Dormant and Defunct company

DORMANT AND DEFUNCT COMPANY

A Company is always started by its founders with a motive of continuous growth, huge profits in the markets, but sooner or later some companies are not able to make such impacts and business starts to show negligible returns, the accounts of the company doesn’t show much profits or it doesn’t show growth and looks very stagnant or inactive or it looks that it is inoperative, those companies are referred to as Dormant companies.

As we now know what Dormant companies are, we must know that when a company is considered dormant and what all companies could apply to be a dormant company. According to sub section (1) of section 455 of Companies Act 2013, Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company. The companies which have not filed their annual returns or revenues for two or more consecutive years then that company could also be considered as a dormant company.

As we now know what Dormant companies are, we must know that why do people start with some dormant companies and why do companies convert to a dormant company over some years, the dormant companies could hold assets or intellectual property and use it later. But why do these companies do such things, the reason is cost advantage, as a restart of a company is always way better than starting a fresh company, as a fresh company has to create market demand, for its products make people aware about it and do a lot of stuffs which might not be needed in the case of reviving a dormant company.

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As we know that what all companies are considered as dormant companies, we must also know that what all companies or types of companies could apply to get a status of a dormant company, there are certain provisions which a company must meet before attaining the status of a dormant company. Some of these provisions are :

(1) There should be no legal inquiry, inspection, prosecution pending against the company at the time of its filling of the application
(2) There should be no outstanding deposits or any defaults in payments of amount to any interest or fees due.
(3) There should be no outstanding loan whether it be a secured loan or an unsecured one.
(4) There shouldn’t be any disputes or arguments between the directors of the company for the ownership of the company and a certificate for the same should be submitted with the registrar in this regard.
(5) There should not be any dues on the taxes, whether it to be the central, state or local authorities and there should be no default in the payments of the wages of the workers
(6) There should be no securities listed on any stock exchange within or outside India during the time of submitting the application for applying to be a dormant company.

Defunct Companies

A defunct company refers to a company which fails to commence business within one year or its opening or incorporation, the company does not possess any kind of assets or liabilities. According to the companies act 2013 a defunct company does not gets involved in any business activities and they could get their names removed from the Register of Companies under section 48 of the companies act 2013.

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Dormant and Defunct companies are closely the same as they both are inactive companies who does not run any business activity, the only differences which are between a dormant and a defunct company is that of the running of the business even after one year of its establishment or incorporation, if the company becomes dormant after one year of its incorporation then it could be termed a dormant company otherwise if shuts down within one year of its establishment, then the company is referred to as defunct company, otherwise they both are the same: not functioning or generating any revenue and shows clearly no chances of future growths and if in case the dormant company does not gets revived within 5 years of receiving its dormant statues the name of the company is removed from the list or register of names of the companies, if it gets revived or gets active within 5 years of that then the company would be considered active and could perform its different functions. A company could not the status of a dormant company for more than 5 years if its over 10 years the company is not considered to be dormant anymore and later their name gets removed from the register of companies.There are certain exemptions that a dormant company over other company, these are:

(1) A dormant company has very few or negligible compliance costs as there are close to nothing compliances applicable to a dormant company
(2) It is not required for a dormant company to include cash flow in its financial statements.
(3) A dormant company shall only hold 2 board meetings in a year and there should be at-least 90 days gap in between the meetings

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As we know that a dormant company could be revived and started again but there is a defined structure to follow for that. In order to revive a dormant company, certain forms have to be filled like file form MSC-4 and file MSC-3 and a prescribed fee has to be paid for that. After all this is done the registrar issues certificates in form MSC-5 which allows the dormant company a status of an active company. If any of the above functions is by any chance not been able to complete or faces some problem, then the directors of the company could again apply for obtaining the status of an active company within 7 days to that.

Author: Harsh Chaudhary,
LLOYD LAW COLLEGE 1st year

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