Dormant Company and Defunct Company

 DORMANT COMPANY AND DEFUNCT COMPANY

DORMANT COMPANY

The concept of dormant company is newly brought in the Companies Act, 2013. It seems like Indian legislature have borrowed it from the legal principles of company law applicable in UK. Keeping in mind with India’s investor friendly policies the provision of dormant companies can be seen in the light of promoting and facilitating the procedure of incorporation and functioning of a company.

According to section 455 of the Companies Act 2013, a company which has been “inactive” (not been carrying out any business) and is registered for a future project or to hold an asset or intellectual property and has no “significant accounting transaction” may apply to the registrar for granting of the status of a dormant company.

The explanation in section 455 states two main terms i.e “significant accounting transaction ” and “inactive company “.

》”Significant Accounting Transaction” means any transaction rather than–

● Payment of fees by a company to the Registrar.
● Remittance made by it to fulfil the requirements of this Act or any other law.
● Share allotment to comply with the clauses of this Act.
● Amount paid for maintaining its office and records.

“Inactive company” is company which has not been carrying out any sort of business , or has not made any notable accounting transaction since the last two financial years, or has not filed any financial statements and annual returns in the last two financial years.

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Steps to comply with for getting a status of dormant company:-

1. By passing a resolution in the general meeting of the company or by getting consent of three-fourth of its shareholders in value.
2. The Company must file an application through From MSC – 1 to the Ministry of Corporate Affairs and then pay the prescribed amount under Companies (Registration Offices and Fees) Rules, 2014.
3. After attaining satisfaction, the Registrar will issue the certificate of Dormant Company.
4. The Registrar should keep a Register of Dormant Companies.

How long a company enjoy can enjoy the status of a dormant company?

A company can enjoy its status of Dormant Company for five 5 years and once the company has been granted the status of a dormant company then the Registrar may cut the name of the company from the register of companies.

Conditions to be fulfilled for acquiring a Dormant company

The provision to Rule 3 of Companies Rules 2014 lays down several conditions that a company must attain before acquiring the status of a dormant company.

Some of the conditions are as follows :-

● There should have been no inspection, inquiry or investigation ordered or held up against the company.
● No conduction of legal proceedings should have been initiated and pending against the company under any law.
● The company shouldn’t have any public deposits which are outstanding nor should it be in default in payment thereof or interest thereon.
● The company should neither have any outstanding loan, whether secured or unsecured.
● No dispute should arise in between the management or ownership of the company and a certificate in this regard should be enclosed with Form MSC-1.
● The company should neither have any outstanding statutory taxes, dues, duties etc. due to the Central Government or any State Government or local authorities.
● The company should not have failed to pay the payment of workmen’s dues.
● The securities of the company should not be listed on any stock exchange within or outside India.

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DEFUNCT COMPANY:

Section 248 of the company’s Act, 2013 gives power to registar to remove name of a company from register of Companies.
As we can understand from the name itself defunct means un-operational. Defunct company is a company whose assets and liabilities are none and it fails to commence business at its first year of establishment.

In the case of Floating services Ltd v MV San Francesco (2004) the capacity of the company ceases on becoming defunct. In this case the date on which a suit was filed in the the name of the company it has been struck off the register as being defunct , the court held it invalid.

In April 2017, procedure of Fast track exit was activated. Section 248 also states the fast track exit procedure.

Two methods of exit fast track are:-

(i) suo moto by registar:

The registar may strike of a company  if

● The company has failed to commence any business in a year of its incorporation.
● If a company hasn’t executed any business or Activity for the preceding 2 financial years. Neither has it sought the status of Dormant Company under Section 455 of the Act.

In this situation the registrar has to send a notice to the company and all its directors telling them that he has the intention to remove the name of the company from the register.

(ii) Voluntary removal of the name :

In this situation the Company itself has to file file an application to the Registrar of Companies(ROC) for striking off the name by itself. But before that company has to:-

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● Extinguish all its liabilities.
● Then it has to pass a special resolution or obtain the consent of 75% members in the terms of the paid up share capital.
● And then the company can file an application in the prescribed manner with registers of company for removing the name of the company.

According to section 8 the companies cannot apply for fast track exit if :-

1) The company is registered by government.
2) The company is being investigated.
3) The company is on the verge of vanishing.
4) The company is having any pending legal matters.
5) The company is charitable company
6) There is a letter issued by the registrar to the company and its reply is still pending.

Difference between Dormant company and defunct company ;-

》 The most important difference between both of them is that in case of dormant company the company gets registered because of being inactive and having to no significant accounting transaction. while in defunct company the company’s name is removed from the register of companies if the company fails to commence its business within a year of its establishment.

Author: sarthak udaipuria,
ICFAI LAW SCHOOL HYDERABAD, 4TH YEAR

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