Preparing financial statements for 2021-22? What does every company need to know about strike-off companies?

Financial statements of a company give information about profit and loss statements as well as its assets and liabilities. A shareholder or analyst often analyses these documents, in order to gauge the company’s performance. In addition, the notes section makes some material disclosures (say on loans or guarantees) that are of financial importance.

The Ministry of Company Affairs or MCA recently introduced more elaborate financial disclosures. Effective from April 1, 2021 i.e for all financial statements prepared by companies for 2021-22 and beyond, they need to disclose transactions with companies struck-off under Section 248 of the Act, or Section 560 of the Companies Act, 1956 by the Registrar of Companies (RoC).

In addition, they need to disclose the following details:

  • Name of the struck-off company
  • Nature of transaction with the struck-off company
  • Balance outstanding and relationship with it

First of all, what is a strike-off company?

Strike-off, as the name suggests, means removing the name of the company from the register of the RoC. In effect, it ceases to be a legal entity and cannot trade, sell its assets or make payments. There are serious consequences for directors of companies which are involuntarily struck-off, especially if the company is still continuing with its operations.

Two modes of Strike-off

  1. A) The Companies Act 2013 provide two modes of strike-off
  • Strike-off by the RoC under Section 248(1) of the Act

Provision for strike-off can be enacted on the following premises:

  • The company hadn’t commenced its operations even after a year of its incorporation
  • The company has not been pursuing any business or activity for the preceding two financial years, for which it hasn’t sought the status of a dormant company under Sec 455 of the Act

When the strike-off is done by the RoC, it may issue a notice to the companies and its directors. This process results in a compulsory removal of names from the RoC.

  • Strike-off on its own accord under Section 248(2) of the Act

Some companies can also file an application for a strike-off on its own accord for which it needs to pass a special resolution (consented by 75% of its members).

However, all companies cannot be struck-off and there are exceptions to the list:

  • Listed companies
  • Vanishing companies (those listed for inspection or investigation)
  • Any ongoing litigation is pending
  • Any director is disqualified
  • The company has changed its name or relocated its registered office to another state in the last three months
  1. B) Similarly, Section 560 of the Indian Companies Act, 1956 gives the power to the Registrar to strike defunct companies off-register. If it has apprehensions about the company’s business operation, it sends a letter inquiring whether the company is carrying its business or operation.

How to facilitate reporting?

The big challenge for companies preparing financial statements for 2021-22 is to compile a comprehensive list of such struck-off companies and check if it has dealt with them last year.

Multiple RoC (about 22 of them) lists names of such struck-off companies and in an ad-hoc manner. So, essentially one needs to keep a tab of all updates of all the RoCs. Moreover, searching for names manually from the MCA website can take a long time.

That’s where the cloud-based company database services could come handy. It compiles data from disparate public sources and provides a fast-searching tool from its comprehensive database of segregated public records.

Effectively, in a single frame, you would be able to get a consolidated list of all struck-off companies.

Takeaway

There are at least 4.2 lakh strike-off companies, as of today. To comply with the new norms of financial reporting, ensure you have the backbone of up-to-date company databases to filter them out. It would not only ensure proper compliance but also save considerably on time and effort.

About Probe42:

  • Probe is an independent Information Services company focused on providing financial information on Unlisted and under-covered companies in India
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