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07 May 2020

A Legal Analysis Of The Companies Fresh Start Scheme-2020

To mitigate the economic hardship caused due to COVID-19 pandemic and to facilitate ease of doing business, various efforts are being made by the Government of India. In furtherance of these initiatives, the Ministry of Corporate Affairs (“MCA”) has brought about certain relaxations for companies vide its general circular no. 13/2020 dated 30th March 2020 (“Circular”). The relaxation enables companies to regularize compliance related filing with the Registrar of Companies ( “Registrar”).

The Companies Act, 2013 (and erstwhile 1956 Act) (‘hereafter the ‘Act’) stipulates various mandatory filings for companies, and in case of failure in adherence, penal provisions are attracted in most instances.  It is observed from the list of ‘defaulter companies’ provided under the official website of the MCA that there is substantial increase in the number of non-compliances by companies. The defaults are mostly caused due to difficulties in understanding the applicability of a provision or due to paucity of time. This leads to a large number of companies being unable to file the required forms and returns with the Registrar within the stipulated time and thereby resulting in being in default under the Act.

In order to lighten the burden of the defaulting companies[1], the MCA has brought out the Companies Fresh Start Scheme, 2020 (hereafter referred to as the “Scheme”), whereby companies have been provided with the flexibility to fulfill pending filing compliances. The Scheme thereby condones the delay in filing of the documents, forms and returns with the Registrar without payment of any additional fees.

 

Applicability of the Scheme:

The Scheme has been promulgated by the MCA under Section 460 read with Section 403 of the Act, which empowers the Central Government to expressly condone the delay in filings with the Registrar.

The Scheme is applicable to all defaulting companies whose documents, returns or forms are pending for filing as on the date of the notification of the Scheme. The benefits under the Scheme is available to both domestic companies registered under the Act as well as foreign companies. The Scheme also gives an opportunity to Inactive Companies[2] to get their companies declared as a ‘dormant company’ under Section 455 of the Act by filing a simple application on payment of the normal fee. The said Scheme is effective from 01st April, 2020 and is valid till 30th September, 2020.

However, it may be noted that the Scheme is not applicable in the following cases:

  1. Where a final notice for striking off the name of the company under Section 248 of the Act has already been issued by the designated authority.
  2. Where a company has Suo-moto applied for striking off the name of the company from the register of companies.
  3. Where a company is amalgamated under the scheme of compromise and arrangement under the provisions of the Act.
  4. Where the company had applied for dormant status under Section 455 of the Act before the introduction of the Scheme.
  5. For Vanishing Companies[3].
  6. For documents related to increase in Authorized Share Capital (Form SH-7).
  7. For charge related documents i.e. Form CHG-1, CHG-4, CHG-8 and CHG-9.

 

The Process under the Scheme:

The Scheme stipulates that every defaulting company will be entitled to make the belated filing by paying only the normal fees as prescribed under Companies (Registration office and Fees) Rules, 2014 for filing of all such belated forms, returns and documents and no additional fees is required to be paid. After filing of the pending document under the Scheme, the defaulting company is required to file e-form CFSS-2020 on the MCA website, without paying any fees thereon, giving brief details of the belated forms which have been filed by it. It is pertinent to note that the defaulting company is required to file the e-form CFSS-2020 within 6 months from the closure of the Scheme i.e. it has to be filed between 01st October, 2020 and latest by 31st March 2021 in order to claim immunity under the Scheme.

If a defaulting company has filed any appeal against any notice, complaint, order passed by court or by an adjudicating authority, it can file an application under this Scheme for immunity certificate only after withdrawing such appeal and furnishing proof of such withdrawal with the application (CFSS-2020). The company is mandatorily required to provide proof of withdrawal of appeal.

 

Relevance of Immunity Certificate:

On the basis of the declaration given in e-form CFSS -2020, the Designated Authority[4] will issue an Immunity Certificate. The immunity provided under the Scheme is only with respect to any penalty in relation to the non-filing of such form or document with the Registrar and the defaulting company is not protected from any consequential proceedings including any interest of shareholder or director etc. It is pertinent to note that the immunity certificate is not granted automatically but is subject to scrutiny and only after the document is taken on record or approved by the Registrar, as may be applicable.

Upon issue of the immunity certificate, the defaulting company gets a protection from any penalty for such non-filings. Further, the designated authority will withdraw the prosecutions before any courts and proceedings pending before adjudicating authority in respect of which the immunity has been granted, which is deemed to be completed without any further action by the designated authority. It is pertinent to note that, an immunity cannot be availed in the following circumstances:

  • In case any management disputes of the company are pending before any court of law or tribunal;
  • In case any court has ordered conviction in any matter, or an order imposing penalty has been passed by an adjudication authority under the Act, and no appeal has been preferred against such order before the commencement of the Scheme i.e. on or before 30th March, 2020.

The only remedy which has been provided for circumstance under point (ii) above is in a situation wherein an appeal under Section 454 (6)[5] is not filed before a regional director for an order passed by the Registrar and the last date of filing appeal falls between 1st March 2020 to 31st May 2020. In such a case, there is an extension in time by 120 days for the company to file an appeal. Furthermore, during such grace period, no prosecution will be initiated against the company or its officers for non-compliance of an order of the adjudicating authority in so far as it pertains to non-filing of forms or documents.

Analysis of the Scheme:

While on one hand, it is noted that the Scheme provides benefits to the defaulting companies, at large, to make the filings of documents, forms and returns which are pending for filing, the Scheme also entail other benefits as explained below:

  1. Inactive Companies- This is a good opportunity for all the defaulting inactive companies to file all their pending forms and returns at normal fees instead of the hefty additional fees of ROC and also file an application for immunity in E- Form CFSS-2020. The company can subsequently file for either Form MSC-1 to obtain the status of Dormant Company under Section 455 of the Act or file Form STK-2 for striking off the name of company under Section 248 of the Act.
  1. Directors whose DIN are deactivated due to non -filing of KYC forms-The Scheme gives an opportunity to those Directors whose DIN were deactivated due to non-filing of Form DIR-3 KYC. Those Directors can activate their DIN after filing their pending KYC forms at normal fees.
  1. Filing of annual return: The Scheme also gives companies, who have not complied with the annual return filing requirement, an opportunity to rectify the same. Further a company which has been struck-off due to non-filing of annual returns, may apply for revival before the NCLT and thereafter obtain approval for revival and then take benefit under the Scheme.

Even considering these benefits, it may be noted that there are some shortfalls under the Scheme or areas wherein the Scheme needs to bring more clarity:

  • A defaulting company gets immunity only with respect to penalty for non-filing of the form/document and the immunity is applicable only upon scrutiny and form being approved (if applicable) and a certificate being issued by the Registrar. However, in the event the form is not approved by the Registrar or the immunity certificate is not granted, the benefit under the Scheme is not available and that means the defaulting company continues to be under default.
  • The Scheme expressly provides that the immunity will not be applicable in case where the adjudicating officer under the Act has already passed an order and it is not being appealed. Similarly, in the event if an appeal is being filed by the defaulting company against an order, then in order for the company to claim benefit under this Scheme, the application has to be withdrawn. In this regard, it is pertinent to note that there is inordinate delay for withdrawal of cases from the appellate authorities.[6] Given the backlog of matters before the authorities and practical difficulties arising due to COVID-19 restrictions, it needs to be considered whether the timeline provided is practically sufficient for the defaulting companies to file for withdrawal and obtain a copy thereof and thereafter file for the benefit under the Scheme. Even considering the options for online application filing that has been provided by most forums such as NCLT because of COVID-19, companies could face difficulties in meeting the timeline. Further, in a situation where a defaulting company withdraws the appeal and files for immunity but the Registrar denies or refuses to grant immunity, there is no express clarity on whether it would affect the ability of the defaulting company to file for a fresh appeal or to what extent the defaulting company will face exposure under Section 454. Alternatively, the company may have to reserve the liberty to seek fresh appeal at the time of withdrawal, as per feasibility.  
  • While at one hand, the Scheme does provide benefit in rectifying non-compliances for forms such as Annual Returns, however, the benefit is not being provided for forms such as charge related filings which carry heavy duties in terms of additional fees as well as time limit for filing. Also, such forms if accepted for filing would have given greater protection to the secured lenders.

In light of the above, it may be noted that while the MCA has undertaken a good effort after prudent thought to provide a one-time relief to defaulting companies while protecting and not affecting existing proceedings under other enactments such as Insolvency & Bankruptcy Code, 2016, RERA Act, 2016 etc. However, it needs to be considered whether the benefits are in its true spirit adequately addressing the woes of India Inc. Especially considering the current situation where every sector is either already in distress or impending peril.

References:

[1] The Scheme defined a ‘Defaulting Company’ as a company defined under the Companies Act, 2013 and which has made a default in filing of any of the documents, statement, returns etc including annual statutory documents on the MCA 21 registry.

 

[2] Inactive Company means companies defined in Explanation (i) to sub-section (1) of section 455 of the Act, which deals with the definition of Dormant Company

[3] Vanishing Companies are those companies which raised funds from public through initial public offers (IPOs) and subsequently failed, inter-alia, to comply with the listing/ filing requirements of Registrar of Companies (ROC) and the Stock Exchanges for a period of two years and were not found at their registered office address at the time of inspection done by authorities / Stock Exchange.

[4] Designated Authority means the Registrar of Companies having jurisdiction over the registered office of the Company.

 

[5] Section 454 (6) requires an aggrieved person to file an appeal against the order of an adjudicating officer within 60 days from the order thereof.

[6] As per Government of India Ministry of Corporate Affairs Rajya Sabha Unstarred Question No. 1148 answered on Tuesday, the 6th March, 2018 regarding pending cases under the Companies Act, 2013: ‘9,004 number of applications have been filed as on date for withdrawal, out of which 4,066 number of cases have been withdrawn.’


Image Credits: Aymanejed

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