N. R. Moorthy on how the Simplified Exit Scheme is not all that simple

N. R. Moorthy

THE Ministry of Company Affairs (MCA) has issued General Circular 2/2005 dated January 28, 2005, introducing the Simplified Exit Scheme, 2005. The circular supersedes:

i) Circular Nos 9/7/83-CL. III of February 17, 1987, and 1/3/91- CL.V; 5/4/91- CL.III of February 19, 1991;

ii) The Fast Track Section 560 scheme of 2000; and

iii) The Simplified Exit Scheme of 2003, to make Section 560 of the Companies Act, 1956 operational.

The latest scheme outlines an exhaustive and extensive procedure to be followed by defunct companies.

The introduction of such a scheme suffers from legal infirmities, though. Obliviously, MCA has arrogated authority/power not delegated to it by the Legislature. Also, Para 9 of the Circular holds out a veiled threat that "after the scheme ends, the Ministry would take necessary penal action under the Companies Act, 1956 against such defunct companies which have not complied with the provisions of the Companies Act, 1956 or are not filing documents with the Registrar of Companies in timely manner."

A plain reading of Section 560 of the Companies Act makes it abundantly clear that primarily it is the responsibility of the Registrar of Companies (RoC) to weed out defunct companies by following the detailed procedure laid down under the section.

The said section does not require a defunct company which is not in operation to apply to the RoC for this purpose, as directed under clause 5 of the scheme.

According to this clause, "A company desirous (emphasis supplied) of getting its name struck off under the Scheme can apply to the Registrar of Companies concerned in the form prescribed."

That this is not contemplated by the legislature is evident from the section. The scheme also requires, under clause 11, that "the application shall be accompanied with a fee of Rs 3,000."

Where has the MCA derived power to levy such a fee? The scope under Section 642 of the Act powers the Central Government to make rules (a) for all or any of the matters which by this Act are to be, or may be, prescribed by the Central Government; and (b) generally to carry out the purpose of this Act.

Surely the purpose of the Act is for the RoC to take steps to weed out the defunct companies after following the procedure laid down under Section 560 of the Act. The RoC, prima facie, has to form an opinion and, in fact, satisfy himself that the company is not carrying on any business. By the same token, the application form is not the one prescribed under the Act to be filed with the RoC for registration. Therefore, no fees can be charged.

Coming to the practical aspect, admittedly, it is a Herculean task for the RoC to cull out from its records the names of inoperative companies. The procedure needs to be simplified so as to facilitate the RoC to discharge his duties. This can be done by appealing to companies to cooperate rather than take a regulatory approach. For this, defunct companies may be classified as:

a) Those that are non-existent, that is, having lost the characteristic of a corporate entity. There are companies where there are no directors or sufficient number of shareholders to form a quorum, and no liability/asset worth the name. Such cases may be few and far between.

b) Those which have not raised capital to the minimum required level laid down under Section 3 of the Act may, however, carry on their business.

c) Shelf companies incorporated for being offloaded to any one who wants readymade companies for a price.

d) Manufacturing companies whose products have become obsolete and, therefore, ceased operations.

e) Those closed down for reasons of viability.

Each category is a class by itself and any approach to follow a procedure, which can encompass all situations, is bound to face resistance.

Companies under category (a) may be struck off, as they fail to meet the fundamental requirements for being a corporate entity. The RoC can adopt a simple procedure and strike off their names.

Companies falling in category (b) may be struck off as well, as they cannot claim to be a company within the meaning of the Act. The RoC will be well within his right to deregister. The last three categories, that is, (c), (d) and (e), may be asked to follow the simplified guideline within the framework of Section 560 and the RoC may issue a public notice in an English as well as vernacular newspaper circulating in the district in which the registered office of the company is situate, giving the names of the companies which have not responded to the requisition of the RoC.

It must be emphasised that companies that voluntarily apply to the RoC for their names to be removed from the register are not eligible to the relief provided under sub-section (6) of Section 560. Briefly, any suggested procedure should be capable of being implemented.

It is ludicrous that to exit a company is costlier than incorporation. It is hoped that the MCA will take a pragmatic view rather than swell its coffers by collecting unauthorised fees. If the RoC is overburdened, this job can be outsourced or privatised.

(The author is a Pune-based company secretary.)

(This article was published in the Business Line print edition dated March 31, 2005)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.