Can I Apply for a Strike-Off of a Private Limited Company That Has Not Filed Annual Statements and Financial Statements Since Incorporation?

Can I Apply for a Strike-Off of a Private Limited Company That Has Not Filed Annual Statements and Financial Statements Since Incorporation?

The majority of private limited companies registered in India are genuine businesses, however, these companies may never operate due to factors such as poor market conditions and funding issues, along with various other reasons including confusion regarding compliance and internal disputes. Over a period of time, it is often seen that promoters lose track of their activities and realize that the company is now in a state of dormancy or non-operation and they are left with a financial burden of complying with obligations placed on them by the Companies Act, along with any potential legal issues. Questions arise at this point about how to deal with the company that is not in operation and whether an application for strike-off can be made where the company has not submitted annual filings since incorporation. This article will provide answers to these questions with regard to the law, procedure and practicalities of filing for a strike-off company application, written specifically for business owners, startup founders and compliance managers. It includes a reference to the strike-off company in India and provides a useful guide to best compliance strategy to help reduce liability when closing down a non-operational private limited company in India.

Understanding Strike-Off of a Private Limited Company

A strike-off of a company is identified as a legal process in which the name of the business has been removed from the ROC. Once a business's name has been removed from the ROC, it is no longer seen as a business entity, and directors will not be required to comply with statutory law regarding the business in the future, although there are some exceptions.

Section 248 of the Companies Act 2013 governs strike-offs in India and is commonly known as the "strike-off company section" of the Companies Act. Section 248 gives the ROC the power to strike the name of a business off the ROC when the business has ceased to operate or conduct business.

Two methods of strike-off are available:

1. ROC Strike Off: Initiated by the ROC due to inactivity or non-compliance of a company.

2. Voluntary Strike Off of Company: The business initiates the strike-off by submitting Form STK-2.

This blog post will primarily be focused on voluntary strike-off, as there is more control over voluntary strike-off and fewer risks of re-occurrence and also provides a cleaner and clearer legal closure.

Eligibility for Strike-Off

Under the Companies Act, 2013, voluntary strike-off eligibility can be established when all of the following conditions are satisfied:

• The business/operations are closed.

• There are no outstanding debts.

• No transactions or activity has occurred for one year prior to the application.

• All required statutory dues (ie. Tax debt, employees) have been paid.

The added complication of not filing the annual and financial statements from time of incorporation. However, although not filing does not prevent a company from applying for a voluntary strike-off; compliance with statutory duties can also create complications for such entities.

Filing Annual Statements and Financial Statements

Business owners often ask if they need to file past annual statements and financial statements before submitting an application for a company strike-off. The answer is not straightforward but can be divided into two parts:

1.Annual Statements (Annual Returns)

• Under Indian law, every company must file an annual return with the Registrar of Companies (ROC).
• The contents of these annual returns are the details pertaining to the directors of the company (the Board), the shareholding of the company (its shareholders) and the address of the registered office(s) of the company.
• If a company fails to file an annual return, the ROC will penalize it under the relevant companies' act provisions and may also take this into consideration when making its determination about a company's application for strike-off status.

2. Financial Statements

• The financial statements consist of the balance sheet (BS), the profit & loss (P&L) account and additional notes detailing the financial condition of a company at a certain point in time (i.e. typically for the latest preceding accounting year).
• The ROC requires all companies to file financial statements each year (as per ROC rules).
• Since companies that have yet to file any financial statements are not in good standing, these companies will be considered to be non-compliant.

Important note: For applications for voluntary strike-off, ROC procedures allow companies to apply with the knowledge that there may still be some filings overdue. However, it is strongly recommended that companies with overdue filings should complete their annual returns and financial statements before they submit any application for voluntary strike-off. By doing so, the likelihood of receiving an objection from the ROC will decrease and the potential for legal repercussions to directors will be avoided.

Legal Basis: Strike Off Company Section Explained

The ROC can strike off the name of a company if the following conditions are met under Section 248:

The business has failed to operate within 1 year of being formed

The business has not operated for the last 2 years

The subscribers are still due to pay their subscription amounts

The business is inactive and will not remain open

In addition, the legislation also allows companies that have fulfilled specific conditions to apply for voluntary strike off.

The Core Question: Can You Apply for Strike Off Without Filing Annual Returns?

Short Answer: Yes, with conditions.

Yes, A private limited company can apply for a strike-off, though at the time of the application, the company must not have filed its annual returns since incorporation or have any assets or liabilities (not commence any business).

That being said, there is still a level of compliance with the requirements specified by the Ministry of Corporate Affairs (MCA), regardless of whether or not the company has complied previously.

MCA’s Practical Position on Non-Filing Companies

The ROC (Register of Companies) will be very vigilant when reviewing strike-off applications. This is because:

• Annual company filings have not been submitted.
• Financial Statements for multiple years have not yet been submitted.
• The company has been inactive since it was formed.

If a company has never done business, never opened a bank account, or has had zero monetary transactions, the ROC may allow that company to be struck off without requiring all the past Annual Returns be filed, but only if there are appropriate declarations and documentation provided to the ROC.

In all cases where a company has:

• Done any kind of financial transaction

• Opened a bank account

• Has any assets or liabilities

• Has any outstanding statutory dues

Will be a requirement for filing the overdue Annual Statements before invoking the strike-off process for that company.

Filing Annual Returns vs Filing Nil Statements

Many promoters confuse non-filing with nil filing. These are legally different.

• Non-filing means statutory forms were never submitted.
• Nil filing means statements were filed but reflected no activity.

From a compliance perspective, nil filings are always safer and strengthen your strike-off application.

When Filing Past Annual Statements Is Mandatory

All pending annual return filings (both statutory and financial) must be completed before pursuing strike-off if:

• The Company's bank account had any transaction activity (deposits, withdrawals, etc.)

• The Company issued or utilized any share capital (issue of shares)

• The Company incurred any expenses (including very nominal amounts)

• The Company has any GST or TDS or other Registration

• The Company borrowed or advanced any funds

In these situations, the Strike-off application is likely to be rejected by ROC until the Company has an opportunity to complete statutory compliance.

When Filing Past Annual Statements May Be Avoided

You may not have to worry about delinquent past annual return filings if:

• The Company has never commenced business

• No bank accounts were opened

• No assets or liabilities of the Company exist

• No statutory registrations were completed; and

• The directors provided their affidavit of no business activity

However, this is discretionary and dependent on the ROC's level of scrutiny.

Strike Off Company Procedure in India (Step-by-Step)

The strike off company procedure involves the following steps:

Step 1: Board Resolution

A board meeting is conducted to approve the strike-off proposal and authorize a director to proceed.

Step 2: Shareholders’ Approval

A special resolution or consent of 75% shareholders (in terms of paid-up capital) is required.

Step 3: Closure of Liabilities

Ensure that:

• All liabilities are settled
• Bank accounts are closed
• No pending dues exist

Step 4: Preparation of Documents

Key documents include:

• Affidavit by directors
• Indemnity bond
• Statement of accounts (not older than 30 days)

Step 5: Filing Form STK-2

The application is submitted to ROC along with government fees.

Step 6: ROC Verification & Public Notice

ROC issues a public notice and allows objections, if any.

Step 7: Final Strike Off

If satisfied, ROC removes the company name from its register.

Documents Required for Strike Off

• Form STK-2
• Board Resolution
• Shareholders’ Resolution
• Indemnity Bond (Form STK-3)
• Affidavit (Form STK-4)
• Statement of Accounts
• PAN, Aadhaar of directors

Is Filing All Past Annual Returns Mandatory Before Strike-Off?

Scenario-Based Explanation

Scenario One: No Business Activity Since Incorporation

In the above case:

Generally, the filing of AOC-4 and MGT-7 (the necessary documents) is not required.

The Directors must submit:

• An Affidavit confirming that there has been no business activity.
• An Indemnity Bond.
• The Statement of Accounts (a nil balance) certified to by a Chartered Accountant.

The ROC will approve only after all the required information has been accurately disclosed.

Scenario Two: There Has Been Business Activity

If any business activity has taken place:

• You are required to file all pending annual returns and financial statements.
• You are subject to late fees/penalties for any filings made after the due date.
• Only once you have complied with the above can you commence with the strike-off procedure for the company.

Risks of Applying Without Filing Past Returns

If you apply for your company to be struck off without resolving any outstanding filings by the Registrar of Companies (ROC), you may receive:

• An application rejection

• Penalty notices

• A disqualification notices under Section 164(2) for directors

• Future litigation issues.

Strike Off vs Compulsory Strike Off by ROC

It is always better to apply for voluntary strike off rather than compulsory strike off because,

• A company strikes off on a voluntary basis retains legal ownership by the directors of that company.

• There is less chance of being disqualified as a director.

• This gives you a clean compliance history.

A compulsory strike-off by the ROC is generally preceded by continuous non-compliance, and as such, it may lead to penalties being imposed on the company.

Consequences of Not Filing Annual Returns Before Strike-Off

Although the ROCs cannot always block a company from being struck-off because of non-filing of returns, the promoters need to understand the implications of not filing:

1.Risk of Director Disqualification

If directors do not file annual returns and financial statements for three consecutive years, then they are liable for disqualification under Section 164(2) and the strike-off application will not remedy or rectify the disqualification caused by the failure to comply with the laws.

2. Penalties and Prosecutions

Where the ROC has evidence that a company has willfully failed to file returns, penalty sanctions could be imposed on that company before or after they are struck-off.

3. An application to Strike Off May Be Rejected

If the information provided in Form STK-2 is incomplete or misrepresented, then the application will be rejected by the ROC.

Conclusion

In India, a company may apply for a strike-off with official registration after not filing an annual return since incorporation (no operating activity or financial transactions). However, this is only allowed if the application meets certain legal requirements. The strike-off provision includes flexibility, while the actual application process involves scrutiny by the Robot on the Company and requires full disclosure and accuracy in declarations followed by complete compliance with all known risks, as well as preparation for possible compliance developments in each State. More often than not, submitting a nil or overdue annual return will prove to be the safest route to taking the steps for and also securing a successful alternative closure (as adding contingency protections if effective for alternative closure) of a company through a voluntary strike-off process, while providing protection to company directors against disciplinary action, disqualification, and potential litigation if Directors prepare the application documents properly.

(FAQs)

Q1: Can I apply for strike-off if my company has never conducted business?
A1: Yes, even inactive companies can apply for strike-off, provided they have no liabilities and meet the ROC’s conditions.

Q2: Is filing past annual statements mandatory before strike-off?
A2: It is not strictly mandatory in all cases, but filing past statements is highly recommended to prevent objections and ensure smooth processing.

Q3: Will non-filing of financial statements prevent strike-off?
A3: Non-filing may attract scrutiny from the ROC. Filing overdue financial statements can facilitate the strike-off process.

Q4: What if the ROC objects to my strike-off application?
A4: The ROC may raise objections related to pending dues, creditor claims, or non-filing. You will need to address these issues before the strike-off is approved.

Q5: Can directors be held liable after the company is struck off?
A5: Directors remain liable for any non-compliance or pending dues, even after strike-off. Filing pending statements reduces personal risk.