In India, the registration of a company has been made simple with digital reforms, and likewise, the process of striking off a company name also plays a very crucial role in this scenario. It is the legal term used in the removal of the name of the company by the Ministry of Corporate Affairs (MCA). It is also one of the methods by which a company may terminate its operations when it ceases to operate in the business or becomes defunct.
Significantly, entrepreneurs and startups should be aware of the possible scenarios for strike-off company clearance, so as not to incur fines due to ignorance. The effect of failing to clear strike-off compliances can be incurring huge fines and even facing legal action; therefore, it is essential to learn the process.
What is a Company Strike-off Clearance?
Strike off clearance is the process that enables the removal when a company removes its name, either through its own volition, or by way of compulsion, from the records of the ROC. After the name is struck off, the company is no longer in existence as a legal entity. The Companies Act 2013, under sections 248 to 252, has provisions on striking off.
A company could also voluntarily make an application for strike off, in the event that it has not been undertaking any business within the past two years or it has not started business since the date of incorporation. In certain instances, the ROC may even take up the strike off proceedings against corporate bodies in the event the company is inactive, non-compliant, or has not filed annual returns or financial statements.
Reasons for Company Strike Off Clearance
There are several reasons why a company may prefer strike off clearance
- A business may not be doing well and promoters may withdraw operations.
- A company might have attained its objectives in business and is no longer in need of a legal existence.
- There are companies that are created according to a certain project, and after this project is fulfilled, they wish to strike off.
- Voluntary strike off also applies when promoters seek to avoid recurring costs, such as audit, filing annual returns and other legal costs.
Company Strike-Off Clearance Process
According to the guidelines of MCA, the following are the processes of strike off clearance.
- The company must initially clear all its debts and make sure that there are no pending obligations.
- A Board meeting must be held, and a strike-off resolution must be passed.
- The company is required to file e-form STK-2 with the ROC, accompanied by the attachments, which include the indemnity bond, affidavit by directors, financial statements, and documents of bank account closure.
- After the application is made, ROC scrutinises the papers and can make a notice in the official gazette to give objections.
- In the absence of any objections being filed, the ROC then goes ahead to strike off the company name and publish the notice of dissolution.
The Effect of Company Strike Off
Strike off clearance is beneficial, as well as there are consequences. On one hand, it helps the company to be relieved of a set routine of compliance and monetary burden. Conversely, when a company is dissolved, the company cannot conduct any form of business nor can it use its name in any legal manner.
The dissolution director may encounter limitations in case of failure by directors of the other struck-off company to rectify their liabilities. In any case of fraud or malpractice, ROC has the power to reinstate the company name after a strike off. This process is beneficial to entrepreneurs as it goes through the process of winding up non-performing entities without having to engage in the long process of winding up the entities under the Insolvency and Bankruptcy Code (IBC).
Difference between Strike off and Winding Up
Some people think strike off and winding up are the same process, but these are two separate processes. Strike off is an accelerated process and is considered an easy process for companies that are inactive or non-operating. Winding up, which is under the care and supervision of the National Company Law Tribunal (NCLT), is a comprehensive process and predominantly applicable within a situation in which a company possesses assets, liabilities, or disputes.
Strike off is voluntary, and the approval of the ROC is not necessary, whereas winding up is more complicated as it involves creditors, courts, and liquidators. The selection of the appropriate method will depend on the company’s financial position and its legal status.
Importance of Professional Help
The clearance needed to strike off a Company entails a lot of documentation, legality and liaising with the ROC. Any error in filing forms or failure to provide all required documentation can provide grounds for the application to be rejected. Therefore, a seamless process will be guaranteed through the professional assistance of company secretaries, chartered accountants, or legal consultants.
They are also capable of advising on tax clearances, cases pending litigation and liabilities prior to strike off. In the case of start-ups and businesses that desire to dispose of their business in a stress-free way, professional expertise is best sought after.
Conclusion
Strike-off clearance is a necessary compliance mechanism in Indian corporate law. It enables companies to close their businesses when they become obsolete due to legal requirements. Digital filing alternatives and e-forms have made the process easier, but the documents and liquidation of debts still require good preparation.
Strike-off may have implications for entrepreneurs and their companies, and it is thus advisable that they evaluate its effects so as to make informed decisions. Strike-off may be voluntary or brought about by the ROC, but in any case, it allows companies to maintain a clean legal record and avoid fines.
