Wednesday, June 2, 2010

Easy Exit for Defunct Companies

The inability to expeditiously close down businesses or companies in India often forms the subject matter of critical comment about doing business in India. In order to address this drawback, the Ministry of Corporate Affairs (MCA) has issued the Easy Exit Scheme, 2010 under which inoperative companies (“defunct companies” to use the technical expression) are given an opportunity to get their names struck off the register under Section 560 of the Companies Act, 1956.

This scheme is in effect from May 31, 2010 to August 31, 2010. Companies that wish to avail of this scheme should ensure that they take the necessary steps within this relatively short window.

While this scheme may enable smoother procedures under the Companies Act, its success may be circumscribed by a fairly long list of situations where the Easy Exit Scheme is not available. These include:

(a) listed companies;
(b) companies registered under section 25 of the Companies Act, 1956;
(c) vanishing companies;
(d) companies where inspection or investigation is ordered and being carried out or yet to be taken up or where completed prosecutions arising out of such inspection or investigation are pending in the court;
(e) companies where order under section 234 of the Companies Act, 1956 has been issued by the Registrar and reply thereto is pending or where prosecution if any, is pending in the court;
(f) companies against which prosecution for a noncompoundable offence is pending in court;
(g) companies accepted public deposits which are either outstanding or the company is in default in repayment of the same;
(h) company having secured loan ;
(i) company having management dispute;
(j) company in respect of which filing of documents have been stayed by court or Company Law Board(CLB) or Central Government or any other competent authority;
(k) company having dues towards income tax or sales tax or central excise or banks and financial institutions or any other Central Government or State Government Departments or authorities or any local authorities.

In other words, this scheme would help companies that have absolutely no pending obligations or dues owed to authorities. Hence, where the closure of companies requires the involvement of other contractual parties or the Government (such as the tax authorities), there could be obstacles in getting companies struck off the register in a timely manner. It is hard to argue with that logic (which has a larger social purpose) because defaulting companies cannot be permitted to avoid their existing obligations under law by closing down.

Separately, the MCA has issued the Company Law Settlement Scheme, 2010, which provides “an opportunity to the defaulting companies to enable them to make their default good by filing belated documents and to become a regular compliant in future”. This scheme too is in effect from May 31, 2010 to August 31, 2010.

4 comments:

Anonymous said...

very nice article. I have a query if a company has not filed its returns for last 4 yrs and is not operational then can such a company take benefit of above mentioned rule?

Abhishek said...

very interesting and informative article, keep the good work going

Umakanth V. said...

@ Anonymous. Thanks for your question. I assume that your reference to “returns” is to tax returns. If the company has tax dues arising out of previous operations, then it would not be eligible for the Easy Exit Scheme due to the exclusion in para (k) above. If no tax is due, or if the company was otherwise not required to file tax returns, then the scheme will be available. But, even in such case, the income tax authorities will be given 30 days’ notice to raise any objections before the company is struck off the register.

Anonymous said...

Very informative article. Can you please tell me if a company has not filed its annual returns for the past three years and is not operational then can such a company file under the EES without completing these filings?