Registrar of Companies (ROC) Strike-Off Actions: Legal Recourse for Startups in India

By Gnana Vithun, B.B.A. LL.B., Final Year, Saveetha School of Law. This article was written during a legal internship at LeDroit India.

KEYWORDS: Registrar of Companies, Strike-off, Startups, Companies Act 2013, Revival of Company, Section 248, Section 252, NCLT, Compliance.

ABSTRACT

The process of striking off companies by the Registrar of Companies (ROC) under the Companies Act, 2013 has profound implications for the Indian startup ecosystem. Intended to eliminate defunct entities and promote corporate transparency, the ROC strike-off mechanism has inadvertently affected a wide swath of genuine startups struggling with early-stage compliance and financial stability. This article explores the regulatory framework governing company strike-offs, primarily Sections 248 and 252 of the Companies Act. It further analyzes challenges faced by startups, procedural safeguards, judicial trends, comparative international practices, and recommends reforms for a more balanced regulatory approach. The study aims to provide practical guidance for founders, investors, and legal professionals navigating the revival process while fostering a compliance-oriented startup environment.

INTRODUCTION

India’s startup ecosystem has emerged as the third-largest in the world, supported by favorable government schemes, foreign investment, and a thriving digital economy. As the ecosystem evolves, the focus has increasingly shifted to improving governance, regulatory compliance, and curbing misuse of corporate structures. The ROC’s strike-off mechanism under Section 248 of the Companies Act, 2013 plays a pivotal role in this regulatory mission. However, its broad application has often disrupted genuine business activity, particularly among early-stage startups that are vulnerable to procedural lapses.The growth of entrepreneurship must be tempered with regulatory accountability. While shell companies and inactive entities must be removed to maintain the credibility of corporate India, the enforcement tools must not become blunt instruments that stifle innovation. The current regulatory design offers both opportunity and peril for startups—especially those in the ideation or pivot stage.This article provides a comprehensive understanding of the legal procedure of strike-off and restoration, reasons behind startup vulnerabilities, statutory and judicial safeguards, and the need for reform in the context of a changing digital economy.

2. Statutory Mechanism: Understanding Section 248 and 252 of the Companies Act, 2013

Section 248 empowers the ROC to strike off a company either suo motu (on its own motion) or upon the company’s application. It seeks to purge the registry of dormant companies, but its execution demands procedural fairness and judicial oversight.

2.1. Suo Motu Strike-Off by ROC:

Under Section 248(1), the ROC may initiate action if

The company has failed to commence business within one year of incorporation; or The company has not carried on business or operation for two immediately preceding financial years and has not made an application for dormant status under Section 455. The subscribers to the memorandum have not paid the subscription they undertook to pay at incorporation and a declaration to this effect has not been filed within 180 days of its incorporation under Section 10A. The company is not carrying on any business or operations, as revealed after physical verification carried out under Section 12(9).

2.2. Voluntary Strike-Off:

Section 248(2) allows a company to apply for voluntary removal by filing Form STK-2, after extinguishing all liabilities and obtaining shareholder approval (a special resolution or consent of 75% members in terms of paid-up share capital).

2.3. Procedure for Strike-Off:

1. Notice issued to the company and directors in Form STK-1.
2. Public notice published in Form STK-5/6 (or STK-5A for voluntary strike-off).
3. Company has 30 days to respond.
4. Final strike-off and publication in STK-7 in the Official Gazette.

This process results in the legal dissolution of the company unless reversed through a Section 252 application.

2.4. Revival under Section 252:

Aggrieved parties—including the company, members, creditors, or workmen—can apply to the National Company Law Tribunal (NCLT) within three years from the date of the ROC’s strike-off order for restoration under Section 252(1).The Registrar of Companies itself can also apply for restoration within three years if the strike-off was inadvertent or based on incorrect information.Further, if a company, or any member or creditor or workman thereof feels aggrieved by the company having its name struck off, they can apply to the Tribunal before the expiry of twenty years from the publication in the Official Gazette of the notice under Section 248(5).The tribunal examines whether the company was operational or had legitimate reasons for non-compliance before deciding on restoration.

3. Unique Vulnerabilities of Startups

Startups, particularly in their early stages, face numerous hurdles that make them susceptible to regulatory action:

Product Development Delays: Startups may incorporate early to secure name, intellectual property, or funding, but delay market entry due to prolonged R&D or pivoting. This prolonged initial period of “no business” activity can trigger ROC action.Compliance Ignorance: Founders, often with strong technical or business acumen but limited legal backgrounds, may be unaware of mandatory annual filings like MGT-7 (Annual Return) and AOC-4 (Financial Statements), leading to inadvertent defaults.Bootstrap Constraints: Many early-stage startups operate on lean budgets, avoiding the cost of hiring dedicated compliance professionals or engaging external consultants, which often leads to procedural defaults. Remote Work Models: Technology startups operating virtually may appear inactive due to a lack of physical assets or traditional brick-and-mortar operations, making it harder for the ROC to ascertain their operational status through physical verification. Pivot or Stealth Mode: Startups in a “stealth mode” or undergoing a “pivot” may show minimal outward activity or revenue generation while they refine their business model or product. This can be misinterpreted by the ROC as non-operational status. Funding Challenges: Delays in securing funding can lead to a pause in operations and a neglect of statutory filings, as resources are prioritized for core business development. Lack of Centralized Communication: Startups, especially those with distributed teams, might miss official notices from the ROC due to frequent changes in registered office addresses or reliance on outdated contact information. Focus on Growth over Governance: The intense pressure to achieve product-market fit and scale quickly often diverts attention and resources away from routine corporate governance and compliance tasks.

4. Consequences of Being Struck Off

The immediate and long-term consequences of strike-off are often underestimated and can be devastating for a startup:

Cessation of Legal Entity: The company is legally dissolved and ceases to exist as a separate legal entity. It cannot operate, enter into new contracts, or pursue legal actions in its name. Asset Freezing: Company bank accounts are typically frozen, and its assets, if not properly disposed of before strike-off, may become bona vacantia (ownerless property) and escheat to the government. This can severely cripple any remaining operational capacity. Loss of Licenses and IP: Business licenses, permits, trademarks, and other intellectual property registrations linked to the company may lapse or become difficult to enforce, potentially leading to a loss of brand value and market position. Ongoing Litigation Impact: Any legal proceedings by or against the company are hampered. While the liability of directors and members continues, the company itself cannot represent itself in court. Director Disqualification: As per Section 164(2) of the Companies Act, directors of a struck-off company may be disqualified from being appointed as directors in any other company for a period of five years. This has significant personal and professional implications for founders. Loss of Investor Confidence: A strike-off significantly erodes credibility with existing and potential funders, customers, and suppliers, making it extremely challenging to raise further capital or build market trust, even if the company is later revived. Personal Liability: While the limited liability of a company generally protects directors and shareholders, in cases of strike-off, especially if liabilities remain, the corporate veil can be lifted, and directors may become personally liable for the company’s debts and obligations. Difficulty in Future Ventures: A history of strike-off can raise red flags for founders attempting to establish new ventures or secure future investments.

5. Procedural Safeguards and Revival Process Under Section 252

The revival process under Section 252 offers startups an opportunity to rectify their past non-compliance and regain their legal status.

5.1. Who Can Apply?

• The company itself, by passing a board resolution.
• Any member (shareholder) of the company.
• Any creditor to whom the company owes money.
• Any workman (employee) of the company.
• The Registrar of Companies (ROC) itself, if the strike-off was inadvertent or based on incorrect information.

5.2. Required Documentation:

To file a petition for revival with the NCLT, the applicant typically needs:

• A certified copy of the strike-off order (Form STK-7) issued by the ROC.
• Audited financial statements and Income Tax Returns (ITR) for the years the company was active and for the period leading up to the strike-off.
• Proof of active business operations (e.g., bank statements, invoices, contracts, GST filings, details of ongoing projects, employee records).
• Affidavits from directors confirming the operational status and reasons for non-compliance.
• Board resolutions authorizing the filing of the petition (if the company is the applicant).
• Memorandum and Articles of Association (MOA & AOA) of the company.
• Application in Form NCLT-9, as prescribed by the National Company Law Tribunal (Procedure) Rules, 2016.
• Any other documents as directed by the NCLT to establish the company’s bona fide nature and operational existence.

5.3. Timeline and Cost:

• Revival petitions must generally be filed within three years from the date of the ROC’s strike-off order. However, an application can be made within 20 years if the applicant (company, member, creditor, or workman) feels aggrieved.
• The legal and professional costs associated with a revival petition can vary significantly, typically ranging from ₹50,000 to ₹2 lakhs, depending on the complexity of the case, the volume of documentation, the legal fees of advocates, and NCLT filing fees. Additional costs may include penalties for delayed filings.

7. International Practices: A Comparative Review

A comparative analysis of company restoration processes across different jurisdictions reveals varying approaches to balance regulatory enforcement with business continuity.

India’s NCLT-based restoration, while providing robust judicial scrutiny and a longer period for certain aggrieved parties, tends to be more formal and potentially time-consuming compared to some administrative restoration processes in other countries. This highlights an area where India could streamline its process for certain categories of companies, especially startups.

8. Preventive Measures: Compliance Tips for Startups

Proactive compliance is paramount for startups to avoid the drastic consequences of a strike-off. Founders should embed compliance into their operational DNA from the outset.

• Regular Filing Calendar: Implement a robust internal calendar with automated reminders for all mandatory ROC filings (e.g., AOC-4, MGT-7, DIR-3 KYC, MSME Form I). Utilize digital tools for scheduling and tracking.
• Use of Compliance SaaS Tools: Leverage specialized Software-as-a-Service (SaaS) platforms like LegalRaasta, ClearTax, Vakilsearch, or IndiaFilings that offer automated reminders, compliance dashboards, and assisted filing services. These platforms can significantly simplify compliance management.
• Register for Dormant Status: If a startup anticipates a period of inactivity (e.g., during prolonged product development or fundraising), it should proactively apply for dormant company status under Section 455 of the Companies Act, 2013. This allows reduced compliance burden.
• Periodic MCA Checks: Regularly review the company’s status on the Ministry of Corporate Affairs (MCA21) portal to ensure that there are no pending notices or changes in status that might indicate an impending strike-off action by the ROC.
• Director KYC and DIN Monitoring: Ensure that all directors complete their DIR-3 KYC (Know Your Customer) annually by the stipulated deadline. Monitor the DIN (Director Identification Number) status to avoid disqualification.

Conclusion

The ROC’s strike-off powers are crucial for maintaining corporate discipline, promoting transparency, and purging the registry of shell companies. However, these powers must be exercised with precision and a clear understanding of the unique operating environment of startups. Startups, as dynamic entities, often operate in high-risk environments characterized by iterative development, financial constraints, and rapid changes, which may naturally lead to short-term or inadvertent non-compliance.Rather than solely punitive action, a supportive, reform-driven framework is needed that emphasizes timely rectification, education, and facilitation. Section 252 of the Companies Act provides an invaluable legal recourse for genuine startups to revive their operations, but the current procedural costs and complexity can deter small and bootstrapping ventures. Judicial trends clearly demonstrate a willingness on the part of the NCLT to aid bona fide entrepreneurs, acknowledging external factors and the true operational intent of the company. This judicial empathy must be complemented and institutionalized by proactive policy reforms. A calibrated approach—based on accountability, flexibility, and digital transparency will ensure that India’s regulatory architecture does not become a bottleneck but rather a backbone for entrepreneurial growth. By implementing the proposed reforms, India can further solidify its position as a global startup hub, fostering innovation and economic development without sacrificing corporate governance principles.

References

• Companies Act, 2013  https://nclt.gov.in/act-rule?utm.com
• Ministry of Corporate Affairs Notifications & Forms
• Companies House UK – Restoration Guidelines https://www.gov.uk/guidance/company-restoration-guide?utm_source=chatgpt.com
• Accounting and Corporate Regulatory Authority (ACRA), Singapore
• Startup India Action Plan, 2021
• National Company Law Tribunal (Procedure) Rules, 2016 https://nclt.gov.in/act-rule?utm.com