The Hindu Business Line : Thus entered the `exit' scheme

TIME and again, the Department of Company Affairs (DCA) has resorted to the practice of issuing circulars/notifications to be acted upon by all the Registrars of Companies in addition to the procedures laid down in various sections of the Act. Circulars are considered to be directives having the force of law and are generally issued to clarify any ambiguity in the law but circulars cannot alter the law itself. Unfortunately, circulars are at times issued against certain accepted understanding of law, or which indirectly amend the statutory provisions.

There is no specific provision in the Companies Act to enable the DCA to issue any circulars. Section 119 of the Income-Tax Act, 1961 empowers the Central Board of Direct Taxes (CBDT) to issue orders, instructions and directions to the I-T authorities for proper administration of the I-T Act. Similar provisions are also contained in Section 37 B of the Central Excise Act, 1944 and Section 151 A of the Customs Act, 1962.

The Supreme Court has repeatedly held that circulars issued by the CBDT or the Central Board of Excise and Customs are binding on the officers who cannot question the correctness or legality of the same. At the same time, assessees can enjoy the benefit of what are called "beneficent circulars" but are entitled to challenge the circulars, which are contrary to statutory provisions.

The Supreme Court has held that circulars cannot be issued so as to contradict the provisions of the Act. In Kerala Financial Corporation vs CIT (210 ITR 129), the Supreme Court held that a circular cannot override or detract from the provisions of the Act as this would amount to the delegated authority amending the provisions of law enacted by Parliament. In Sales Tax Officer vs Sri Durga Oil Mills Ltd 1998 (97 ELT 202), the Supreme Court held that the Government could not, by executive order, override the provisions of a statute. In Bengal Iron Corporation vs CTO (1993 63 ELT 13), the apex court categorically held that a circular issued by the Board must be for giving effect to the provisions of the statute and not in derogation thereof.

Circulars issued by the DCA have come up for consideration before the High Courts in the past. A Division Bench of the Calcutta High Court held in Bejoy Kumar Karnani vs Asst. Registrar of Companies (1985 58 Com. Cas. 293), that a circular could never be intended to be used as an instrument for circumvention or subversion of the provisions of the Act.

A Division Bench of the Madras High Court, in K. Leela Kumar and M. Subbiah vs Government of India (2002 108 Com. Cas. 610), held that the circular in question issued by the Department is not a statutory order passed in exercise of any statutory power and, therefore, has no legal effect or sanction.

This view is not totally free from doubts. Any circular issued by any government department is binding on the departmental officers. They cannot ignore the same on the ground that the circular does not have legal sanction or is not in accordance with the statute. They have to implicitly follow the instructions contained therein.

Background of the circular

The circular on "defunct companies" from the DCA (No. 9/7/83-CL-III of February 17, 1987), prescribes a "revised procedure" to be adopted by all the Registrars before the name of the company is struck off from the Register of Companies under Section 560 of the Companies Act.

Under this circular, an affidavit to the effect that the company has no assets or liabilities as on date and an indemnity bond to the effect that the liabilities, if any, will be met by them. The documents have to be executed by the managing director/whole-time director or two directors.

A notice has to be issued to the Commissioner of Income Tax (CIT) before striking off the name of a company stipulating that if no reply/objection is received within three months from the date of notice, the name would be struck off from the Register of Companies. In addition, the RoC would comply with the procedure as provided under Section 560.

By Department's Circular No. 6/91 of February 19, 1991, the earlier procedure prescribed in 1987 was suitably liberalised so that the names of such defunct companies were struck off the Register of Companies without unnecessary delay. It was, therefore, decided that the conditions in clause (c) of the circular dated February 17, 1987, that is, notice to the Income-Tax Commissioner, need not be insisted upon and it would suffice if an affidavit and indemnity bond accompanied by audited accounts of the subject company was filed.

It further stated that latest available balance-sheet may be relied upon for this purpose and the Registrar need not insist upon the company to produce `nil' balance-sheet for the past years. Para 2 of this circular also pointed out that where a request had been made under Section 560, expeditious action in accordance with the aforesaid liberalised procedure should be taken. Meanwhile, prosecution for non-filing of annual return/balance-sheet, and so on, were also kept on hold.

The DCA launched Fast Track Section 560 Scheme with effect from September 20, 2000 (vide Press Note No. 10/2000 of September 25, 2000), with intent to encourage more companies to file arrear documents at minimum additional fees and also to identify those companies entitled to be struck off the register as defunct. The scheme was initially in operation for 60 days from September 28 to November 26, 2000, and extended till January 31, 2001, vide letter No.1-5-2000 CLV dated January 2, 2001.

The response to the scheme was overwhelming across the country mainly because it was very much in tune with the existing law and also imposed minimum penalty on the erring companies. The Fast Track Scheme lapsed on January 31, 2001, and no circulars on Section 560 were in operation. However, the Department on request from any company or the directors to treat the company as a defunct company under Section 560 followed the procedure given in Circular dated February 19, 1991.

Another circular (No. 4/2002 of December 11, 2002) was issued by the DCA, which not only went beyond its powers but was also in derogation of the Companies Act. According to this circular, all private companies covered under Section 3(3) and all public companies mentioned in Section 3(4) are required to increase their paid-up capital to Rs 1 lakh and Rs 5 lakh respectively by December 12, 2002. This circular directed all Registrars to prosecute companies which failed to increase their share capital under Section 629A.

The direction to launch prosecution was most unfortunate and not warranted by the provisions of the Act. There is no provision under Section 3(5) to initiate prosecution.

If the company does not raise its capital, the Registrar can only strike its name off because it is deemed to become defunct. The option is given to the company to either raise its capital or face the consequence of its name being struck off as a defunct company. Such a company cannot be prosecuted for failure to increase the capital.

Luckily, the administrative instructions to prosecute were withdrawn when the DCA realised that the action proposed was contrary to law. Then the DCA found another way not only to implement the law on `minimum capital' but also to eliminate companies unwilling to comply with the minimum capital requirement. And thus was born the simplified exit scheme again through a circular.

(To be concluded)

More Stories on : Accountancy | Regulatory Bodies & Rulings

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
CAS gets messier

Thus entered the `exit' scheme

Trial by delay for tribunals

You can only lead a horse to water

Cost rewards with security risk

Two forums, many contrasts

Surging forex reserves — Look beyond history and emotions

Double standards in nuclear proliferation

Aren't our ethics more benign?

Fair globalisation

SEBI move

TRAI recommendation