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The Shelling Of Shell Companies – Corporate and Company Law



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Inactive corporations without significant operations or assets
may commonly be used to disguise business ownership from government
authorities and the public at large. This is a tactic which may
often be used for purposes that are spurious—including the
evasion of taxes and the illegal siphoning off of money.

The Companies Act, 2013 (“Act“)
classifies any company that has not, in the past 2 years: (i) been
carrying on any business/operations; (ii) made any significant
accounting transaction; or (iii) filed financial statements and
annual returns, as “inactive”1. The
Act further elucidates that any transaction which does not include
the: (i) payment of fees by a company to the Registrar of Companies
(“Registrar“); (ii) payments made by it
to fulfil the requirements of the applicable laws; (iii) allotments
of shares to fulfil the requirements of the Act; and (iv) payments
made for the maintenance of its office and records; would be
considered a “significant accounting
transaction”2.

The Registrar, pursuant to Section 12(9) of the Act, has the
power to physically verify the registered office of a company in
the event the Registrar has reasonable cause to believe that the
company is not carrying on any business or operations. Further, the
aforesaid Section provides that the Registrar may initiate action
for the removal of the name of the company from the register of
companies under Chapter XVIII of the Act if the Registrar finds
that the company does not have a registered office capable of
receiving and acknowledging all communications and notices as may
be addressed to it.

Recently, vide the Companies (Incorporation) Third Amendment
Rules, 20223 dated August 18, 2022, the
Companies (Incorporation) Rules, 2014 were amended and Rule 25B was
inserted thereto. The aforesaid rule now provides that the
Registrar may, pursuant to the information/documents made available
to it on MCA 21, physical verify the registered office of any
company for the purposes of Section 12(9) above. Such a physical
verification would need to take place in the presence of 2 (two)
independent witnesses belonging to the locality in which the
aforesaid registered office is situated. The Registrar may also
seek the assistance of the local police for such verification.

The Registrar is required to carry the documents filed on MCA 21
in support of the address of the company’s registered office of
the company for the purposes of the physical verification and to
check the authenticity of the same by cross verifying those
documents with the copies of supporting documents of such address
collected during the said physical verification, authenticated from
the occupant of the property in which the registered office is
situated.

Additionally, the Registrar is required to take a photograph of
the registered office of the company during the course of the
aforesaid verification and prepare a report of the same, in the
format provided in Rule 25B(4). This report would detail the
following: (i) name and CIN of the company; (ii) latest address of
the registered office of the company (as per the MCA 21 record);
(iii) date of authorization letter issued by the Registrar; (iv)
name of the Registrar; (v) date and time of visit for the aforesaid
physical verification; (vi) location details along with landmark;
(vii) name, father’s name, residential address and relationship
with the company of the person available (if any) at the time of
the aforesaid visit; and (vii) remarks (if any).

The following documents would also be attached to the aforesaid
report: (i) copy of the agreement/ownership/rent agreement/no
objection certificate of the registered office of the company from
owner/tenant/lessor; (ii) a photograph of the registered office;
(iii) self-attested ID card of the person available; and (iv) any
other necessary documents.

If, after conducting such physical verification of the premises
in which the registered office of the company is situated, the
Registrar finds that the company is incapable of receiving and
acknowledging all communication and notices, the Registrar is duty
bound to notify the company and all its directors of his intention
to remove the name of the company from the register of companies
and requesting their representations (along with accompanying
documentation), if any, within 30 (thirty) days from the date of
the notice. Thereafter, the Registrar may exercise his power to
remove the name of the company from the register of companies,
pursuant to Section 248 of the Act.

In the wake of several noteworthy instances of shell
companies/inactive companies being used to layer the proceeds of
crime, and to shirk compliance and disclosure related obligations,
this amendment to the Companies (Incorporation) Rules, 2014 marks a
welcome step towards curbing the malicious utilization of inactive
companies by larger companies and merchants. Without excessively
broadening the scope of the Registrar’s powers, the amendment
establishes a streamlined process which aids the Registrar to
succinctly gather the information necessary to ensure compliance
with the Act.

Footnotes

1. Section 455(1)(i) of the Act.

2. Section 455(1)(ii) of the Act.

3. Ministry of Corporate Affairs Notification
No. G. S. R. 643 (E), https://www.mca.gov.in/bin/dms/getdocument?mds=9Y5OnM%252BynyaO2gmwIgo30A%253D%253D&type=open

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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