MCA tightens norms for closure of firms
May 12, 2023
Firms applying for removal of their names from the Register of Companies will have to file financial statements and annual returns in order to cease business operations. To this effect, the ministry of corporate affairs has introduced fresh conditions for companies that wish to de-register with the RoC.
According to the changes, a firm cannot file for removal of names unless it has filed overdue financial statements and overdue annual returns up to the end of the financial year in which it ceased to carry its business operations. Further, in case a company intends to file the application after the action has been initiated by the Registrar, it will have to file all pending financial statements and all pending annual returns prior to this.
The move comes at a time when the government is trying to quicken the process of closure of companies and has set up the Centre for Processing Accelerated Corporate Exit effective May 1. The thinking however, is that such firms remain accountable and responsible for their actions.
Although the sine qua non that is filing pending financial statements and annual returns for making an application for removal of name from the Register was not formally notified till now, such a pre-requisite was practically posed by the Registrar while disposing of applications, said Sandeep Jhunjhunwala, Partner, Nangia Andersen.
“The pre-condition of regularising the filing of over-due financial statements and annual returns before filing a strike off application notified on May 10, 2023 puts some screws on stakeholders to stay vigilant while managing the affairs of the company and ensure compliances are observed even where business operations cease,” he said, adding that mounting the guard on compliance management and regulatory filings would be essential to safeguard companies and directors from hefty penalties and additional or late filing fees for non or delayed compliances especially when the company wanting to strike off may have an almost nil cash reserve.
Under the law, a company can apply for strike off of name if it is defunct or the RoC can also initiate the process. Typically, a firm has to extinguish all its liabilities, by a special resolution or consent of 75% members in terms of paid-up share capital, and then file the application.
Nishant Aggarwal, Partner (Audit & Advisory services) at SW India noted that these amendments aim to enhance corporate transparency and compliance in India’s business environment. “The MCA’s move emphasises the importance of fulfilling financial reporting obligations and ensures that companies cannot evade regulatory action by filing for the removal of their name from MCA. These rules are expected to strengthen the integrity of the financial system and safeguard the interests of stakeholders,” he said.
Sudish Sharma, Executive Partner, Lakshmikumaran & Sridharan Attorneys said the amendment promotes transparency and accountability by imposing mandatory requirement with respect to filing of overdue financial statements and annual returns on companies seeking name removal. “The amendment ensures that these companies fulfil their statutory obligations and will also prevent abuse of the process of law and contribute to a more efficient and effective corporate governance regime as envisaged by the current government,” he said.
[The Financial Express]
