#There will be two FTEs per case and one Special Event

[magistralconsulting]

Venture Capital Due Diligence: Does Outsourcing Work for the Desired Moonshot?

Introduction

The business of Venture Capital funds depends on the targets it invests in. The more the chances of its portfolio companies hitting a moonshot, the more successful the fund is in general. Venture Capital Due Diligence is a process that ensures the appropriate targets are locked in at the seed or early stage to ensure 50-1000X returns in a 5 to 10-year horizon.

The way a VC fund looks at a target is fundamentally different from how a Private Equity or a lender would look at it. A VC fund looks for that one silver lining that can make a portfolio company a roaring success. PE firms mostly weigh pros and cons and generally invest if the Pros outweigh the cons. A lender analyzes if anything at all could go wrong with the company and may jeopardize its investments. Different objectives of investment require different lenses for analysis.

Challenges regarding Venture Capital Due Diligence

VC firms invest in small firms, primarily start-ups, often only at the idea stage. The biggest challenge for due diligence, in this case, is the availability of data. When the idea has not shown any traction, the research needs to be more outside-in. That is finding out the market information and if any customers may be willing to pay for such services of the potential portfolio company. If there is any traction, then the analysis needs to be both outside-in and inside-out. An inside-out investigation is more towards getting into the details related to the operations and finance of the company along with the opportunity that the market offers.

Another challenge is to keep the deal pipeline active for multiple due diligence exercises to happen. Due diligence can throw numerous red flags. If there are various deals in the pipeline, a VC fund can walk away from the opportunity till they get into the company that justifies investment in terms of money and time. Many VC funds park small amounts with the companies they know or are from their circle of friends and family. That biased approach would result in sub-optimal results in the long run. Deals found from networks or events are usually the hot deals that others are also evaluating. That leads to FOMO (Fear of Missing Out) on the part of VCs and hence the overvalued assets.

Advantages of Outsourcing Venture Capital Due Diligence

The advantages the outsourcing brings are numerous like it saves costs, resources are available on-demand and there is a certain specialization with the vendor who works with multiple VC firms, which raises your own investing game.

However, when it comes to outsourcing, there is always a lingering threat in the minds of asset managers. Will the quality be any good? Or what if the deal gets outed due to many individuals knowing about it? Or do they even understand it, ours is anyway a specialized investing or a niche industry?

Challenges around Venture Capital Due Diligence Outsourcing

It is easy to make a business case for outsourcing on an excel sheet, where it can produce 30-70% cost savings while in most cases improving the quality of due diligence. However, concluding everything is hunky-dory with outsourcing is far-fetched. Here are the top challenges with outsourcing venture capital due diligence

There are way too many generalist research and outsourcing players out there, who offer to do research, list generation, and make company profiles, but most of them lack a deep understanding of how VC investing works. There are very few specialist VC research players. Magistral is one of them

VC itself is a new and upcoming industry. In the US alone in the first 8 months of 2021, the number of unicorns created has crossed the number of unicorns ever created in the history of VC investing. That is the acceleration. Though outsourcing provides the access to talent that can deliver, you can be assured the talent itself is half baked, purely due to the massive acceleration that this industry is witnessing

Even the outsourcing home country is witnessing the talent crunch. For example, India itself lacks VC talent and there is a huge demand for trained resources. In a typical FTE-based outsourcing model, it is very possible that you train someone offshore in your diligence processes and he is poached by the competition, leading you to train offsite resources again and again and again. It’s a massive headache

VC investing is more of an art than an exact science and some of the DNA of VC investing is very difficult to outsource.

Magistral’s proprietary process aims to do away with the shortcomings related to Venture Capital due diligence research outsourcing.

Before we dive into the Magistral’s process, here is how we evaluate targets. The things that we analyze closely to ensure the target you invest in has the best chance of becoming your next moonshot and increasing the profile of your fund

Magistral’s Process to Outsource Venture Capital Due Diligence

Venture Capital Due Diligence: Key Components

Venture capital due diligence involves looking specifically around the following aspects of a potential portfolio company before committing to investing:

The opportunity size

Assessing the opportunity size carefully gives an idea of whether there is a possibility of a moonshot with the investment. If the total addressable market (TAM) runs into billions and the company solves an acute pain or saves cost or saves time, or makes the process easier, then there is a massive chance that the company will scale up faster. Sometimes the addressable market is at the conjunction of two or more big markets, and there the TAM needs to be arrived at, with careful triangulation and estimates. Calculation of TAM carefully gives an idea of the upside possible if the strategy and team are right.

Strategy

The opportunity size almost always coincides with the Go to Market (GTM) strategy. This is where lots of VCs add value with their network and connections along with the domain experience. The company suggests a GTM, which experts in the due diligence phase verify. A well-presented GTM has level 2 and level 3 steps, along with the timelines and business outcomes. There is also the requirement of funds laid out clearly for every stage.

The size of the opportunity and how the company plans to seize that opportunity is almost a make-or-break part of the due diligence process.

Competition

Competition sometimes is assuring and occasionally threatening. Competitive intelligence in itself throws light on multiple possibilities. If it’s a product or service promised to be one of its kind, it will be challenging to find an exact competition. The task is not to find the competition per se but carefully checking if the market makes sense, to begin with. Is it just too tricky a market to crack, or is there no market at all, or it’s a service or product no one wants to pay for? Competition or absence of it here is a great pointer. In moderately accepted business models, the company is expected to face competition, big or small. The competition is studied for traction. If all the competition out there is growing at a healthy pace, it shows that the industry may have a place for someone who could do the job better. If competition is shutting shops or taking too long to be profitable, then also it’s a pointer towards the choppy waters ahead.

This also needs to be seen in the light whether the target can be number 1 or 2 in a vast market as it all works on the “winner takes it all” philosophy with VC investing

In any scenario, a careful evaluation of the competition throws a guiding light and is an essential step in the due diligence process

ESG

ESG has picked up in the recent past and for a reason. ESG stands for Environmental, Social, and Governance aspects of an investment that indicates sustainable investing. Though it’s far more critical towards the later stage funding rounds, planning yields rewards in the earlier rounds too. It is estimated that the majority of the deals in the future will be impact or sustainable investments, which will fulfill the criteria of ESG maturity. Some studies show almost all investments would be impact investments a few decades down the line. A VC not only plans for an exit from the portfolio but to raise following funding rounds too. Chances of raising rounds at higher valuation increase if the company is primed to be an ESG investment right from the seed or early-stage rounds.

Financials

If the company has been around for a few years and has seen some traction, financial analysis becomes crucial as any other factor in the due diligence process. Financials feed into the valuation of the company. Financials are also essential to forecast future revenues, profitability, and cash flows. In the due diligence process, reasonable estimates are made to project the company’s financial statements for the next five years. That drives the valuation of the company on which the funds are to be raised. In the due diligence process, sometimes, the assumptions made during the preparation of financial models are tested thoroughly. If there is an assumption that may not stand the scrutiny of the financial analyst, it is flagged. If there is a massive impact of an erroneous assumption, this exercise alone could save millions of dollars for the VC investor.

The team

The founding team in a smaller company is the driving force. Suppose the team is experienced, has relevant skills, produced returns for investors in the past, and is motivated to make a difference. In that case, it can be the difference between an investment that reaches out for a moonshot and another one that proves to be a dud. Checking the team’s credentials, experience, qualifications, and connections is an essential aspect of the due diligence process.

Red Flags

Apart from significant aspects discussed earlier, the due diligence team also looks for red flags in the documents submitted by the company seeking investment. It could either be a legal hurdle, financial irregularities, or any other problems with the documentation. Discussing these red flags with the company may well turn out to be fruitful.

Magistral’s proprietary process for Venture Capital Due Diligence

Magistral’s unmatched advantages in VC Due Diligence

Magistral works with multiple VC firms, some one-man companies, and others running a portfolio of hundreds of companies or start-ups with a few unicorns and soonicorns. After performing hundreds of due diligence exercises across industries like SaaS, healthcare, Tech, Industrials, Services, Real Estate, and others, Magistral has developed a proprietary due diligence service delivery method that counters almost all the drawbacks of outsourcing.

Magistral’s financial analysts take control of the data room. The VC or the company populates all the documents in the data room. We comb through the records with an eagle eye to spot opportunities or red flags. We have developed a standardized checklist to evaluate all types of documents. All our observations and questions are collected by the VC and discussed with the company. We also prepare a detailed report on the business. The information on the company comes from secondary research, discussions with the industry experts, and our in-house expertise in the area. Finally, Investment Memo or pitch deck crystallizes all the insights. These pitch decks are designed consistently with the global marketing standards of the financial industry.

All FTE-based engagements of Magistral have an ever-evolving Standard Operating Procedure (SOP) document. This helps in standardizing the process irrespective of the personal capability of the analyst working on the project. It also ensures a smooth transitioning in case the trained analyst leaves. There is also a shadow analyst always ready to take on in case the analyst leaves permanently or takes off or holidays. It’s so much like the cockpit of Boeing 747, planned for all eventualities.

Our experience has made us more knowledgeable about VC investing than some of our clients. That helps our clients improve their investing game too. Templates, Systems, and our experience and DNA of VC investing ensure due diligence that meets the global standards of investing at competitive valuations. If it sounds interesting, for a conversation with, drop an inquiry here

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

[davidslepkow]

There are many stair and stairwell  fall accidents in Rhode Island during the course of a calendar year. Stair accident Liability is regulated under the same laws and rules for other RI slip and fall mishaps. Common injuries from falling down stairs include fractures, concussions and other injuries.

RI stair accident lawyers

Nonetheless, stairway or stairwell accidents require special considerations which tend to make them more complicated than a slip and fall on ice or falls on slippery substances near a salad bar.  A top RI slip and fall lawyer will battle the insurance company to get you the money you are entitled to.In order to get the settlement that you are entitled to, you must immediately retain one the best personal injury attorneys in RI.

Stair mishap or plummet down a staircase

Under Rhode Island law, it is necessary to prove that the landowner or landlord is negligent and at fault for a stair mishap or plummet down a staircase in order for a victim to be compensated for her injuries. In the event of a fall on an elevator, escalator, ramp or incline it is important to speak with a top Providence Slip and fall lawyer with lots of experience dealing with falls on stairs.

Property owners such as fast food restaurants, malls, stores, parks and museums are expected to provide proper warning of wet, damp or slippery floors or a flight of stairs on their premises if they knew or should have known of the hazard. In cases when the floor has been recently mopped, cleaned or waxed and is still wet or slippery then owners must put up adequate signage warning of the dangerous condition.

Unevenly applied wax

In some instances appropriate action may be blocking off the dangerous, icy, slimy or oily area or steps to prevent customers from taking a spill or face plant on the property. A recent waxing or application of wax on a floor could create problems if wax was applied unevenly or haphazardly. The most common areas for slip and fall resulting in serious injury or death is: arenas, stadiums, theaters, parks, playground, construction sites, shops and retail stores.

Stair accident

According to the National Safety council: Most common locations for falls: • Doorways • Ramps • Cluttered hallways • Areas with heavy traffic• Uneven surfaces • Areas prone to wetness or spills Most common locations for falls to another level: • Unguarded heights • Unstable work surfaces• Ladders • Stairs”  NSC

Tumble down stairs

In order for a landowner to be responsible to pay damages for an injury resulting from a tumble, fall, descend or topple down wet, defective or damaged stairs, the injured person must prove:

The landowner, landlord, property manager or their agent / employees knew of the defective or unreasonably dangerous condition on the premises (supermarket, apartment complex or department store) but did not take appropriate steps to remedy or fix the defective condition.

If the owner, agent or employees exercised reasonable diligence they should have known that the stairs in the parking lot area were dangerous and should have taken appropriate action to remedy the dangerous condition on the stairs.

The property owner or employee caused the defective condition or dangerous condition. For example, a waiter at a restaurant spills water, soda or beer on the stairs and then does not towel dry the staircase or put up a warning sign. If a restaurant patron is injured as a result of sliding on such liquid then the restaurant is at fault for such accident. In this event, the restaurant is liable for the failure of its employee to warn of the water or liquid substance on the stairs and failure to put up a caution sign or otherwise attempting prevent such calamity.

common injuries from falling down stairs

In the event of an employee tripping, plunging down or slipping at their place of employment, while working, then the injured worker may have a Rhode Island workers compensation claim. Workers compensation in RI is a no fault system in which the injured employee is not required to prove negligence on behalf of his or her employer. In the event that you are injured while in the scope of your employment then you should hire a top Providence workers compensation lawyer.

Fatal stair accident

The Bureau of Labor Statistics stated: “A preliminary total of 4,405 fatal work injuries were recorded in the United States in 2013, lower than the revised count of 4,628 fatal work injuries in 2012, according to results from the Census of Fatal Occupational Injuries (CFOI) conducted by the U.S. Bureau of Labor Statistics. The rate of fatal work injury for U.S. workers in 2013 was 3.2 per 100,000 full-time equivalent (FTE) workers, compared to a final rate of 3.4 per 100,000 in 2012.”  Source

Factures and stairwell accidents

The following types of injuries may result from a slip and fall: herniated disk, broken / fractured bone, back, neck, foot, spinal cord injury, leg injury or traumatic brain injury (tbi).

“A slip and fall or trip and fall cause of action usually involves the property owners or occupants failure to maintain the real estate in a safe manner. It can also involve failure to fix an unreasonably dangerous conditions on the property of which they either knew or should have known about. Premises liability in Rhode Island is not just limited to slip and fall but also includes: dog bites, tripping on uneven surfaces, asbestos exposure, mesothelioma, lead paint exposure, Inadequate security measures enabling assaults,falling merchandise, Sidewalk or roadway defects, Poorly lit stair cases, falling debris, hanging hazards, swimming pool liability, balcony or deck collapses, carbon monoxide leaks, iced entrance ways, slippery or obstructed floors, electric shock due to exposed electric wiring” http://www.slepkowlaw.com/slip-fall-articles.

Duty owed

The RI Supreme Court sitting in Providence adopted the “Connecticut rule” when the TOP Court ruled “…landlord or business invitor owes a duty to a tenant or business invitee to use reasonable care to see that the common areas are kept reasonably safe from the dangers created by an accumulation of snow and ice which is attributed to purely natural causes.” BERARDIS v. LOUANGXAY et al 969 A.2d 1288 (2009) http://www.ripersonalinjurylaw.com/ri-slip-fall-personal-injury-attorney-falls-ice-snow/

Mix of rain and snow- slippery conditions

“In her deposition testimony, plaintiff averred that the weather was a mix of rain and snow and that the roads were wet. Greenberg‟s office was accessible by a pair of ramps, as well as by a set of stairs. The plaintiff used the ramps because she was ambulating with the aid of crutches, and her left foot was in a soft cast. Sullo alleged that, after ascending the two ramps and walking across a wooden walkway towards the office door, her left crutch slipped on the wet wood, causing her to fall hard on her left leg and foot. In her complaint, plaintiff claimed that she had slipped on accumulated snow, but during her deposition she testified that the wood surface was wet from rain and snow but was not “slushy.” Quote from Patricia Sullo : v. : David Greenberg.  CourtRI The plaintiff alleged permanent injury as a result of the RI Slip and fall on the ramp.

Comparative negligence in Rhode Island slip & fall

Rhode Island has adopted comparative negligence law. The insurance company regularly uses this defense to attempt to undermine the victim’s RI premises liability cause of action. The liability insurance company regularly asserts that the victim was not paying proper attention as a result of carelessness or distraction. If the person could clearly see the sheet of ice and collapses when they lose their footing, the indemnity company will assert that the pedestrian was negligent, comparatively negligent. If you were injured in a pedestrian accident in Providence , Pawtucket or East Providence then you should retain a Rhode Island Pedestrian accident attorney,

Warwick slip and fall lawyer

A good Warwick Rhode Island slip and Fall lawyer will minimize the injured victims culpability for the fall and establish crucial facts to establish the negligence of the tortfeasor. The following could constitute comparative negligence reducing a settlement or injury verdict

texting while walking,

web surfing and walking

pedestrian distractions

running,

horseplay,

rushing

not properly paying attention

Pure Comparative fault

“1) Rhode Island is a pure comparative Fault state. This means that even if someone is more than 50 percent at fault for a RI Auto Accident or premises liability claim, they can still seek compensation for their injuries. In other words, if a motorist is 99 percent liable for an auto crash they can obtain 1 percent of their damages, pain and suffering, medical bills and disability.”  Source

§ 9-20-4 Comparative negligence

Here is the law for comparative fault in RI: § 9-20-4 Comparative negligence. – In all actions hereafter brought for personal injuries, or where personal injuries have resulted in death, or for injury to property, the fact that the person injured, or the owner of the property or person having control over the property, may not have been in the exercise of due care shall not bar a recovery, but damages shall be diminished by the finder of fact in proportion to the amount of negligence attributable to the person injured, or the owner of the property or the person having control over the property. Information

“The surface can be tested to identify if it is above or below accepted levels of slip resistance thresholds.” http://en.wikipedia.org/wiki/Slip_and_fall

Sadly, some falls result in a fatality. This leaves the spouse, children or loved ones of the deceased mourning the death of their family member and considering wrongful death litigation in Providence Superior Court. In some instances as a result of malfeasance, reckless actions or a careless landlord, a person could tumble, nosedive or topple down a set of stairs.

RI law: Duty owed by business

“This rule, as we apply it, provides that a landlord or business invitor owes a duty to a tenant or business invitee 1292*1292 ”to use reasonable care to see that the common areas are kept reasonably safe from the dangers created by an accumulation of snow and ice which is attributed to purely natural causes.” Id. at 772, 279 A.2d at 440 (adopting the Connecticut Rule in the landlord-tenant context); see also Terry v. Central Auto Radiators, Inc., 732 A.2d 713, 716 (R.I.1999) (extending rule to business invitor-invitee relationship). The landlord or invitor, however, must be afforded “a reasonable time after the storm has ceased to remove the accumulation.” Benaski, 899 A.2d at 503 (quoting Fuller, 108 R.I. at 774, 279 A.2d at 441). Therefore, as a general rule, any duty to clear a natural accumulation of ice and snow is not triggered before a reasonable time after the storm ends. Id. Under unusual circumstances, however, the duty to remove the accumulation may arise before the end of the storm. Terry, 732 A.2d at 717.” Quote from : BERARDIS v. LOUANGXAY et al 969 A.2d 1288 (2009)

Standard Test Method for Determining the Static Coefficient of Friction of Ceramic Tile and Other Like Surfaces by the Horizontal Dynamometer Pull-Meter Method (Withdrawn 2014)  ASTM

Falls are one of the leading causes of unintentional injuries in the United States, accounting for approximately 8.9 million visits to the emergency department annually (NSC Injury Facts 2011).

The national Safety Council states : “Adults 55 and older are more prone to becoming victims of falls, and the resulting injuries can diminish the ability to lead active, independent lives. The number of fall deaths among those 65 and older is four times the number of fall deaths among all other age ”  NSC

“A Scott County jury awarded a woman who slipped and fell on ice at a Quad-City hotel $1.2 million on Friday. Brenda Alcala, 54, of Dallas stayed at the Courtyard by Marriott Bettendorf when she fell on an icy private sidewalk Jan. 21, 2010, according to her attorney, Mike Bush.” Qc Times

“$2.38 million SETTLEMENT, personal injury. A 72-year-old woman suffered a severe spinal injury occasioned by a trip-and-fall on an uneven public sidewalk. Liability was highly contested in that the injured party had walked on this sidewalk almost daily for more than 25 years and there were few prior injuries at the location” Source

“Special types of stairs include escalators and ladders. Some alternatives to stairs are lifts (US:elevators), stair lifts and inclined moving walkways as well as stationary inclined pavements (US:sidewalks).” http://en.wikipedia.org/wiki/Stairs

The Rhode Island Supreme Court licenses all lawyers and attorneys in the general practice of law, but does not license or certify any lawyer / attorney as an expert or specialist in any field of practice. While this firm maintains joint responsibility, most cases of this type are referred to other attorneys for principle responsibility.

[postolo]

Company deregistration and CODS under the Companies Act, 2013

The Companies Act, 2013 provides for a robust process of deregistration and restoration of companies in the Register of the Registrar of Companies. The Central Government has also launched the Condonation of Delay Scheme, 2018 (CODS) providing an opportunity to non-compliant companies to comply with the return filing provisions of the Companies Act. The CODS is of significant importance to companies desirous of correcting the non-compliances to avoid being struck off by the Government.

The significance of the aforesaid is heightened by the recent elimination by the Central Government of few lakhs of shell companies in its fight against black money.[1] At the same time High Courts, Company Law Boards and National Company Law Tribunals (NCLTs) have passed several major decisions in recent years which have significant impact on the remedies available against the deregistration of a company by the Registrar. This article analyses the provisions of the Companies Act, the CODS and some decisions having a bearing on this important aspect of company law in India.

Deregistration of companies and restoration

Sections 248 to 252 of the Companies Act, 2013 stipulate the process of deregistration of a company from the Register of Companies (RoC). Section 560 of the erstwhile Companies Act, 1956 provided for a Fast Track Exit mode for defunct companies to voluntarily apply for deregistration. Similar provisions for voluntary deregistration have been provided under the Companies Act, 2013. The Companies (Removal of Names of Companies from the Register of Companies) Rules, 2016 (Deregistration Rules) provides the procedural aspects related to deregistration.

There are two modes of deregistration under the 2013 CA, namely, suo motu deregistration by the Registrar of Companies under Section 248(1) and voluntary deregistration by application of a defunct company under Section 248(2). The involuntary mode of deregistration attracts greater attention of companies which want to be aware of remedies against any erroneous deregistration by the Registrar.

Section 248(1) stipulates that a reasonable belief on the part of the Registrar regarding a company’s failure to commence business within one year of incorporation or failure to carry on any business for two or more preceding financial years would justify deregistration of such company by the Registrar. However, the company and its Directors have a right to receive a notice from and send representations to the Registrar before any deregistration.

In the event of deregistration, Section 250 mandates that the deregistered company shall cease to operate as a company and its certificate of incorporation shall be deemed to have been cancelled, except for the purpose of realising the amount due to the company and for the payment or discharge of the liabilities or obligations of the company. The liabilities of any director, manager or other officer under the Companies Act, 2013 shall continue and may be enforced as if the company had not been dissolved. The proviso to Rule 3 of the Deregistration Rules, inter alia, states that penalised/defaulter listed companies, companies under investigation/prosecution, companies with public deposits and non-profit companies cannot be deregistered in terms of Section 248.

Section 252 of the Act empowers NCLT to restore a deregistered company in the following scenarios—

(a) Any person aggrieved by the order of the Registrar may file an appeal before the Tribunal within 3 years of the order passed by the Registrar. If the Tribunal is of the opinion that the deregistration was unjustified for lack of grounds, it may pass an order for restoration of the name of the company in the register of companies. But the Registrar will be given a reasonable opportunity of making representations and of being heard.

(b) The Registrar may, within a period of three years from the date of deregistration, apply to the Tribunal for restoring the name of such company if it is satisfied that the deregistration was erroneous or done on the basis of incorrect information furnished by the company or its Directors.

(c) On an application made by the company, member, creditor or workman before the expiry of 20 years from the publication in the Official Gazette of the notice of dissolution of the company, the Tribunal may order restoration if it is satisfied that the deregistered company was a company with active business or on presence of other just grounds. Further, the Tribunal may also pass a just order for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been struck off from the Register of Companies.

Company restoration when deregistration has occurred under Fast Track Exit Scheme

The Union Government had earlier launched a Fast Track Exit Scheme (FTE) which permitted a fast-paced deregistration process for companies without business activity. In Intec Corpn. (P) Ltd. v. Registrar of Companies[2], the Delhi High Court adjudged that in just and proper situations, restoration of deregistered companies in the Register of Companies maintained would be legally valid.

The facts of the case are that due to general depression in the market during 2011 to 2013, the petitioner company could not commence its operations as it required a huge amount of capital infusion. During the said period, even the subscribed capital was not received from initial subscribers and, therefore, the project remained a non-starter. Thus, the petitioner company filed an application and Form FTE as per the Fast Track Exit Scheme, 2011, under Section 560 of the 1956 Act with RoC, for striking off its name from the Register of Companies. The company sought restoration of its name for there had been a change of business environment in the country.

The company stated that because of the Government’s special attention towards ease of doing business in the country, there was renewed excitement in the air-conditioning market and that it was expected to grow at a rapid pace of up to 12% annually. Resultantly, the company was contemplating starting a manufacturing unit for manufacturing roof mounted air conditioners for Railways.

The judgment of the High Court placed reliance on its judgment in Siddhant Garg v. Registrar of Companies[3] which stated, “As a matter of law, it cannot be said that where the company’s name has been struck off on an application filed under Simplified Exit Scheme, the company cannot be restored.” Reliance was also placed on the Madhya Pradesh High Court’s judgment in VI Brij Fiscal Services (P) Ltd. v. Registrar of Companies[4], which had restored a company which had been struck off under Simplified Exit Scheme. Thus the Delhi High Court ruled that restoration of the petitioner company would be just and proper in the given circumstances and ordered accordingly.

Scope of the term “carrying on any business or operations” under deregistration norms

The NCLT, New Delhi’s judgment in Microtech Infoserve (P) Ltd. v. Registrar of Co.[5], provides much needed clarification in regard to what constitutes carrying on business or operations with respect to deregistration or restoration. The petitioner company had claimed that it availed services and procured equipment required for running its operations. It availed services from Next Gen Networks including laying of CAT6UTP cable on telephone clip and Invoice Number SER-NEXT-17-18-03 dated 8-6-2017 was issued against the company. It also paid MTNL bills as was evident from the bank statement. The company had taken office space on lease for running its operations. The company was incorporated on 3-2-2004 under the provisions of the 1956 Act.

The company had acknowledged a receipt of notice sent by RoC to the company and its Directors to show cause along with copies of documents, the company had claimed that at the time when its name was struck off it was carrying on business and its operation were in progress. The company had claimed that it had 84 employees on its payroll as on 31-3-2017 and it had paid a salary of Rs 6.86 lakhs to its employees for the month of May 2017. The company had also provided services to Hitachi Systems Micro Clinic (P) Ltd. Thus, the NCLT held that the company fulfils the requirement of Sections 252(1) and (3) of the Companies Act which overwhelmingly warrant its restoration. The reasons for such restoration were substantial and demonstrated that such restoration was just and proper.

Subsequently in its decision in Vasudev Hembhai Dabhi v. Registrar of Co.[6], NCLT, Ahmedabad permitted the application for name restoration, after observing a land development agreement which indicated substantial business activity. NCLT noted that the Company was registered with the object of doing real estate business and it had entered into an MoU to purchase certain lands for land development. NCLT perused Section 252(3) of the Act and laid down that the same requires carrying on the business operation on date of strike off for the purpose of such restoration. Accordingly, the NCLT allowed the application for name restoration.

Condonation of Delay Scheme, 2018

The Condonation of Delay Scheme, 2018 is a scheme of the Union Government under Sections 403, 459 and 460 of the Companies Act, 2013 which gives an opportunity to non-compliant companies to comply with the return filing provisions of the Companies Act.

Para 2 of the said Scheme[7] lays down certain basic concepts underlying it. These concepts are as follows:

“ *                  *                     *

(ii) “Overdue documents” means the financial statements or the annual returns or other associated documents, as applicable, in the case of a defaulting company and refer to documents mentioned in Para 5 of the Scheme.

(iv) “Defaulting company” means a company which has not filed its financial statements or annual returns as required under the Companies Act, 1956 or Companies Act, 2013, as the case may be, and the Rules made thereunder for a continuous period of three years.

(v) “Designated authority” means the Registrar of Companies having jurisdiction over the registered office of the company.”

The beneficiaries of the Scheme would be defaulting companies which have not been deregistered i.e. removed from the Register of Companies by the Registrar of Companies. Such defaulting companies can file annual accounts or annual return which are overdue for filing till 30-6-2017. It is noteworthy that even though deregistered companies are ineligible to avail this Scheme, this Scheme can provide a useful gateway to alert Directors and Managers to correct all the existing non-compliances which might otherwise lead the Registrar of Companies to deregister their active companies.

The procedure for availing the Scheme involves the temporary re-activation of deactivated DINs of defaulting Directors. Defaulting companies shall complete pending filing by payment of additional fees as prescribed. A defaulting company shall file an e-Form “e-CODS” along with a fees of Rs 30,000. If defaulting company does not file the requisite documents/e-Forms, the DIN of the Directors will be deactivated. Where a company has been restored after an application to NCLT, the DIN of such Directors would be re-activated, subject to company filing all overdue documents. Annual return, annual accounts/financial statements, submission of compliance certificate, appointment of auditors can be filed as part of the Scheme.

The Registrar shall withdraw the pending prosecution, if any, before the court concerned in lieu of documents filed under the Scheme. However, this Scheme does not affect any action under Section 167(2) of the Act. This Scheme also does not affect civil and criminal liabilities as may be Applicable on such disqualified Directors during the period of such disqualification.

The Scheme requires beneficiaries to disclose whether any appeal was filed against any notice issued or complaint filed before the competent court for violating provisions of the Act. Disclosure about prosecution pending before any court against the company and its officers in respect of belated documents is also required. The e-form also requires disclosure about any Director who is declared as proclaimed offender or facing criminal case for economic offences. It also requires a declaration that company has withdrawn existing appeals/writs before any court of law.

The significance of the CODS, 2018 is also understood in the light of a Press Information Bureau (PIB) Press Release of 5 September, 2017 which has introduced a number of restrictions on bank accounts of deregistered companies. The press release reads as follows:

“Department of Financial Services advises all banks to take immediate steps to put restrictions on bank accounts of over two lakh deregistered companies … Banks have also been advised to go in for enhanced diligence while dealing with companies in general. A company even having an active status on the website of the Ministry of Corporate Affairs but defaulting in filing of its due financial statement(s) or annual return(s) of particular of charges on its assets on the secured loan should be seen with suspicion as, prima facie, the company is not complying with its mandatory statutory obligations to file this vital information for availability to its stakeholders.”

Conclusion

The Companies Act, 2013 provides for a speedy process of dissolution of defunct companies and companies which persistently violate statutory provisions. Even though the company is dissolved the liabilities of Directors may persist relating to statutory violations. The restoration related provisions provide an effective opportunity to the promoters and directors to challenge wrongful or erroneous deregistration. The onus would lie upon the applicants to demonstrate the absence of grounds which would otherwise permit such deregistration. Since the 2013 Act became fully effective, the Registrars have become active in sending notices to the companies which prima facie appear liable for deregistration. Such notices are also being posted at the MCA website. It is worth noting that companies must be cautious in dealing with such notices. After all, should the company be deregistered the Directors and members may yet be proceeded against for civil or criminal liabilities, if applicable under the law. The CODS provides ample opportunity to alert Directors to correct any non-compliances which might cause the Registrar to suspect fulfilment of either grounds for deregistration.

  *Bhumesh Verma is Managing Partner at Corp Comm Legal and can be contacted at bhumeshverma@corpcommlegal.com and Somashish, Fifth Year B.A. LL.B. (Hons.) student, School of Law, Christ (Deemed to be University), Bangalore.

[1] PTI, Shell companies crackdown: Govt. to deregister 1.20 lakhs more firms, Livemint <http://www.livemint.com/Politics/QezF00YdFhnQiv4Nb4l0wN/Shell-companies-crackdown-Govt-to-deregister-120-lakh-more.html> (last visited on 1-3-2018).

[2]    2016 SCC OnLine Del 6476.

[3]    2012 SCC OnLine Del 302 : (2012) 112 SCL 99.

[4]    (2010) 155 Comp Cas 157 (MP), decided on 8-2-2010 (Madhya Pradesh  High Court).

[5]    (2017) 205 Comp Cas 439, decided on 7-11-2017 (NCLT New Delhi).

[6]    (2017) 205 Comp Cas 435, decided on 10-11-2017 (NCLT Ahmedabad).

[7]    Condonation of Delay Scheme, 2018, General Circular No. 16 of 2017.

  Tweet

The post Company deregistration and CODS under the Companies Act, 2013 appeared first on SCC Blog.

Company deregistration and CODS under the Companies Act, 2013 published first on https://sanantoniolegal.tumblr.com/