Govt scheme to give easy exit route to firms

In a major relief to over 500,000 unlisted companies across India that have stopped functioning according to government records, the Easy Exit Scheme 2010 ( EES-2010) comes as a great relief.

The government has come up with two schemes: One, EES-2010, is for complete exit; and the other, Company Law Settlement Scheme (CLSS- 2010), is to grant amnesty to defaulting companies that wish to continue to be in business from violations of the Companies Act and criminal prosecution.

These schemes come after a long gap of five years, the last one being in 2005. EES-2010, under Section 560 of the Companies Act, 1956, comes into effect from May 30, and remains in force up to August 30. The rider in this scheme is that it is applicable to only those companies that are either not in operation since incorporation or not in business after April 1, 2008.

Official sources said the salient feature of EES-2010 was that the scheme was absolutely free and could be filed online. The last scheme, which came in 2005, required a company to first pay an application fee of RS 2,500, and then update its records and be ready to quit. “The entire exercise is aimed at cleaning up records and start afresh,” added the official.

Prior to this, there was no scheme available for companies since 2005. Therefore, the companies were first required to update balance sheets for all the years in which they remained functional, even if they were not doing any business. There were penal fees, amounting ten times the original fees, for every filing. Besides, the matter was referred to the court for criminal prosecution.

CLSS-2010 is aimed at giving defaulting companies, which have not filed their documents timely with the Registrar of Companies (RoC), or not increased their paid-up capital under Section 3 of the Companies Act, 1956, an opportunity to continue business by updating returns, without attracting criminal prosecution.

Otherwise referred to as “condoning the delay”, a company receives immunity from prosecution by paying 25 per cent of the actual additional fee payable for filing belated documents. It can avail of CLSS scheme till six months of the expiry, after which RoC starts criminal proceedings against the defaulting and defunct companies, the notification says.

Among the formalities outlined in the notification to opt for EES, the primary requirement is that a company needs to be defunct and, if it is a government company, it needs “no objection certificate” issued by the administrative ministry concerned. RoC gives thirty days’ time to regulators concerned of the companies opting for EES-2010 for any objection.

The EES-2010 form and statement of account for last one month of the company need to be certified by a practising chartered accountant, company secretary or cost accountant, and the company needs to disclose pending litigation.

Every director of the company, individually or collectively, would have to submit an indemnity bond stating that losses, claims or liabilities would be met in full if they arise after exiting the business.

CLSS-2010, on the other hand, is applicable to all private and public companies and requires them to first raise their minimum paid-up capital to threshold level of Rs 1 lakh for private and Rs 5 lakh for public company under Section 3 of the Companies Act.

The scheme does not apply to companies against which RoC has initiated action under Section 560 for declaring defunct.