Penalty and Provisions for ‘Struck off’ Companies

Preface: Understanding the Background

In the continuance of the process of cleaning up the financial sphere, the Ministry of Corporate Affairs (MCA) has taken stringent measure by ‘Striking Off’ of more than 2 lakh companies in 2017. As a side-effect of this action, more than 3 lakh Director Identification Numbers (DINs) were de-activated. Hence the disqualified directors couldn’t continue working.

Reasons which Led to this Action:

• Most of the companies hit by this action had defaulted and not complied with the prescribed law.
• Dormant companies had not informed the authority of their status.
• Shell companies that showed huge amount of money transactions during demonetization but couldn’t explain them.
• Majority of these companies didn’t file income tax returns for the preceding 3 years.
• Directors didn’t take note of due-diligence therefore failed in their duties.
  

Outcome of the ‘Strike Off’:

• Outcome #1: The company is barred from functioning from the date of issue of notice by the Registrar of Companies.
• Outcome #2: No bank transaction can be done as the bank accounts are frozen from the date of ‘strike off’.
• Outcome #3: No exemption from dues and liabilities.
• Outcome #4: Directors are disqualified and their DINs deactivated. (Know more on Restoration of DIN)
• Outcome #5: These directors are removed from the Board of Directors of other legitimate companies too.
• Outcome #6: Fine and penalties are levied on defaulter companies as per rules prescribed under the Act.

The data, facts and statistics collected by various govt. agencies, specially after Demonetization, has prompted the agencies to act so sternly.
Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)

Penalties: u/s 166 of Companies Act, 2013

• PENALTY #1: As most of the companies have been de-registered because of defaulting in filing of documents such as IT returns, therefore the penalty imposed is generally like ‘Late Fine’.
• PENALTY #2: Repeat offenders, who don’t fall in line, are given harsher punishment.
• PENALTY #3: The full-time Directors are supposed to be custodians of ethical practices and if they fail in doing so, they are liable to penalty under section 166 (7) of Companies Act, 2013.
• PENALTY #4: A disqualified director can be fined anything between 1-5 lakh rupees, based on the severity of non-compliance.

Want to know – How to Revive a Struck Off Company? Read This!

Provisions for Restoration and Revival:

APPEAL TO THE TRIBUNAL U/S 252 (3):

• A de-registered company, its members, its creditors or its workmen can appeal within 20 years of the date of notification.
• APPEAL TO NCLT (National Company Law Tribunal) under Rule 87(A),2017: The affected company or its workmen can file an application to NCLT within 3 years from being debarred.

Avail the Condonation of Delay Scheme (CODS), 2018:

#1: Most of the defaulting companies can avail this scheme which will lead to temporary restoration of the DIN of the directors. The directors then can work on compliance and file the returns.
#2: There are prescribed forms which has to be duly filled and submitted along with the stipulated fee.
#3: The company will have to fill e-CODS and submitted on the portal of MCA along with a fine of 30,000 rupees as fee.
#4: The Directors need to file individual e-CODS otherwise their DIN would be deactivated once again on the expiry of the scheme.
#5: Defaulters under section 248(5) are barred from appealing under this provision.

Conclusion:

The Condonation of Delay scheme, 2018, was introduced by the MCA keeping in mind the mass strike-off of companies in 2017. Several aggrieved companies and directors acted swiftly and applied under this scheme and
as a result, almost 14,000 companies have got reprieve and started functioning again. Many more will get relief in the near future.

According to the experts and analysts, this financial year, i.e. 2018-2019 will see an equal number of companies being struck-off. Therefore, it’s essential that ALL companies are aware of the rules and at the same time judiciously ethical towards their dealings.

The best way forward for ALL companies is to follow the rule book and work with hundred percent transparency.
Shweta Gupta (Founder and CEO, MUDS)

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