act but had simply accepted the fact.
The ROC had contended that the petitioner be directed to produce the statutory documents and make payment of penalty and additional fee as pre-conditions to the restoration of the petitioner’s name. This was not a logically sound argument as striking off results in dissolution of the company. Thus, the petitioner was not in existence and it was impossible to fulfil the conditions set by the ROC before the restoration of its name. Restoration of name is essentially a declaration that the company has been in existence since its incorporation.
The ROC had struck off the petitioner’s name from the register of companies on the ground of default in filing statutory documents. The petitioner had given an undertaking that it would file the statutory documents within 6 weeks from the date of receipt of the copy of the order. It is on this undertaking the Court directed the ROC to restore the petitioner’s name and hence made Section 611(2) of the Act applicable instead of the penal provisions. However, if the petitioner fails to file the statutory documents within those 6 weeks, the petitioner will be penalised under Sections 162 and 220(3).