Post demonetisation, the Ministry of Corporate Affairs (MCA) has joined the Indian government’s crusade to curb black marketing and tackle tax evasion. Around 2,00,000 companies have been struck off and de-registered during last few months by the MCA in its campaign against shell companies. 

The term ‘shell company’ has not been defined in the Companies Act, but includes companies that exist in multiple layers and have been created for the purpose of money laundering or for the purpose of diverting money. Most of these companies have no existence and their presence is merely on paper and exists without attaining the status of a dormant company under Section 455 of the Companies Act, 2013.

Even though the Companies Act provide for a dormant tag, only a few companies have opted for it. Such shell companies without the dormant tag have been recommended by the Registrar of Companies to be struck off under Section 248 of the Companies Act, 2013. As per Section 248, the Registrar of Companies has the power to strike off the name of a company from the register on various grounds. The MCA has notified a list of defaulting companies as ‘companies under alert’ on its website.

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This specific list of defaulting companies includes the following as MCA defaulters:

1. Multi-level marketing (MLM company in India) companies

2. Vanishing companies

3. Disqualified directors

4. Year-wise list of defaulter companies

5. Defaulter directors and defaulter secretaries (directors associated with defaulting companies)

6. Dormant companies 

7. Companies and limited liability partnerships under the process of striking-off.

Vanishing companies include any company which has failed to file returns with the Registrar of Companies (RoC) for 2 years; any listed company that has failed to file returns with the stock exchange for 2 years; any company that does not maintain its registered office at the address registered with the RoC; any company whose directors cannot be traced.

Dormant companies include has been registered with Registrar of Companies but is not involved in any business activity. A dormant company also includes any company that does not receive any kind of income. A dormant company may have become inactive from the date it was incorporated or at a later stage.

The MCA confirmed de-registration of around 2.24 lakh companies as they remained inactive and defaulted on filings for more than 2 years. As per the data provided by MCA, these companies saw a spurt of cash transactions and moved nearly around Rs 17,000 crore in and out of bank accounts since demonetisation. In addition to this, the MCA also put restrictions on the operation of their bank accounts to prevent further transactions by these companies. 

Following this, MCA identified around 1,06,578 defaulter directors associated with these companies, to be disqualified under Section 164(2)(a) read with Section 167 of the Companies Act, 2013. Such MCA defaulters are directed not to act as directors in any company during this debarred period and not to file any document or application with MCA as the same would be summarily rejected.

What does the Law say?

Section 164(2)(a) says that a director in a company who has not filed financial statements or annual returns for 3 consecutive financial years would not be eligible and hence disqualified for re-appointment in the company or for appointment in any other company for 5 coming years. This disqualification under Section 164 must be read with Rule 14 of the Companies (Appointment and Qualification of Directors) Rules, 2014. 

As per Rule 14, every director has a duty to inform the company by filling the requisite form about his disqualification under Section 164(2) before his appointment or reappointment. A company has the same duty- if a director fails to file financial statements or repay any deposits as specified under Section 164(2), a company must furnish the names and addresses of all directors in the requisite form. 

If the company contravenes this rule and fails to fill the requisite form then officers of the company would be held as officers-in-default. The disqualification under Section 164(2) of the Companies Act requires the defaulter director to vacate the office. A list of disqualified directors has been uploaded and made public by MCA on its website.

Section 274(1)(g) of the Companies Act, 1956 was retrospective in operation. But, Section 164(2) of the Companies Act, 2013 which is akin to the said provision is prospective in operation. This observation was given by NCLT in the case of Vikram Ahuja v. Greenstone Investments (P.) Ltd. 

Punishment to MCA Defaulters

The MCA has instructed that in case a director or authorized signatory of any ‘struck off’ company tries to siphon-off or embezzle money in any manner from his bank account, he will be liable for punishment of imprisonment for a period of 6 months- 10 years. Further, if it is found that the fraud involves public interest, then the punishment will not be less than imprisonment for 3 years and fine which can be equal to or up to the amount involved.

Prohibition of multi-layering of corporate structures

The MCA has also laid down the Companies (Restriction on the number of layers) Rules, 2017. From the date of the commencement of these rules, no company other than the exempted companies can have more than two layers of subsidiaries.

Relief by MCA

The ‘condonation of delay scheme’ is expected to come into force on January 1, 2018. A 3-month window is provided to defaulting companies to submit their annual filings from January 1, offering a relief to hundreds of defaulting directors.

MCA’s move and vigilant steps towards black money, wilful defaulters, and erring directors are an effective way to curb the menace of shell companies and can lead to overall growth of the country. Such active steps promote effective and transparent governance by penalising non-compliance. Know more about MCA defaulter and shell companies- talk to the best Corporate lawyers in India. Email us at info@myadvo.in or call us at +919811782573.