Striking Off Your Section 8 Company in India

A Section 8 company is a non-profit entity registered in India under the Companies Act, 2013. It is created for purposes such as promoting art, science, commerce, charity, sports, education, research, social welfare, religion, or environmental protection.

Unlike other companies, a Section 8 company's main objective is to use its profits and income to further its charitable goals, and it cannot distribute dividends to its members. These companies are licensed and regulated by the Central Government through the Registrar of Companies (RoC) under the Ministry of Corporate Affairs (MCA).

Section 8 companies can be registered in any Indian state or Union Territory through the respective RoC office, like RoC Delhi, RoC Mumbai, or RoC Bangalore. While compliance is mostly uniform nationwide, minor regional differences may arise due to state-specific stamp duty, though these are usually smaller than for private limited companies.

Strike Off a Company under Section 248 of the Companies Act, 2013

Section 248 of the Companies Act, 2013, governs the striking off of a company's name from the Register of Companies. This applies mainly to companies that are inactive or have never started their business activities.

Key points under Section 248:

• The company should not have carried on any business or operation for at least two consecutive financial years, or has never commenced business operations.
• Companies can apply voluntarily for striking off, or the RoC can initiate an involuntary strike-off if it finds the company inactive.
• Before removing the name, the RoC ensures that there are no pending liabilities, such as tax dues, loans, or legal disputes.
• Once the process is completed, the company’s name is deleted from the register, and it ceases to exist as a legal entity.

In simpler terms, striking off a company is the process of getting its name removed from the ROC. This section provides a simpler, faster, and more cost-effective way to close an inactive or defunct company compared to winding up.

Striking off an inactive company can be advantageous for several reasons:

• Avoids Compliance Penalties: It helps the company and its directors avoid penalties for non-compliance with the Companies Act, 2013.
• Reduces Costs: It eliminates the recurring expenses of maintaining the company, such as audit fees, professional fees, and annual filing fees.
• Frees Directors: It removes the legal and financial liabilities of the directors associated with the defunct company.
• Faster Process: The strike-off process is significantly faster and less complex than the winding-up procedure.
• Closes Old Financial Records: Ends the need to maintain books of accounts or file tax returns for an inactive company.
• Improves Creditworthiness: Clears inactive companies from the founders’ records, helping maintain a clean business profile for future ventures.
• Removes Unnecessary Legal Risks: Avoids risks of the inactive company being misused for fraudulent purposes.
• Simplifies Business Structure: Helps promoters focus on active entities without the distraction of a dormant company.

When closing a company in India, it is important to understand the difference between strike off and winding up, as each process is suited for different situations. Here is a comparison:

Note: Strike-off is suitable for companies that are inactive and have no liabilities, while winding up is required for companies with debts, disputes, or assets that need to be formally settled.

Striking off a Section 8 company involves legal steps to ensure proper closure, compliance with the Companies Act, and protection of directors from future liabilities. Here’s the process:

Step 1. Mandatory Conversion: The Crucial First Step for Section 8 Companies

Before applying for strike-off, a Section 8 company must convert into a registered company, as Section 8 companies have special privileges that do not allow direct strike-off. This conversion is mandatory under Rule 21 of the Companies (Incorporation) Rules, 2014.

This conversion is a mandatory prerequisite that allows the entity to proceed with the standard strike-off application. The company must obtain approval from the Regional Director (RD) for this conversion.

Step 2. Voluntary Strike Off: Procedure

Follow these steps to complete the voluntary strike-off process:

1. Convene Board Meeting and Pass Resolution: The Board of Directors should call a meeting to discuss the strike-off and pass a resolution approving the closure.
2. Settle All Liabilities: All outstanding debts, loans, statutory dues, taxes, and pending legal obligations must be cleared before initiating the strike-off process.
3. Obtain Shareholder Approval: A special resolution (a resolution passed with at least 75% majority) must be passed in a general meeting, formally approving the company’s application for strike-off.
4. File Form MGT-14: The company must file the Special Resolution with the Registrar of Companies in Form MGT-14 within 30 days of passing the resolution.
5. Submit Form STK-2 to C-PACE: An application for strike-off is filed with the ROC in Form STK-2 (Application for Removal of Name) through the C-PACE (Centre for Processing Accelerated Corporate Exit) portal. Include all necessary documents, such as board and shareholder resolutions, financial statements, and a declaration confirming no liabilities.

Note: Since May 2023, all strike-off applications are handled centrally by C-PACE, ensuring faster processing compared to the earlier state-wise RoC procedure.

6. Public Notice by C-PACE/ROC: Upon receiving the application, C-PACE issues a public notice for 30 days, inviting objections from the public. This notice is published on the MCA portal (mca.gov.in) and in the Official Gazette.

Note: The RoC publishes a notice of the proposed strike-off in Form STK-5 on the Official Gazette and the MCA website, informing the public before the strike-off is finalized.

7. Final Strike Off and Dissolution: If no objections are received, the RoC strikes off the company’s name from the register, officially dissolving the company. Directors are then relieved from compliance obligations and liabilities, provided all dues have been cleared.

Additional Important Points:

• The company must ensure all bank accounts are closed and any remaining assets are properly disposed of or transferred.
• Maintain records for a few years, as historical financial or legal responsibilities may still apply even after strike-off.

To apply for the strike-off of a Section 8 company, you must prepare and submit the following documents for the process to be completed successfully:

• Board Resolution: A copy of the resolution passed by the Board of Directors.
• Special Resolution: A copy of the Special Resolution passed by the company's shareholders.
• Regional Director's Approval Letter: The letter approving the conversion from a Section 8 to a regular company.
• Statement of Accounts: A statement of assets and liabilities, duly certified by a Chartered Accountant, showing that the company has no assets or liabilities.
• Affidavit by Directors (Form STK-4): An affidavit, on stamp paper, stating that the company has no business operations.
• Indemnity Bond by Directors (Form STK-3): A bond, on stamp paper, indemnifying the government against any future claims.
• Bank Account Closure Proof: A letter from the bank confirming the closure of the company's bank accounts.
• Identity & Residential Proofs: Self-attested copies of the directors' PAN cards and address proofs.
• MOA & AOA: Copies of the company's:

• Memorandum of Association
• Articles of Association

• Income Tax Returns: Copies of the company's income tax returns filed for the last three years.
• NOC from Authorities: No Objection Certificates from statutory authorities (usually Income Tax Department), if applicable.
• Professional Certificate: A certificate from a professional, like a Company Secretary or Chartered Accountant, stating that the company has complied with all legal requirements.
• Proof of GST Cancellation: A certificate or acknowledgment confirming the cancellation of the company’s GST registration.
• Proof of FCRA License Cancellation: If the company had FCRA registration, proof of its cancellation.

Involuntary or compulsory strike-off happens when the Registrar of Companies (RoC) or C-PACE initiates the process to remove a company from the register, usually due to inactivity or non-compliance.

Reasons the ROC/C-PACE Might Strike Off Your Company

The authorities may initiate a compulsory strike-off for several reasons, such as:

• The company has not started business within one year of incorporation.
• The company has been inactive for two or more consecutive financial years.
• Failure to file statutory returns, including annual filings and financial statements, with the RoC.
• Non-compliance with provisions of the Companies Act, 2013.
• The company is dormant or abandoned, with no active management or operations.

What Happens During a Compulsory Strike Off?

The process of compulsory strike-off usually follows these steps:

• The RoC issues a notice in the Official Gazette before initiating strike-off.
• Creditors and other stakeholders are allowed to raise objections within a specified period.
• If no objections are received, the RoC removes the company’s name from the register, officially dissolving the company.
• Directors are relieved of compliance responsibilities, but any unresolved liabilities or legal matters existing before strike-off remain enforceable.

Striking off a Section 8 company has important implications for the company itself, its directors, shareholders, and financial obligations.

Legal Implications for the Company

Once a Section 8 company is struck off, it ceases to exist as a legal entity. Key points include:

• The company cannot enter into contracts or file legal cases.
• Any ongoing disputes may be affected, though claims that arose before the closure can still be enforced.
• The company’s remaining assets, if any, may be transferred to the government if not properly disposed of before closure.

Impact on Directors and Shareholders

The process of closing a Section 8 company affects directors and shareholders in several ways:

• Directors are relieved from future compliance obligations under the Companies Act.
• Shareholders cannot claim dividends or returns after the company is struck off.
• Directors may still be personally liable for unpaid debts or statutory dues if these were not cleared before it was struck off.
• Non-payment of statutory dues may disqualify a director from holding any directorship for 5 years under Section 164 of the Companies Act, 2013.
• Failure to comply may also lead to action under Section 167 (vacation of office) and can prohibit directors from forming or managing other companies.

Financial Considerations

When closing a Section 8 company, key financial considerations include:

• Any pending tax liabilities, GST, or statutory dues must be cleared before the company strikes off.
• Remaining funds or assets of the company should be properly accounted for or transferred before closure.
• Failure to settle financial obligations can lead to personal liability for directors.

Yes, a struck-off company can be revived under certain conditions. The National Company Law Tribunal (NCLT) can restore the company’s name on the register under Section 252 of the Companies Act, 2013.

• Time limits for application:
  • An application can be made within 3 years of the strike-off by the company, its members, or creditors under Section 252(3).
  • Within 20 years from the date of strike-off, any person aggrieved can apply under Section 252(1) to restore the company.

This provides a legal way for both the company itself and other affected parties to revive a struck-off entity.

Key Points About Revival

• Application to NCLT: Directors, shareholders, or any interested party can apply for the restoration of the company.
• Valid Reason Required: The application must clearly state why revival is necessary, such as:

• Unsettled disputes
• Recovery of company property
• Protection of creditors’ interests

• Clearance of Dues: All statutory dues, including taxes, penalties, and filing fees, must be paid before the NCLT approves revival.
• Public Notice: After approval, a public notice is issued to inform stakeholders and ensure transparency.
• Restoration of Legal Status: The company regains its legal status and can conduct business, enter into contracts, and pursue or defend legal cases.
• Impact on Directors: Directors may still face penalties or late fees for non-compliance, even after the company is struck off or revived. Clearing dues does not automatically exempt them.
• Update of Records: The company’s name is restored in the RoC register, and previous filings are reinstated.

Revival allows companies that were struck off to continue operations when there are legitimate reasons to do so, ensuring that assets and legal matters can be properly managed.

The government fee for filing Form STK-2 is Rs. 10,000. For striking off a Section 8 company, the government fees and professional costs are relatively low, but there isn’t a fixed amount specified under the Companies Act, 2013. Here’s a general idea:

• Professional fees: Chartered Accountant or Company Secretary charges for preparing the required documents and certificates range from ₹10,000 to ₹30,000, depending on the complexity.
• Stamp duty: For affidavits and indemnity bonds, it varies by state but is usually ₹500 to ₹2,000 per document.

Overall, striking off a Section 8 company can cost roughly ₹20,000 to ₹ 40,000 in most cases, making it far cheaper than the winding-up process.

Note: The conversion of the Section 8 company into a regular private limited company also incurs additional costs.