The Centre identified over 2.38 lac shell companies between 2018 and 2021. In 2019, the Ministry of Corporate Affairs (MCA) struck off one in three companies from its records as part of a plan to crack down on shell or paper companies. The centre's efforts to weed out shell companies is no news, but before that, let's get a grip on - What is 'Shell Company' and who defines 'Shell Company'? The Gauhati HC in its judgement in March 2019, offers some clarity.
What is ‘Shell Company’? Whether authorities are right in branding a company as ‘Shell Company’?
Assam Company India Ltd.
v.
Union of India
| WP(C) NO. 2572 OF 2018, March 7, 2019 | Gauhati HC
HC- ‘Shell Company’- No Statutory Definition.
The expression ‘Shell Company’ has not been defined under any law in India. Therefore, there is no statutory definition of shell company, be it in fiscal statutes or penal statutes. The Companies Act , 1956/2013 does not define the expression ‘shell company’. In Concise Oxford English Dictionary 11th Revised Edition, Shell Company has been defined as a non-trading company, used as a vehicle for various financial manoeuvers.
HC- Shell Company exists only on paper without having any office or employee.
In popular parlance, a shell company is understood as having only a nominal existence; it exists only on paper without having any office and employee. Just like a shell which has a thick outer covering but is hollow inside, a shell company is a corporate entity without having active business operations or significant assets.
It may be used as a deliberate financial arrangement providing service as a tool or vehicle of others without itself having any significant assets or operations i.e., acting as a front. Popularly shell companies are identified as companies which are used for tax evasion or money laundering, i.e., channelizing crime tainted money or proceeds of crime into the formal economy.
But just being a paper company and not having any assets or business operations per se is no offence. A corporate entity may be set up in such a fashion with the objective of carrying out corporate activities in future. That would not make it an illegal entity.
HC- Straightaway branding Company as a ‘Shell Company’ was not justified.
In the opinion of the Court, considering the negative implications of being branded as a shell company, it was not justified either on the part of the SFIO or SEBI to treat petitioner as a shell company straightaway and thereafter to initiate investigation to justify such branding.
Principles of natural justice would require that before such branding, petitioner should have been put on notice and afforded a reasonable opportunity of hearing as to why and on what grounds it was being suspected to be a shell company and only if the response was found to be not satisfactory, such a finding could have been recorded.
A finding of shell company de hors any notice or hearing would not be justified having regard to its negative implications and serious consequences. In the case of petitioner , the circumstances and the context in which it has been declared as a shell company is a virtual condemnation but it is a condemnation without a hearing. That apart, there is also the question of the State or its agencies using an expression which is not defined in any law.
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