Striking a Balance: Registrar's Powers vs. Company's Rights - A Shift Towards Practicality

[Shrey Bhatnagar]

Introduction

The registrar's powers, by virtue of Section 248 of the Companies Act, 2013, to remove a company name from the Register are based on the rationale of checking non-compliance and facilitating the closing of business. Since corporate operations carry investor and creditor interests and economic stakes, the registrar’s approach must be practical and not technical. In the same line, there have been two recent orders, one from the NCLAT and one from the Hon’ble Supreme Court. Upholding the principles of Natural Justice and preventing grave prejudice to the company, the statute offers a way through Section 252 to challenge such striking off before the tribunal within three years; the recent orders have highlighted the adjudicatory bodies’ approach towards hailing the company's interest by directing restoration. In the first instance, where due to the death of the then-chartered accountant, the publication of financial statements and annual report was defaulted with, it was held that the company was operational with Fixed assets and not a shell, revenue cannot be the sole basis, and it was directed to restore the name and second, on the basis that negligence and failure to publish annual accounts not be viewed to construe that the company cease to exist and could be corrected at the payment of costs when the company faced monetary hardship with the refundable due stuck in litigation with Central excise.

Case 1: DD Finance and Holdings (P.) Ltd.

The appellant Company DD FINANCE AND HOLDINGS PRIVATE LTD VERSUS REGISTRAR OF COMPANIES, NCT OF DELHI & HARYANA - ,2024 (3) TMI 292 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL , PRINCIPAL BENCH , NEW DELHI deals with the sale, purchase, investment, and transfer of property, shares and stocks.

Background

 In 2001, the Company was transferred in the favour of Mr. Manohar Lal Nagpal and his four sons, who were designated as directors.  Mr. Manohar suffered from different ailments and failed to file the annual returns and balance sheets. Nevertheless, the AGM Meeting was done on time. He was the only director taking care of the affairs of the company because his sons were residing in different places, and they could not handle the business. In 2010, he passed. 

The then-chartered accountant also passed in 2009, and no information or documents were available from the company.

The ROC exercised power under Section 248(5) on the ground that the company had violated the provision to file annual accounts, and so deemed not to be carrying on the business.

Earlier, NCLT dismissed the appeal pursued by virtue of Section 252, which allows the aggrieved company to seek restoration of name before the Tribunal, on the grounds that the petitioner company had failed to provide the document demonstrating that the land revenue/rent receipt is still in the possession of the appellant company. It also failed to produce any document other than the sale deed, which demonstrates that the company is still carrying out its business.

Appeal to NCLAT

Subsequently, The Company filed the appeal with NCLAT, saying that the removal of the name has caused grave prejudice on the grounds that the documents, including the income-tax return and proof of payment, viz. electricity bills, water bills, and land receipts, were handed to the then counsel. Still, he did not place it before the Hon’ble Tribunal. They also contended that the four sibling directors are willing to continue the business for their daily survival. The appellate company relied on Section 252(3) and argued that the appellate is not a shell company and has not indulged in the siphoning of funds or advancing loans to the sister concern. They also contended that the company is the sole owner of the property. If the company’s name is not restored, it will lead to irreparable loss and result in property waste.

They also contended that because of the illness of their father and the unfortunate death of CA, the financial statement could not be filled with the ROC. They also claimed that the company was not served with any notice; therefore, they could not make the representation.

Judgment

The court, while giving judgment, relied upon M/S SANTACLAUS TOYS PVT. LTD. VERSUS REGISTRAR OF COMPANIES - 2010 (2) TMI 1245 - DELHI HIGH COURT among other precedents and held that the company’s name must be restored because directors are optimistic about carrying off the business given, they have assets of crores, and they have prepared the annual accounts report. Still, due to some unintentional and accidental circumstances, it could not be filled with ROC. The appellant company has undertaken to comply with all applicable provisions. The court ordered the appellate company to file the affidavit in the same regard. The appellate company was ordered to pay ₹ 2,000,00 to ROC Delhi, and the appellate company has to file an annual return and balance sheet within four weeks of the judgement.

Case 2: R.P. Casting Private Limited

In a later case before the Hon’ble Supreme Court R.P. CASTING PRIVATE LIMITED VERSUS REGISTRAR OF COMPANIES, NCT OF DELHI AND HARYANA & ANR. - 2024 (5) TMI 680 - SC ORDER the appellant company’s name was removed from the register of companies; they filed a restoration application with NCLT under Section 252(1), which was dismissed and upheld by NCLAT, aggrieved by order of NCLAT; the appellant approached the Supreme Court on the ground that an amount accounting to almost ₹ 2.3 crores was due refundable from Central Excise Department and was successfully retrieved by an appropriate order.

Grounds for Appeal

The grounds taken for striking off the name were noncompliance with the provision to file annual accounts and failure to respond to notice under Section 248(1). The appellant, R.P. Casting Private Limited, argued that the rejection of their prayer for restoration caused grave prejudice due to a significant amount of ₹2,29,81,287, which was refundable from the Central Excise Department. The litigation with the Central Excise Department adversely affected their operations. The company was operational during the relevant time.

Tribunal's Decision

The tribunal found the rejection of the company’s restoration request unsustainable, emphasising a practical approach over a technical one. The tribunal acknowledged the company’s litigation with the Central Excise Department and its impact, suggesting that the company’s removal from the register was unjustified. The tribunal determined that R.P. Casting Private Limited was operational during the relevant period, not a shell company, despite lapses in compliance with the Companies Act.

However, the non-compliance could not be overlooked; therefore, restoration of the name was made subject to a cost of ₹ 5,00,000 payable to the Registrar within 60 days.

Conclusion

Both the orders have prioritised the company’s operations over strict compliance with procedures, looking at the potential harm of removal of the company’s name from the register. Both orders converge on the point of preventing grave prejudice. Further, these sister pronouncements have solidified the legal principle of the company as a separate entity by recognising the company’s rights and interests independent of its shareholders or directors; in the case concerning DD Finance, the court focused on the company’s intention to continue the business, the existence of assets and the unintentional nature of the non-compliance. While, the case of R.P. Casting was allowed for restoration in consideration of financial hardships caused by litigation.