Erwin Schrodinger was an Austrian physicist who developed the thought experiment to illustrate quantum superposition, where a cat was placed with a flask of poison and radioactive source inside a sealed box. If an internal monitor detects radioactivity, the flask is shattered, releasing the poison, which kills the cat. The Copenhagen interpretation of quantum mechanics implies that after a while, the cat is simultaneously alive and dead. Yet, when one looks in the box, one sees the cat either alive or dead not both alive and dead. This poses the question of when exactly quantum superposition ends and reality collapses into one possibility or the other. Similarly, the Indian Government in 2017, had done an ‘experiment’ on the corporate sector!
Such action, despite preceding with two notices to the Companies, had come as a shock to the Industry as Companies which had been carrying out bonafide business activities were affected; Their Corporate Identity Number was disabled; Some of the Directors of these Companies were disqualified; Despite filing Income Tax Returns and taking various requisite Registrations from the Government, the Companies were branded as shell companies, much to their dismay. The activities of such Companies had come to a stand-still as various stakeholders became vary about extending any service to such Companies.
Removal of disqualification of Directors of struck off Companies was complicated as there was no recourse under the Companies Act, 2013 for the same. Thus, the Directors filed a writ petition with the High Courts to obtain an interim stay for disqualification and direction to the Registrar for restoration of the DIN.
The Ministry also announced the Condonation of Delay Scheme, 2018 whereby the DINs of disqualified directors were enabled for a period of about three months to enable filing of pending returns of active companies. The returns were to be accompanied by a filing of Form eCODS with a fee of Rs. 30,000. Many Companies made use of this mechanism to update their pending filings.
Further, there was ambiguity on the position of Companies which were actually not carrying any business and did not want to continue doing any business. Whether the strike off would amount to absolving the on-going liabilities of the promoters and directors or should the Companies be revived and be voluntarily closed after completion of filings was a major dilemma. The Delhi High Court and the Madras High Court vide their Orders dated 22nd March 2018 and 26th March 2018 however allowed the Directors of a Struck Off Company who obtained an interim stay order towards the disqualification of the DIN, to avail the benefit of the Condonation of Delay Scheme 2018 without waiting for the restoration of Company by filing the pending forms physically with the Registrar of Companies and depositing the requisite fees with the Court. Many Companies which did not want to restore their names had used this option to ensure that the Directors of the Company do not suffer disqualification.
The only recourse that was available to the Companies that did not fall under the above category was to approach the respective benches of National Company Law Tribunal under Section 252 of the Companies Act, 2013. It was common knowledge that the Hon’ble Benches entertained applications from shareholders of the Company only and not even from Directors. Even the Central Board of Direct Taxes had made petitions under Section 252 where striking off of Companies lead to uncertainty regarding various other proceedings which were already under way under the Income Tax Act, in case of these companies.
On perusal of the petition for restoration, the Hon’ble benches allowed and denied the restoration mainly based on whether the Company did carry on business, the Company had duly filed its Income Tax Returns and paid Taxes; they also considered to allow cases where there were employees and cases with pending litigations. A typical Order of the Tribunal consisted the following:
- A direction to the Registrar of Companies to restore the Company in their Register of Companies
- A direction to the Company to file the pending Financial Statements and Annual Returns and further file an affidavit stating that the Company was not involved in money laundering activities during the demonetization period
- A direction to the Company to make a payment of Rs. 20,000 to the Registrar of Companies to effect the publication in the Official Gazette
Interestingly, the Chennai Bench of the Tribunal in its latest Order also directed the Registrar to restore the Director Identification Number (DIN) of the Directors of the Company if the DINs were deactivated pursuant to striking off of the Company.
Affected or not, the lesson seems to have been learnt by the Industry, we see a flurry of filings being made and the Companies taking this seriously as at this point. The Industry is now plagued with furthermore questions about the fate of the Companies which were denied restoration of name and that of the thousands of Directors who are disqualified till the year 2021. Further, the High Courts only issued interim stay order for the disqualification of Directors; the Ministry’s decision on whether to appeal the decisions collectively at the Supreme Court or not will only take us to the final stage of this exercise. Is the cat dead or alive? We’ll know only when the box is opened!