How to deal shell companies

Why in news?

Recently union government has initiated action against more than two lakh shell companies as part of Operation Clean Money.

What is operation clean money?

• Operation Clean Money was initiated by Income Tax Department (ITD).
• Initial phase of the operation involved-verification of large cash deposits made after demonetization.
• Second phase of the operation involves is identification of high risk persons for detailed investigations by the ITD.

What are shell companies?

• Shell companies are typically corporate entities which do not have any active business operations or significant assets in their possession.
• The government views them with suspicion as some of them could be used for money laundering, tax evasion and other illegal activities.
• Some laws helpin curbing illegal activities to target shell companies are

1. Benami Transaction (Prohibition) Amendment Act 2016
2. The Prevention of Money Laundering Act 2002
3. The Companies Act, 2013.

How can name of these companies be removed?

• Companies can be removed from the rolls of the Ministry of Corporate Affairs by two means either by strike off by Registrar of Companies (RoC) or by voluntary strike off.
• The strike off happens in case of companies which have failed to commence business within a year of incorporation.
• Voluntary closure can be done with the approval of the board and shareholders and the firm should have nil liabilities.

What is the difference between dormant and shell companies?

• A dormant company gets its title in three ways

1. If it has chosen to get a ‘dormant’ status from the RoC by way of an application.
2. If it is in compliance of the requirements of Section 455 of companies act 2013.
3. In case a company has not filed financial statements or annual returns for two financial years consecutively, the RoC shall issue notice and include it in the register of ‘dormant’ companies.

• But a shell company is one which is typically suspected of illegal activities.

What actions can be taken against shell companies?

• The RoC issues a show-cause notice to such companies and their directors seeking their response within 30 days.
• If the response is not satisfactory, the company’s name would be removed from the register.
• Then companies have to make an application before the National Company Law Tribunal for restoration which the NCLT will decide on a case-to-case basis.

Source: The Hindu