Fairness and RoC’s Compliance: Natural Justice under Section 248.

[By Anaya Nandish Shah & Pulkit Rajmohan Agarwal]

The authors are students of Gujarat National Law University.

 

INTRODUCTION

The National Company Law Appellate Tribunal (“NCLAT”), New Delhi in the matter of M/s Sanmati Agrizone Private Limited v. Registrar of Companies & Anr., upheld the decision of National Company Law Tribunal (“NCLT”) and favoured the move of the Registrar of the Companies (“RoC”) in striking off the name of M/s Sanmati Agrizone Private Limited from the list of Register maintained by the RoC. The Companies Act, 2013 (“the Act”) by virtue of Section 248 empowers the RoC to strike off the names of all those companies:

  1. that have been incorporated but have not commenced their business within a year of incorporation,
  2. that have not obtained the status of a ‘dormant company’ after failure to carry on business operations for a period of two years immediately preceding the financial year,
  3. whose subscribers at the time of incorporation obtained the subscription, however, they have not paid the subscription amount and a declaration for the same has not been filed within a hundred and eighty days,
  4. that fail to carry on its business operations after physical verification.

However, it is important to note that such a strike-off under the aforementioned section can only be undertaken after serving appropriate notice to the company and its directors, along with providing them with an adequate opportunity to submit their defences. Following that, a notice must also be published in the Official Gazette,in order to inform other stakeholders of the company such as creditors, business traders, vendors, etc.

In the present case, the records indicate that Sanmati Agrizone Pvt. Ltd. dealt in a number of agricultural activities, and filed income tax regularly . However, it failed to file returns and other financial statements from 31.03.2016 to 31.03.2020 before the RoC, owing to certain financial uncertainties. Upon becoming aware of the issue of non-submission of documents, the Company decided to expeditiously deposit all the relevant documents with the RoC. However, on 08.08.2018, they discovered that their name had been abruptly struck off by the RoC, without any prior notice.

The legal conundrum that arises herein, is whether such a non-compliance results in a violation of principles of natural justice and whether the aftermath of such judgment creates adversities among the already existing companies. Typically, the repercussions of such non-compliance  with statutory procedural requirements have proven to be detrimental. Abstractly omitting essential requirements before coming to a conclusion often leads to more harm than good.

INFRINGING THE PRINCIPLES OF NATURAL JUSTICE

In the present case, the problem stems from the fractional and erroneous application of the law. While analysing the section, the tribunals merely ensured that the act of striking down was well within four corners of the provision. However, they failed to acknowledge the mandatory procedural obligations upon the RoC to serve the notice to the company before such a strike off. Moreover, the principles of natural justice, which are very well-established within our legal system, were blatantly disregarded. The Supreme Court in its landmark judgement of A.K. Kraipak v. Union of India, expanded the principles laid down in the case of Ridge v. Baldwin, infamously referred to as the Magna Carta of principles of natural justice in the English law. It emphasized on the importance of these principles and defined them as the safeguards of justice.

Natural Justice, which is synonymous with “fairness”, is centred on two fundamental principles: “Nemo Judex in Causa Sua” and “Audi Alteram Partem”. The latter principle finds its application in the case at hand, which stands for “the right to be heard and to defend oneself”. Recently, the Apex Court in State Bank of India v. Rajesh Agarwal upheld the principle of Audi Alteram Partem and stated that an opportunity of being heard is quintessential before declaring the defaulters as fraudulent. Supreme Court in another case, State of Orissa v. Dr. Binapani emphasized the right to be heard especially in situations where an administrative action has civil repercussions.

It can thus be agreed upon that the fundamental tenet of a fair hearing, is that the party being sued be made aware of the case against him, before the adjudication process begins, so as to give him a fair opportunity to defend himself. It is through the notice, that the concerned party is informed of the case and the proposed actions/ charges levelled against him. The Apex Court in Olga Tellis v. Bombay Municipal Corporation underlined the importance of notice in adjudicatory proceedings. Thus, notice is a sine qua non of a fair hearing, in the absence of which, the fundamental right to be heard stands compromised.

IMPLICATIONS OF OVERRIDING THE LEGAL PROCEDURE

This arbitrary application of the law, without following the due procedure, can have multifold implications. It is pertinent to note that once a company is deregistered it can undoubtedly approach the NCLT under Section 252 of the Act for its re-registration. The NCLT may also reverse the orders, nonetheless, the harm caused cannot be wholly remedied. This can have substantial ramifications for a company since its day-to-day operations, contractual commitments, and prospects stand stalled. Moreover, regaining stakeholders’ trust becomes difficult, consequentially resulting in the loss of a company’s value and its probable insolvency. Furthermore, the whole process of reinstating the company’s name comes at an enormous cost, which could have been avoided if an opportunity to present their case had been offered initially.

Without affording an opportunity to represent, like in the present case, the fallacious removal of names from the register by RoC can lead to a loss of reputation and credibility of a company. The Supreme Court’s ruling in Erusian Equipment & Chemicals Ltd v. State of West Bengal & Anr. highlighted the damaging effects of arbitrary blacklisting on a business’s reputation.  This can be compared to the de-registering of a company by RoC. The implications of the latter are even more perilous since the company ceases to exist. The Tribunals have not only overlooked the procedural irregularity but also the negative impacts these actions can have upon a company’s business. Despite the Apex Court’s interpretation of the right to be heard in a holistic and all-inclusive manner, the tribunals time and again have failed to acknowledge these principles.

CONCLUSION

Previously, in the case of Ms. Theiventhira Aruna v. Registrar of Companies, a similar issue of non-service of notice prior to striking off the name was overlooked by the tribunal. It is alarming that aforesaid mentioned instance is not an isolated one, and if not remedied is likely to recur in the future. Judgments, especially those of the NCLAT carry a significant precedential value, and such erroneous ones, justify the abuse of power by such authorities in an arbitrary fashion, guided by their whims and fancies. Subjective application of law even by the appellate tribunals  strikes to the very core of principles of justice, equity, and good conscience.

The tribunals must realize that accurate procedural application assumes major importance in order for a provision of law to have legal efficacy and to develop a solid framework. The RoC, rather than presuming a company to be non-functional, by merely relying on limited documents and financial statements, should instead adopt a more liberal approach. The companies should be provided with a fair opportunity of representing themselves at the very first instance, breaking the bandwagon of unnecessary litigation. The tribunals, on the other hand, should take into account an array of circumstances that would ensue once a company is deregistered. The right to present a case is a fundamental entitlement of a company, rather than being at the discretion of the RoC.

The resolution of this matter rests with the courts in the higher hierarchy, which happen to be the High Courts and Apex  Courtof the nation. The principles of natural justice must be strictly enforced as a requirement for the Registrar of Companies (RoC). Instances where law enforcers unilaterally flout established legal procedures must be met with firm action.  Furthermore, where such arbitrary acts have civil repercussions that result in grave injustice, suitable remedies and tougher measures against the accountable authorities should be adopted to rectify the situation.

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