Striking off of a company means that the company has been removed from the official register of businesses by the relevant regulatory authority, generally for failing to meet specific legal and financial obligations.
A striking off of a company can have a substantial impact because it can no longer do business or participate in legal agreements. Furthermore, the government may confiscate or sell the corporation’s assets or property to pay off creditors.
The Companies Act, 2013 (Act) specifies numerous methods for dissolving a business, such as striking off, winding up, merger, and so on.
The process and way in which a company is closed are determined by a number of elements, including the commercial rationale of the members, the company’s financial state and business operations, the timescales and expenses involved, and so on.
When a company is not continuing any business, its operations have been shut down, and there is no intention of reviving it in the future, the Registrar of Companies (“RoC”) may, either on its own motion or on the company’s application, strike off its name from the register of companies (“Register”) by following a simple procedure prescribed under chapter 18 (sections 248 to 252) of the Act read with The Companies Rules, 2016.
When RoC has good reason to believe that a company is not operating or conducting business, he may, after giving the company statutory notice asking for an explanation, strike the company’s name from the register and publish notice of the action in the Official Gazette. The company will then be dissolved as soon as the notice is published in the Official Gazette.
Impact on Shareholders
Striking off of a company by the RoC indicates that it has been disregarded and is no longer listed on the official register of corporations. The company’s shareholders may suffer as a result of this.
First off, the shares’ value will drop sharply, if not completely, in value. The corporation will no longer be owned by its shareholders, and they won’t be able to sell their shares or get dividend payments. For shareholders, especially those who own a big number of shares or have made sizable financial investments in the company, this could mean a significant financial loss.
Second, shareholders won’t be able to earn any more returns on their investment because the company won’t be able to operate and create revenue. For shareholders who were banking on the company for long-term financial success, this can be very distressing.
Thirdly, the company’s assets will be sold, and the profits will be divided among the creditors, with shareholders often receiving a very small portion, if any, of the proceeds. This indicates that stockholders would not only lose their investment in the business but also be left with nothing to make up for their losses.
Fourth, shareholders will no longer be able to cast ballots or have a role in how the company will develop in the future. For investors with a stake in the business’s success, this can be very irritating.
Furthermore, the reputation of the stockholders may suffer if a firm is struck off. It may be viewed as evidence of poor judgment or bad investing choices to own stock in a corporation that has been declared invalid.
The ability of shareholders to secure future investments or business prospects may become more challenging as a result.
The striking off of a corporation can, in conclusion, have a major negative impact on shareholders, including monetary loss, a loss of future profits, and reputational harm.
Therefore, before making an investment, shareholders should be aware of the risks associated with doing so and carefully assess the possible effects of a firm being struck off.
Impact on Creditors
A creditor is a person or organization to whom the company owes money. Striking off means that the creditor can no longer claim the money it owed from the company because it no longer exists. This can be especially devastating for small businesses or individuals who are relying on the payment to keep their own operations running.
In addition, if a company is struck off while it still owes money to creditors, the creditors may not be able to recoup their losses through liquidation or receivership.
This is because the company has already been dissolved and its assets have been distributed. Creditors may also be unable to pursue legal action against the company or its directors, as the company is no longer in existence.
Options for creditors to recover their losses in case of striking off of a company –
One option is to pursue legal action against the company’s directors for wrongful trading or misfeasance. This can be a complex and time-consuming process, and there is no guarantee that the creditors will be able to recover their losses in this way.
Another option is to make a claim through the government’s insolvency service. This is a process where creditors can claim money they are owed from a government fund that is set up to compensate them in the event of a company’s insolvency. However, the fund may not have enough money to cover all of the creditors’ losses, and the process can take a long time.
It is vital for creditors to be aware of the risks of lending money to a company, and to take steps to protect themselves in the event that it is struck off. This can include conducting thorough due diligence on the company and its directors and taking out insurance to cover any potential losses.
Impact on Other Stakeholders
Striking off of a company can have a significant and lasting impact on stakeholders of the company such as –
- Creditors are one group of stakeholders who can be greatly affected by the striking off of the company. They are individuals or organizations that are owed money by the company.
- Shareholders are another group of stakeholders who can be impacted by the striking off. They may lose the value of their investment in the company, as well as any dividends or other returns they were expecting. Shareholders may also be unable to sell their shares or claim any money back from the company.
- Customers and suppliers can also be impacted by a striking off of the company. Customers may not be able to claim refunds or compensation for goods or services they have purchased from the company. Suppliers may not be able to claim payment for goods or services they have provided to the company. This can cause financial hardship for customers and suppliers, and may also negatively impact their own businesses.
- In addition to the financial impact, a striking off of a company can also have a negative impact on the reputation of the company and its directors. This can make it hard for the management of the company to re-establish new businesses or find employment in the future.
Options for other stakeholders to recover their losses in case of striking off of a company –
Creditors can make a claim through the government’s insolvency service, or pursue legal action against the company’s directors for wrongful trading or misfeasance. Employees may be able to make claims through the government’s Employment Insurance scheme.
Shareholders may be able to claim compensation through the government’s shareholder protection scheme. However, these options may not be able to fully compensate the stakeholders for their losses, and the process can take a long time.
It is essential for stakeholders to be aware of the risks of engaging with a company, and to take steps to protect themselves in the event that the company is struck off.
This can include conducting thorough due diligence on the company and its directors and taking out insurance to cover any potential losses. It’s also important for the stakeholders to stay informed about the financial and legal standing of the company and take necessary actions to secure their interests.
Impact on Employees
Upon striking off a company, its employees may lose access to benefits like retirement plans, health insurance, and other perks that were provided by the company. This can cause additional financial stress and uncertainty for employees, especially if they have dependents who rely on these benefits.
Employees may also experience emotional distress and uncertainty as a result of losing their jobs. This can include feelings of insecurity, anxiety, and depression.
They may also struggle to find new employment, especially if the company has a poor reputation or if there is a downturn in the job market.
In addition, employees may also lose seniority, pension, or other benefits which they have accumulated while working with the company. This can have long-term financial and emotional impacts on employees.
Options for employees to recover their losses in case of striking off of a company –
Employees may be able to make claims through the government’s Employment Insurance scheme. They may also be able to pursue legal action against the company’s directors for wrongful dismissal or other employment-related issues. However, these options may not be able to fully compensate employees for their losses, and the process can take a long time.
Striking off a company can bring emotional turmoil and uncertainty for employees. It is crucial for employees to be aware of the risks of working for a company, and to take steps to protect themselves in the event that the company is struck off.
This can include staying informed about the financial and legal standing of the company before making an application for a position, and seeking legal or financial advice from within or outside the company if they are concerned about their rights and benefits.
The RoC can screen out non-operating firms that were formed to siphon off funds thanks to the strike off provisions. In the recent last few years, it has accomplished this. By submitting an application to the RoC, these regulations also give management the ability to close entities that are no longer necessary.
In comparison to other methods of business dissolution, the process for removing a company’s name from the Register kept by the RoC on an application by the firm itself involves far less time and money. The liabilities of the members, directors and managers outlined above do not end with the dissolution of the company under this section. Even after their collapse, they still owe debts.
The appropriate bench of the national company law tribunal, which has territorial jurisdiction over the company, has the authority to reinstate a company that has been dissolved pursuant to Section 248 within twenty years if it is deemed reasonable by the tribunal.
Frequently Asked Questions
Ques: When a company is struck off?
If one of the following applies, the business may be struck off:
- The failure of a company to start operations within a year of incorporation
- If a company has not applied for the status of a dormant company within the two financial years immediately prior and has not been actively conducting any business or operations throughout that time.
- When this occurs, either the firm willingly requests the name to be struck off by the registrar of companies, or he, the registrar of companies does so on his own.
Ques: What happens after the registrar strikes off the name of the Company?
In particular, if the company is still in operation, directors of companies that are involuntarily struck off may face severe repercussions.
- After being dissolved, the firm is no longer a valid legal entity.
- The state is given ownership rights to the company’s assets.
- Banks won’t lend money if the business fails, and any pending contracts with clients or suppliers could be in jeopardy.
- According to a recent court decision, directors of companies that are involuntarily struck off may be barred from serving as directors or in management of any company for a period of up to 12 years at the request of the director of corporate enforcement.
- Shareholders and officers of the firm are operating without the protection of limited liability and are therefore subject to personal liability for the company’s obligations.
Ques: What are the documents needed to strike off the company’s name?
Ans. The company that is likely to be struck off must submit an application to the company registrar along with the necessary supporting documentation:
- The indemnity bond is properly notarized by each director (in Form STK 3).
- A certified statement of liabilities that lists all of the company’s assets and liabilities is signed by a chartered accountant.
- Form STK-4, an affidavit by all of the company’s directors, along with a validly executed CTC of the Special Resolution.
- A description of any legal actions the corporation is currently involved in.