Faced by the challenges posed by black money, the Government of India is aiming to ensure its eradication. Amongst various measures taken thereunder, the Government has now focused its line of operation to crackdown the shell companies. The shell companies being the companies with no operational business become common media to carry out unlawful negotiations including tax evasion. The Government has taken strict measures to prohibit the use of such companies to channelize black money.
Fight against Black Money in Corporates
By passing the Companies Amendment Bill, 2017, limitations have been imposed on the layering of the subsidiary companies to forbid probable diversion and laundering of funds. Further the Government, struck off the names of over 200,000 companies on account of prolonged inactivity under the provisions of Section 248 of the Companies Act, 2013. All the banks were advised to put restrictions on bank accounts of struck-off companies.
In another recent action, the Government identified more than 100,000 Directors for disqualification under Section 164 of the Companies Act, 2013. Under the provisions of the said Section, a director in a company that has not filed financial statements or annual returns for three years in a row will not be eligible for reappointment as a director in that or any other company for five years.
The Government publically listed the names of directors disqualified for associating with companies that did not file their financial statements or annual returns for three financial years. The Professionals, Chartered Accountants/ Company Secretaries/ Cost Accountants associated with such defaulting firms and involved in illegal activities have been identified in certain cases and the action by Professional Institutes such as the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India and the Institute of Cost Accountants of India is also being monitored.
Aggrieved by the decision of the Government in the process of disqualification of the Directors, such directors have approached the Government seeking redressal against the order disqualifying them and that they were not associated with the struck-off companies.
During framing of the policies by the Government, all pros and cons should be identified. While considering the aspect of constraining the use of shell companies as an instrument for illegal transaction, it should be considered that not all shell companies are created for such purpose. The varied activities of shell companies include holding intellectual property or accumulation of shares.
Under the aforesaid scheme of the Government for striking off shell companies and the disqualification of their directors has narrowed down the criteria of directors’ disqualification under the Companies Act, 2013 limiting it only to the non-functionality of the companies and ignoring the wrongdoing which may be attributable to such directors.
The removal of Directors from disqualified company under the provisions of the Companies Act, 2013, does not specifically state the removal of such directors from all such positions held in other companies.
It would thus be beneficial to make careful analysis with regards to the purpose of the shell companies before they are struck off from the list of companies registered and their directors disqualified thereby being prevented from holding directorship in any other company.