| DIVYANG P. Majumdar |
A defunct company means a company which never commenced business or which is not carrying on business and has either no assets or has such assets as shall not be sufficient to meet the cost of liquidation. A company is, however, not considered defunct if the cessation of business is due to the conduct of winding up. Also, the mere fact that the number of stockholders of a company are reduced below the statutory minimum does not render not render it defunct.
The policy which is followed with regard to weeding out the defunct companies is that where it appears from the latest available balance sheet of a defunct company that it has adequate realisable assets, steps are taken to take the company into compulsory liquidation. It is only where the latest available balance sheet shows that the company has no assets or has such assets as would not be sufficient to meet the cost of liquidations, steps are taken to strike theri names off the register under section 560.
Also sub-section (5) of section 3 introduced by the companies (amendment) Act, 2000 states that if a company, private or public, has failed to meet the paid-up capital norm, it shall be deemed to be difunct company and the ROC shall strike off the name of the company. |
| Dissolution of a company, which is not operating or carrying on business by the Registrar of Companies, is not new to the corporate world in India, particularly after the 'Fast Track Scheme' announced in the recent past by the Department of Company Affairs. There are several intriguing issues in the aftermath of such dissolution. An effort to highlight the same is hereby made. |
| As the legal process causes birth of a company, so is its death. In several ways, a company's life may be brought to an end. Dissolution of a company would result on account of members' or creditors' voluntary winding up. It could be compulsory winding up too. Dissolution could also be without winding up in terms of Reconstruction and Amalgamation prescribed in Section 394 of the Companies Act. Dissolution is possible pursuant to the company's name being removed from the Register by the Registrar of Companies in terms of Section 560 of the Companies Act. The remarkable distinction between the dissolution pursuant to section 560 and others is that the former is a result of an adminstrative act of the Registrar whereas any of the others succeeds the complete winding up of the company's affairs and can be caused at the instance of or with the knowledge of the Liquidator. Presently the deliberation revolves around the dissolution under Section 560. |
"The principle behind the law was stated to be that the State may, more properly be custodian and beneficiary of abandoned property than any other person.' Consequently with the principle stated above, a law relating to abandoned property, enacts, firstly, provisions for the State conserving and safeguarding, for the benefit of the true owners, property in respect of which no claim is made for a specified and reasonable period, and secondly, for those properties vesting in the State absolutely when no claim is made with reference thereto by the true owners within the time limit."
The Escheat over which no one has a claim is known as Bona Vacantia. The term can be expressed as 'abandoned property' too. A fine line of distinction between the two terms is that is Escheat, the State becomes the owner of the property when a person dies without heir or successor as his ultimate heir, whereas in Bona Vacantia there is not even an owner of the property and the State merely takes possession of the property of the property, which is an abandoned one.
In practice, both these terms are used interchangeably not going into the finer aspects thereof. |
Sec 560 - Power of Registrar to strike defunct company off register
- Where the registrar has reasonable cause to believe that a company is not carrying on business or in operation, he sahll send to the company by post a letter inquiring whether the company is carrying on business or in operation.
- If the Registrar does not within one month of sending the letter receive any answer thereto, he shall within fourteen days after the expiry of the month, send to the company by post a registered letter referring to the first letter, and stating that no answer thereto has been received and that, if an answer is not received to the second letter within one month from the date thereof, a notice will be published in the Official Gazette with a view to striking the name of the company off the register.
- If the Registrar either receives an answer from the company to the effect that is is not carrying on business or in operation, or does not within one month after sending the second letter receives any answer, he may publish in the Official Gazette, and send to the company by registered post, a notice that at the expiration of three months from the date of that notice, the name of the company mentioned therein will unless cause is shown to the contrary, be struck off the register and the company will be dissolved.
As stated above Section 560 (1), (2)and (3) are governing the process of dissolving a company by the Registrar of Companies. Where he has a reason to believe that a company is not carrying on business or is non-operative, he has been bestowed with the powers to remove the name of the company from his register. After two sequential notices to the company by ordinary post and registered post respectively and a notice in the Official Gazette at the prescribed interval, unless sufficient contrary cause is shown to him, the Registrar shall erase its name off the register, and again publish a notice thereof in the Official Gazette; and on the publication of this notice in Official Gazette, the company stands dissolved, in a contingency, the Liquidator being inactive in case of a winding up of a company, the Registrar can takeover the formalities and follow the route of publishing notice in the Official Gazette onwards. |
"The policy which is followed with regard to weeding out the difunct companies is that where it appears from the latest available balance sheet of a defunct company that it has adequate realizable assets, steps are taken to take the company into compulsory liquidation. But where the latest available balance sheet shows that the company has no assets or has such assets as would not be sufficient to meet the cost of liquidation, steps are taken to strike their name off the register under section 560.
(Extract from the Fourth Annual Report on the Working and Administration of the Companies Act, 1956-Year ended 31st March 1960)" |
6.01 Suspended Animation
Upon dissolution, the corporate status of an entity ceases to subsist; functionality stops and for all practical purposes corporate activities come to an end. Under Section 559, the Court can order the dissolved company's revivification in the prescribed circumstances within a period of two years of the date of dissolution whereas under Section 560(6) this period is twenty years. For a company dissolved under section 560, the alternative remedy for resuscitation fi section 559 too. When revived under Section 560 (6), the court may order for the status quoante' position. A distinction between a rebirth under section 559 and 560 (6) is that in the former the Court has been granted a discretion to make an order as may thought fit, while in the later the Court has been empowered to issue directions and make orders to place the Company and all other persons in the same position as nearly as they were while the name was struck off of course in consistency with the justice. Again the rationale behind the distinction is that the Company, which is being revived was proclaimed dissolved by administrative functions of the Registrar without involvement of a third party and there was neither winding up no the superintendence of the Liquidator therein. Hence, as you were position has been desired by the Legislature.
Thus under the latter, it could be a complete rebirth. Even claims for the Company could be restituted. The moot question is that; is it possible to say, when a company is dissolved under section 560, it si the state of suspended animation' for a period of twenty years, as upon its revivall all its rights and liabilities are restituted (as you were, position) with the retrospective effect from the date of extinction! Suspendd animation means a state of temporary insesibility expecially that due to asphyxia or a condition of suspended powers. Here the position is for the 'time being'. When conditions of asphyxia are over, mind and body starts getting osygen the vitality reverts back. In Webster's Encyclopedic Unabridged Dictionary, the meaning has been conveyed as 'state of temporary cessation fo the vital functions;. In the case of a company dissolved under section 560 (3) till the time of twenty-year elapses, one is inclined to believe its status as 'suspended animation'.
At this stage, it would be appropriate to consider the opening words of Section 560 (6) itself.
'If a company, or any member or crdditor thereof, feels aggrieved ................... in the same position as nearly as may be as if the name of the company had not been struck off".
(Emphasis underlined)
The Legislature also thought of that the company too could be one of those who may apply for its name to be restored to the Register, clearly indicates that a company in that situation has an existence at least for that purpose. Thus it is not a state complete extinction but that of a suspended animation gets a support from the section 560 itself. |
6.02 Status of Liabilities
Relevant proviso t section 650 (5) of the Companies Act, 1956 governing the matter is:
"Provided that-
(a) the liability, if any, of every dierctor manager or other officer who was exercising any power or management, and of every member of the company, shall continue and may be enforced as if the company had not been dissolved; and"
Notwithstanding the company's dissolution, the liabilities of its Directors and Officers who exercised powers and those of its members continue, remain unaltered and enforeceable. However, the dissolution does not make any enhancement to the enforcement of the liabilities affecting the personal capacity of the persons above referred to. This fiction supports a view that the dissolution under section 560 is a state of 'suspended animation' till twenty years pass from the date of dissolution. |
6.03 Winding up of a dissolved company
A proviso to section 650 (5) of the Companies Act, 1956 governing the matter is:
"Provided that -
(b) nothing in this subsection shall affect the power of the Court to wind up a company the name of which has been struck off the register."
In case of a company dissolved under section 560 (3), vide section 560 (5) (b) the Court is empowered to wind up the said Company thereafter too. In such a contingency, whether to restore the name of such Company on the register or not, prior to call for its winding up has been deliberated in a judgement delivered by the Court. Interstingly, the Court ruled that a winding up order can be passed against such company without first getting the dissolution order set aside. Though it looks strange, for the reason that what could be a need to call for the death of a company, which has already been pronounced dead, it is true that the lasw permits it. A person cannot die twice. But this is the fiction of law. In one of the cases, an Income tax officer, whose demand for taxes remained unsatisfied with the assesse company, aggrieved by an action of striking off the name of the register, pettioned before the court for winding up action against the company. The court said that it couldn't be contended that the application under this sub-section [560(5)(b)] is not maintainable, as the company is not existant consequent on dissolution. This all the more adds to a view that till twenty years time limit pases [Section 560 (6)], the status of a company dissolved under section 560 (3) could be termed as a 'suspended animation' phase. |
6.04 Dissolved company having no successors?
What if the company is dissolved and still there are properties and rights vested in or held on trust for the company while it was functional? In India, the law is well settled that the property of an intestate dying without leaving lawful heirs pases to the Government by escheat or as bona Vacantia. The property of a dissolved Corporation passes to the Government by escheat or as bona Vacantia and if the company has a subsisting interest in a lease on the date of dissolution, such interest must necessarily vest in the Government by escheat or as bona Vacantia.
At this stage reading Article 256 of the Constitution; "Subject as hereinafter provided, any property in the territory of India which, if this Constitution had not come in operation, would have accrued to His Majesty or, as the case may be, to the Ruler of the Indian State by escheat or lapse of bona Vancantia for want of a rightful owner, shall if its property situated in a State, vest in such State and shall in any other case, vest in the Union. "The leagal position in this reagards becomes absolutely clear.
"Under the Act of 1853, made by the British Parliament [an Act to provde for the Government of India (1853), Statute 16 and 17 Victoria, C. 95, S.27], it was specifically provided as under:
'All real and personal estate within the said territories escheating or lapsing for want of an heir or successor and all property within the said territories devolving, as bona vacantia for want of a rightful owner, shall (as part of the revenues of India) belong to the East India Company in trust for Her Majesty for the service of the Government of India."
At this stage, referring to section 555(2) and 555(8) is essential. These sections dealing with the unclaimed or undistributed estate of a company, come into play where there is a liquidator involved in winding up of a company. But a company, which is dissolved in purusance of Section 560, is ahving no liquidator. Hence the operative part of Section 555 does not play any role in the dissolution of a company under Section 560. It may be noted that in the case of Narendra Bahadur Tandon, the Apex Court was dealing in a matter of a voluntary winding up.
In the Companies Act 1985 as applicable in England, section 654 deals with this issue. Worthy would it be to cite the section at this stage. |
Section 654 - Property of dissolved company to be bona vacantia
- When a company is dissolved, all property and rights whatsoever vested in or held on trust for the company immediately before its dissolution (including leasehold property, but not including property held by the company on trust for any other person) are deemed to be bona vacantia and-
- Accordingly belong to the Crown, or to the Duchy of Lancaster or to the Duke of Cornwall for the time being (as the case may be), and
- Vest and may be dealt with in the same manner as other boan vacantia accruing to the Crown, to the Duchy of Lancaster or to the Duke of Cornwall.
- Except as provided by the section next following, the above has effect subject and without prejudice to any order made by the court under section 652 or 653.
In India, the Companies Act, 1956 has no such corresponding provision. "The doctrine of bona vacantia or escheat was declared to be part of the law in India by the Privy Council as early as in 1860 in Collection of Masulipatam V. Cavaly Vencata Narrainapah, [1859-61] 8 Moo Ind App 500(Mad) at pp 525, 526, 527"5.
Thus there is no doubt about the applicability of the doctrine of bona vacantia in respect of a Company which could be considered in the state of "suspended animation" while dissolved under section 560, whether this doctrine comes into operation immediately or after a lapse of time limit of twenty years is a matter to be weighed. |
The Companies (Amendment Act, 2000 made certain changes in Section 3 dealing with the definition of Company and types of companies. With effect from 14th December 2002, any private company and public company, which does not have minimum paid up capital of Rupees one lakh and rupees five lacs, respectively would come under the fold of section 3 (5).
Referring to Section 3 (5) at this juncture is essential.
"3 (5) Where a private company or a public company fails to enhance its paid up capital in the manner specified in sub-section (3) or sub-section (4), such company shall be deemed to be a defunct company shall be deemed to be a defunct company within the meaning of Section 560 and its name shall be struck off the register by the Registrar,"
Plainly reading, this section has pervading efects on the future of those companies not compying with Section 3(3) or 3(4). In the event of non-compliance, the Registrar shall deem the said company to be defunct one and shall have to make a hearing in the matter on the principle of natural justice. Thereafter if thought fit and just, he shall dispense with the name of the Company from his Register.
The section does not specify that the Registrar has to follow the process narrated in Section 560(1), (2) and (3). Moreover Section 560 (1) casts a duty on the Registrar to look in to the aspect "whether the Company is carrying on business or in operation", but in this section a straight jacket formula to be applied i.e. the Company is defunct if its is not having the designated level of paid up capital. The policy of the Department of Company Affairs governing the matter (Para 5 supra) is overpowered by the language of Secion 3(5), as the only criteria to be observed for considering the company a defunct its level of paid-up capital. Interstingly, the word 'defunct' has also not been defined in the Companies Act, 1956. A question arises as to the mode and manner of revivification of such company on account of any contingency and applicability of Section 560 (6) to such a company. Since such a company has met its fate simply by an administrative order of the Registrar, the revivification thereof as envisaged in Section 560(6) seems to be more logical than as per Section 560 (6) seems to be more logical than as per Section 559. A meanigful interpretation to Section 3(5) could be that the legislature has ignored the characterstics of a defunct company and the process to erase its name off the register, i.e. Section 560 (1)(2)and (3) are bypassed and the rest to be followed in such case. Otherwise there is no reason to refer to Section 560 at all in Section 3(5). The ramifications of effectuating this section in the envisage manner could be litigious. But be it may as on date. |
| In an interesting case in UK reported as Neville V. Willson [1996] 3 AIIER 171 CA, though there were no formal compliances to winding up, the company stood dissolved. Its shareholders amongst themselves made interse arrangement to distribute the property of the company without a formal winding up. The court granted its approval thereto weighing the total consent of shareholders behind the process of transferring the assets of the company amonst themselves, accepting the exemption from the compliance of the Property Act, 1925 and held that the property of the company transferred by the shareholders was not bona vacantia. With due respect, the said judgement has been debated a lot. |
In case, where a company is under a state of statutory suspense up to twenty years, whether doctrine of bona vacantia could be applied or not, is a murky issue. With all above arguments, one would be inclined to answer the issue in negative. Now, if the State is not entitle to the assets of such entity, whether the shareholders are the collective owners of assets underlying the changed status? If so, in what capacity? Can they distribute the surrplus if any. amonst themselves by a unanimous decision? In the event the Company like the Phoenix comes back in 'as you were, position' by virtue of Section 560 (6), the assets so distributed would be brought back to the books of resusciated company by a court order. In the interregnum, if the assets have been destroyed demolished or extinguished, whether the shareholders are accountable for the loss? These are all vexatious issues to be settled in real life as and when these arise.
In an ordinary case, where the Registrar is to apply Section 560(1), (2) and (3), he shall be inclined to follow the policy of the Department of Company Affairs and such issues shall not crop up for the reason he shall put the Company having sufficient assets to the course of compulsory winding up. But ambifguity looms large in the aftermath of Section 3 (5).
Taxation of such an entity is also a dubious question. Section 2 (17) (iii) of the Income Tax Act, 1961 considers an entity under a state of statutory suspense within the meaning of company. If such of statutory suspense within the meaning of company. If such association or body owns assets and therefore distributes, the proceeds from sale thereof or in specie amonst its members, what could be the tax treatment in thehands of the entity as well as members is a subject matter of research. |
- Reference to the section is that of the Companies Act, 1956 as applicable in India, unless otherwise stated.
- Bombay Dyeing And Manufacturing Co., Ltd. V. The State of Bombay And Others 1958-(001)- SCR-1122-SC
- Guide to the Companies Act. A. Ramaiya, 15th Edition 2001, Page 3818 and 3819.
- Top Creative Ltd. and another V St. Albans District Council (1999) BCC 999
- Srikrishen Dhoot V. Kamalapurkar (1965) 35 Comp Cases 29 (Ker)
- Seth Kundanlal V. Hanuman Chamber of Commerce Ltd. (1966) 36 Comp. Cases 231 (Punj).
- Re. MorningStar (P) Ltd. (1970) 40 Comp Cases 29 (Ker)
- Biswanath Khan V. Prafulla Kumar Khan (1989) 66 Comp. Cases 42 (Cal)
- Narendara Bahadur Tandon V Shanker Lal [1980] AIR 1980 SC 575
- Shoo Nand And Others, Appellants V Deputy Director Of Consolidation, Allahabad And Others Respondents 2000-(087)-AIR-1141-SC.
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