NCLT can deal with the problem of struck-off companies
- Karan Gulati is a research fellow with the corporate and financial regulation vertical and Manjushree RM is a research fellow with the competition team at the Vidhi Centre for Legal Policy The views are personal.
The enormous backlog at the National Company Law Tribunal (NCLT) calls for an urgent plan of action to help truncate procedural delays. Constituted under the Companies Act 2013, NCLT was initially established to adjudicate on corporate disputes under the Act but was later saddled with additional caseload arising from cases of bad debt under the Insolvency and Bankruptcy Code, 2016 (IBC). With this, the NCLT had to take over approximately 26,000 insolvency-related cases, pending before forums such as Company Law Boards, the Board of Industrial and Financial Reconstruction, the Debt Recovery Tribunal, and various High Courts. To add to its ever-increasing caseload, the ministry of corporate affairs recently extended the application of the IBC to Financial Services Providers and NBFCs whose assets are worth more than ₹500 crores, resulting in more insolvency applications being filed before the NCLT. Resultantly, the average probability of case completion within nine months, the maximum time limit stipulated by law, stands at a meagre 22%. This has enormous consequences. Delays cause uncertainty and make and make commercial processes inefficient. In fact, at NCLT Benches in cities such as Delhi and Mumbai, this rate stands at an unimpressive 8% and 14%, respectively, demanding imminent action to alleviate the backlog.
While ‘fixing’ the backlog will require a multi-faceted approach which includes establishing more benches and increasing budgetary allocation for the staff to ease administrative delays, attention is seldom paid to the workload of the Tribunal. In particular, as per data released by the NCLT and compiled by the XKDR Forum, approximately one in every six cases (16.45%) heard by the NCLT between 2018 and 2020 related to the ‘restoration of struck-off companies’. At certain benches of the NCLT (Hyderabad, for instance), almost one in every two cases was an application seeking the restoration of a struck-off company.
Striking off refers to an act of removing or striking off a company’s name from the register of companies maintained by the registrar. Effectively, striking off is the legal recognition of shutting shop by a company and may either be voluntarily requested by the company or may be carried out suo motu by the registrar if the company is not actively engaged in carrying out business. In case of such striking off, any aggrieved party (including the company, its members, creditors and workmen) may approach the NCLT to restore the company’s name on the register of companies, thereby ‘reviving’ it. Reviving struck-off companies is a fairly commonplace practice in several jurisdictions, including the United Kingdom, Singapore, and Australia.
In India, sections 248 and 252 of the Companies Act, 2013 lay down the procedure for striking off and revival, respectively. While section 248 empowers the registrar to pass orders to strike off a company’s name from the register of companies, section 252 allows parties to approach the NCLT to restore struck-off companies. If the NCLT believes that there is sufficient cause for restoration, it may pass an order stating so and direct the registrar to re-enter that name of such a company in the register of companies.
Entrusting the NCLT with the revival of struck-off companies appears to unnecessarily add to its already logjammed pipelines, contributing to lengthy hurdles for parties seeking speedy revival of struck-off companies. Presently, the NCLT is the only body authorized to hear appeals on orders passed by the registrar and involves sitting in an appeal of the order passed by the registrar. While it is formally termed as an ‘appeal’, the procedure for restoration is relatively straightforward given that there are no third parties that appear before the NCLT. The restoration process also does not adversely affect any other parties. As such, mandating the application of a judicial mind to such restoration proceedings may be needlessly rigid.
Further, parties to restoration applications also find themselves unduly delayed at the NCLT level. As per Section 248 and 252 of the Companies Act, 2013, read with Rule 87A of the NCLT Rules, 2016, such delay is counted towards the total period the applicant company has defaulted in its filing of annual returns and financial statements. The company, upon restoration, becomes liable to pay a penalty for not filing annual returns and financial statements in time for the period during which the restoration application remains pending before the NCLT.
As such, assigning NCLT as the appellate forum for struck-off orders and revival applications appears to be misaligned with administrative efficiency and stakeholders’ interests.
Enabling an in-house restoration mechanism for companies – by an application to the Central Government to revive the company instead of an appeal with the NCLT – is a viable alternative. Such a mechanism comes with the dual benefit of lessening the number of matters to be heard by the NCLT, thereby easing up the clogs in its pipelines and helping applicants and companies revive more easily without significant delays and resultant monetary consequences.
Similar mechanisms for the revival of companies through in-house administrative mechanisms can be observed in Australia and the United Kingdom. In Australia, directors, secretaries or members of a deregistered company may apply for reinstatement of such a company to the Australian Securities and Investments Commission. Similarly, in the United Kingdom, directors or shareholders may apply for ‘administrative restoration’ to the Companies House if the company sought to be restored was struck-off the register and dissolved by the registrar within the last six years.
Instituting such an in-house mechanism is in line with the recent amendments to the Companies Act 2013, where NCLT was relieved of its erstwhile obligation to hear applications on the conversion of companies from public to private and on change in the financial year to be followed by companies. The applications are now to be made to the Central Government.
However, upon bringing restoration process in-house, the Central Government will need to build capacity to attend to the enormous number of revival applications that may be made before it. The change in the forum for restoration applications – from the NCLT to the Central Government – should not be a cosmetic one, where such applications start clogging up government functions.
The benefits of instituting an administrative restoration process are clear- it is cost-effective, arguably faster and circumvents the need to approach the NCLT for a judicial order to revive companies. With the astounding number of companies being struck-off due to the financial hardships caused by the pandemic, applications for restoration are expected to be on the rise, with the pandemic now seemingly quelled. Therefore, an in-house and hassle-free mechanism to restore companies is the need of the hour.
(Karan Gulati is a research fellow with the corporate and financial regulation vertical and Manjushree RM is a research fellow with the competition team at the Vidhi Centre for Legal Policy The views are personal.)