Companies Act Section 251

Companies Act, Section 251: Fraudulent Application for Removal of Name

Section 251 of the Companies Act, 2013 provides for stringent consequences in situations where a company fraudulently applies for removal of its name from the register of companies under Section 248(2). This provision is designed to prevent the misuse of the process of voluntary dissolution and to ensure that the procedure is not adopted as a tool to evade liabilities, deceive creditors, or defraud any person.

The section imposes both civil and criminal liability on the persons responsible for such fraudulent conduct, and it empowers the Registrar of Companies (ROC) to initiate further legal action, including prosecution.

When Does Section 251 Apply?

This section is triggered after a company has made an application under Section 248(2) a provision which allows a company, after extinguishing all liabilities, to voluntarily apply for removal of its name from the register of companies.

Section 251 applies retrospectively if it is discovered that the application:

Was made with the intention of evading financial or other legal obligations;
Was intended to mislead or deceive the company’s creditors;
Was made with fraudulent intent to escape liabilities owed to any person or stakeholder.
Even if the company has already been notified as dissolved, Section 251 holds that legal consequences shall still follow against those involved in the fraudulent application.

Consequences of Fraudulent Application Under Section 251

If a company is found to have made a fraudulent application under Section 248(2), the following legal repercussions arise:

1. Civil Liability of the Persons in Charge of Management

The persons responsible for managing the affairs of the company typically directors, officers, or any individual who was in control at the time of the application shall be:

Jointly and severally liable to compensate any person or entity who suffered loss or damage as a direct result of the fraudulent removal of the company’s name.
“Joint and several liability” means that each person can be held individually responsible for the full extent of the loss, or all of them can be held collectively liable.
This liability survives even though the company has been legally dissolved, ensuring that stakeholders are not left without recourse merely due to the company's non-existence.
2. Criminal Liability: Punishment for Fraud

In addition to civil liability, the persons responsible shall also be:

Punishable for fraud as per the provisions of Section 447 of the Companies Act, 2013.
Section 447 imposes severe penalties for fraud, including:
Imprisonment for a term which may extend to ten years (with a mandatory minimum of six months in certain cases), and
A fine which may extend to three times the amount involved in the fraud.
This ensures that individuals do not escape the consequences of deliberately misleading authorities and stakeholders through misrepresentation or concealment.
3. Registrar’s Power to Recommend Prosecution

Sub-section (2) of Section 251 grants additional authority to the Registrar of Companies (ROC) to act against fraudulent filings.

If the Registrar determines that the application under Section 248(2) was filed fraudulently, he may recommend prosecution of the responsible individuals.
This provision underscores the proactive regulatory oversight role of the Registrar and ensures that such cases can be pursued through the judicial system for criminal prosecution.
Objective and Implications

Section 251 reinforces the principle that the removal of a company’s name from the register is a serious and legally significant process. It must not be abused by companies or their management as a method to:

Escape financial obligations, Avoid legal action from creditors or regulators, Mislead investors or any other stakeholders.
This provision is an important safeguard against corporate fraud and provides strong deterrents to ensure that dissolution applications are made honestly, transparently, and only after discharging all liabilities.