Fate of Assets of a Company Dissolved under Section 248

Srijan Srivastava

It is essential to have a legislative framework that gives clarity on the ownership of the properties and assets of the company whose name has been struck-off.

Company-Strike-Off

In a country like India where more than 3 million companies have been incorporated since April 2016[1], there exists certain pertinent questions that are very logical and important to answer in today’s world. One of such questions is that what would be the fate of properties and assets of a company after its name is struck off from the register of companies and it stands dissolved.

The Ministry of Corporate Affairs vides Notification [2] dated 26.12.2016 notified Section 248 to 252 of the Companies Act. The provisions relating to Strike Off provide an opportunity to the defunct companies to get their names struck off from the records of the Register of Companies. In addition to the provisions of the Act relating to Strike Off, Ministry of Corporate Affairs has also issued the Companies (Removal of Names of Companies from the Register of Companies) Rules [3], 2016 to be effective from the same date i.e. 26.12.2016 in order to provide a procedural aspect of Strike Off under the Act. Prior to Companies Act, 2013, Section 560 of the Companies Act, 1956 was very similar to section 248 of The Companies Act, 2013. It also empowered the Registrar to strike off the name of a company from the register of companies.

If a company has not commenced its operations or hasn’t been pursuing any business activity in the past two years (and has not obtained the status of a Dormant Company) then the long process of winding up is not relevant for the company, the Registrar of the Companies can strike off the name of the company as if the company never existed. Striking-off of companies is an option that exists both with the company, and with the Registrar of Companies.

Grey area in the Act

A growing concern that arises after a company whose name has been struck-off by the Registrar of Companies is that what will happen to the properties and rights vested in or held in trust for the company, cash balances of the company and other current or non-current asset of the company while it was functional. The fate of such assets is a question to be addressed.

There are certain provisions in Companies Act, 2013 that deals with similar situations. Section 352(2) and 352(7) of the Act manages the unclaimed or undistributed estate of a company, however these sections become applicable where there is a liquidator engaged in winding up of a company. On the off chance that a company is dissolved under Section 248, there is no liquidator appointed. Henceforth, the operative part of Section 352 isn’t pertinent in the dissolution of a company under Section 248.

UK Companies Act, 1948 and Constitution of India

The Companies Act of England, under section 354 states that the property of dissolved company shall be bona vacantia. Bona vacantia basically means the Escheat over which no one has a claim. This term can be expressed as ‘abandoned property’. Bona vacantia is applied when there is no owner of the property and the State takes possession of the property. In India there is no such corresponding provision in the Act. However, as per the laws in India, the property of an estate dying without leaving lawful heirs passes to the government by escheat or as bona vacantia. Article 296 of the Constitution of India clearly provides “that any property in the territory of India which, if this Constitution had not come into operation, would have accrued to His Majesty or, as the case may be, to the Ruler of an Indian State by escheat or lapse, or as bona vacantia for want of a rightful owner, shall, if it is property situate in a State, vest in such State, and shall, in any other case, vest in the Union.

Judicial Pronouncements on doctrine of Bona Vacantia

In Re: U.N. Mandal’s Estate Private Ltd. [4], is a landmark case that elaborately discusses the issue in hand. In this case, the registrar struck off the name of a company as the company did not ever function nor did it own any assets or liabilities. An argument that was not pressed strongly by the applicants but still is very important was that if there was any property or asset of the Company then there would be none to take it over and it would be a loss to everyone concerned.

The Calcutta High Court dealt with the question and opined that in such a contingency, the Doctrine of Bona Vacantia would be attracted and “The assets of such a company would not be without an owner. The state would take them over.” The court held that “Now if this property of a dissolved Company could accrue formerly to the Crown in India then as bona vacantia it now belongs to and vests in the Union of India under Article 296 of the present Constitution.” The court also stated that for unclaimed dividends and undistributed assets of companies in liquidation there is Section 555 of the Companies Act under which it can go to the public account of India in the Reserve Bank. But there exists no comparable provision for assets of dissolved Companies under Section 560 of the Act.

The Supreme Court acknowledged the opinion in In Re U.N. Mandal’s Estate case and has held in Peirce Leslie and Co. Ltd. vs. Violet Ouchterlony Wapshare [5] that the shareholders or creditors of a dissolved company cannot be regarded as its heirs and successors. On dissolution of a company, its properties, if any, will vest in the Government. Further in Narendra Bahadur Tandon v. Shankar Lal [6] the Apex Court held that if the company had a subsisting interest in the lease on the date of dissolution then such interest must necessarily vest in the Government by escheat or as bona vacantia.

On similar lines the Patna High Court in Bihar State Sugar Corporation Ltd v. Ahmad Abdullah [7], held that a shareholder in a company has a limited right conferred by the Companies Act and has no right, title or interest in the assets of the company. If a factory is acquired by the State Government then the assets of that factory will be vested in the State Government free of all encumbrances. Moreover in Yeshwant Raghunath Bhide vs. Income Tax Officer [8],  the Karnataka High Court stated that if the name of a company is struck off the register, it’s undisposed of property is not appropriated towards its liabilities. Nobody would claim that property. It vests in the Crown as bona vacantia subject to its rights to disclaim.

Conclusion

After getting a deeper insight as to what the precedents suggests, it is clear that when a company is struck off the register, the rightful owner of the properties and assets of the company will be the government. However, it is essential and important to have a legislative framework that gives more clarity to certain situations. With changing laws and new amendments coming up very frequently, the shareholders, creditors or any other associated person should have clarity as to what will happen to the shares of the company, in case the company’s name is struck-off.

The lawmakers should also keep in mind that the government should not use this to benefit themselves. They can use unfair means and collude with the registrar of the companies and strike-off that company from the register of the companies. A balance between the rights of company and the government should be maintained while making any provision regarding the issue in hand.


Srijan is a 4th year B.B.A, LL.B (Hons.) student at the National Law University, Jodhpur.


Image Source: IndiaFilings

  1. http://www.mca.gov.in/MinistryV2/easeofdoingbusiness.html
  2. http://www.mca.gov.in/Ministry/pdf/Notificatiion28122016.pdf
  3. http://www.mca.gov.in/Ministry/pdf/Rules_28122016.pdf
  4. In Re: U.N. Mandal’s Estate Private Ltd, AIR 1959 Cal 493.
  5. Peirce Leslie and Co. Ltd. vs. Violet Ouchterlony Wapshare, AIR 1969 SC 843
  6. Narendra Bahadur Tandon v. Shankar Lal, AIR 1980 SC 575
  7. Bihar State Sugar Corporation Ltd v. Ahmad Abdullah, (2015) 2 PLJR 437
  8. Yeshwant Raghunath Bhide vs. Income Tax Officer, [1974] 44 CompCas290 (Kar)

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