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  • Xerxes Antia

Crack in the Shell – MCA to physically verify existence of Companies

(Xerxes Antia, Sheel Ghia & Arbaaz Maniyar)


Introduction and Background:

The Ministry of Corporate Affairs (“MCA”) has been trying to tackle the menace of shell companies (which become conduits of illegal monies which are siphoned off after committing financial crimes). While a ‘shell company’ is not defined under the Companies Act, 2013 (“Companies Act”) or the erstwhile Companies Act of 1956, the term ‘inactive company’ has been defined as a company that has not been doing the following for the last 2 financial years:

  1. carrying on any business/operations

  2. made any significant accounting transaction[1], or

  3. filed financial statements and annual returns[2].

The Registrar of Companies (“Registrar”) having jurisdiction, has the power to cause and conduct physical verification of the registered office of a company if he/she has reason to believe that such company either is not conducting any business/operations or is not capable of receiving and acknowledging communications[3]. If either of the above are found to be true[4], then the Registrar has the powers to strike off the company in question. Up until now there was no clear procedure prescribed for conducting such physical verification. MCA has now inserted a new rule in the Companies (Incorporation) Rules, 2014 which sets out a precise and transparent procedure to be followed for physical verification of companies' registered office addresses by the Registrar, based on the information uploaded on the MCA portal by such companies. With this amendment, the Registrar has been provided with a clear path to distinguish between genuine companies, and shell companies/inactive companies.

The Physical Verification Process:

From August 18, 2022 onwards, the Registrar, based on the information uploaded on the MCA portal, would have the power to[5]:

  1. visit the registered office of a company for verification of the same in presence of two independent local witnesses. The Registrar is entitled to seek assistance of the local police, if required in this regard;

  2. carry any documents that had been filed in support of the address of the registered office of the company to cross check the authenticity;

  3. take photographs of the registered office of the company; and

  4. prepare a report of the physical verification that it has undertaken which would cover the following.

  5. Name and CIN of the company in question;

  6. Address of the registered office of such company as per MCA 21 records;

  7. Date of authorization letter issued by the Registrar;

  8. Name of the Registrar in question;

  9. Date and time of the physical verification visit;

  10. Location details for the registered office in question; and

  11. Details of any person that was available at the registered office address (Name, Father’s name, Residential Address and his relationship with the company). If after conducting the physical verification of a company’s registered office address, it is found that such company either is not conducting any business/operations, or is not capable of receiving and acknowledging all communication and notices, then the Registrar is to send a notice to such company and all its directors recording the Register‘s intention to strike off the company in case of any failure to provide the Registrar with reasonable representations to the contrary within 30 days.

What companies should do to be in the Registrar’s good books?

A company should ensure that:

  1. the requisite form for commencement of business (Form INC 20A) has been duly filed within 180 days from the date of incorporation;

  2. the company has actually commenced its business within 1 year of its incorporation.

  3. the company has made regular filings with the MCA viz. filing of financial statements, annual returns, etc.

If at all a company has not carried on any business or operations for two financial years, then to prevent the company from being struck off as an inactive company, the company should make an application to the MCA for obtaining the status of a dormant company.

What companies should prepare for, in case of physical verification of a registered office address by the Registrar?

The following need to be complied with to reduce possible objections/adverse remarks from the Registrar when carrying out a physical verification of a registered office address:

  1. ensure that the full name of the company along with the registered address is painted or affixed, outside the office in a conspicuous position;

  2. maintain sufficient evidence of the company conducting its business is available at the registered office;

  3. ensure at least 1 employee/officer of the Company is present at the registered office during normal business hours;

  4. ensure that the Company maintains relevant corporate records at its registered office (including statutory registers, board meeting minutes, etc.). Whilst the Registrar would not have a right to review/verify the records, the Registrar may ask if the records have been maintained at the address as required under the Companies Act, 2013;

  5. maintain copies of the applicable authorization/right to use the premises in question as the company’s registered office (including copies of any agreement/ownership documents/rental agreement/No Objection Certificate for use of the address as the registered office are available at for any inspection by the Registrar.


 

Footnotes:

  1. “Significant accounting transaction” means any transaction other than— (a) payment of fees by a company to the Registrar; (b) payments made by it to fulfil the requirements of this Act or any other law; (c) allotment of shares to fulfil the requirements of this Act; and (d) payments for maintenance of its office and records.

  2. Section 455 of the Companies Act.

  3. Section 12(9) of the Companies Act.

  4. Or if certain other stipulated conditions are not met such as the applicable subscribers to the memorandum and articles of association not making their committed subscription.

  5. Rule 25(B) of the Companies (Incorporation) Rules, 2014

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