Difference Between Dormant Company and Defunct Company

25 Sep, 2021

In General language, dormant company and the defunct company is the same but as per companies act both modes of the closure of a company has a different meaning which we will discuss in this article.

What is Dormant Company?

The concept of Dormant Company has introduced under the Companies Act, 2013 [1] . In a simple word, Dormant Company means an inactive Company.

Section 455 of the Companies Act 2013 deals with the provisions of Dormant Company. As per Companies act Dormant Company means a company which is formed or registered for the below objectives:

• Incorporated for the future project;
• Hold an asset or intellectual property;
• Has no significant transaction;
• Is an inactive company.

Such Company can file an application with a registrar to obtain the status as Dormant Company.

Defunct Company Meaning

The word ‘Defunct’ means non-operational, outdated

A defunct company refers to an organization that has zero assets and zero liabilities and fails to begin a business within a year of its incorporation.

Such companies are considered useless as they are not providing any benefit to society.

As per the Companies Act, 2013, a defunct company is a company that is not involved in any business activities. Such companies’ names get removed from the Register of Companies.

Examples of Defunct Companies in India

• Bank of Bombay
• Tata Textiles
• Jet Airways

Status of a Defunct Company

A defunct Company has now fallen into the category of a dormant company. The Government provides financial support to such companies.

Limited Liability Partnership in a Defunct Company A partnership between two parties ends in a company if the company becomes defunct. It is no longer considered active.

In the above situation Inactive Company means a company has not:

• carried any business or operations
• made any significant transaction during the last two financial years
• Filed financial statements and annual returns during the last two financial years.

Significant Transaction means any transaction made by the company except below transaction:

• Payment of fees to the registrar
• Payment made to fulfill the requirements of any Act
• Allotment of shares to fulfill the requirements of any Act.
• Payment made to maintain the records of its office.

Also, the registrar may issue notice the Company who has not filed the financial statements or annual returns for two consecutive financial years to enter its name into registrar maintained for a dormant company.

To maintain the status of a dormant company, a company shall have a minimum number of directors and pay such annual fees as may be prescribed by the Registrar.

What is the procedure to obtain the dormant company?

• Call a Board Meeting to fix the date and time of EGM.
• Ask an Auditor/ Chartered Accountant to issue a certificate.
• Hold Extra Ordinary General Meeting.
• Pass Special Resolution to obtain the status of a dormant company.
• The director shall be authorized to make an application for Dormant with ROC.
• File E-form MGT-14 with ROC for filing special resolution.
• After filling of form MGT-14, File Form MCS-1 with the registrar along with the required attachments.
• Registrar shall issue certificate through e-mail confirming the application

Conditions to be fulfilled by the Company before obtaining a dormant status:

• The company shall not undergo any inspection, inquiry, or investigation or shall not initiate any prosecution against the company and pending under any court.
• The company shall not have any public deposits or interest and outstanding for payment.
• There should be an outstanding loan, secured or unsecured in Company. If there are unsecured loans then the consent of the lender should be obtained and enclosed along with the form.
• Any dispute or difference between the management and promoters of the company shall not be there and a certificate was issued to give effect is enclosed.
• The Company shall not have any outstanding tax dues.
• There shall not be any default in the payment of its workmen’s dues;
• The Company should not be listed company.

Dormant Company Compliances requirement:

A dormant company shall have a director as below: if a Company is:

1. Public Limited Company: minimum of 3 director
2. Private Limited Company: 2 Director
3. OPC: 1 Director

• A dormant company shall file a “Return of Dormant Company” annually, duly audited by Chartered accountant n such form along with the fees prescribed under the act.
• If a dormant company fails to file an annual return for consecutive two financial years Register may ask to change the status of dormant company
• Dormant company tenure is 5 consecutive year. They cannot hold status as a dormant company for more than 5 years.

What are the benefits and exemptions provided to a dormant company?

Dormant Company gets an advantage of fewer compliances cost as there are only minimal compliances applicable to the dormant company.

Dormant Company is not required to include the statement of cash flow in its financial statement.

Dormant Company shall hold only two board meeting in a year with a gap of 90 days in between the two company.

The auditors are not required to be rotated under the dormant company.

What is Defunct Company?

A defunct Company means a company who has:

• Nil asset and nil liability, and
• Failed to commence business within one year of incorporation

On 5 th April 2017 vide circular the most awaited procedure Fast track Exit is activated. Section 248 of Companies Act 2013 deals with fast-track exit procedure. Strike Off mode was introduced by the MCA to give the opportunity to the defunct companies to get their names struck off from the Register of Companies

Fast track exit can be done in below two ways:

Suo moto by Registrar:

The Registrar may by its own strike off the name of a company on its own if:

• A company has failed to commence any business in a year of its incorporation;
• The company is not carrying out any business or Activity for preceding 2 financial years and has not sought the status of Dormant Company under Section 455 of the Act.

The ROC shall send notice to the Company and all the directors of the Company stating his intention to remove the name seeks the representation of Company in 30 days.

Voluntary Removal of Name:

The Company by itself can file an application to Registrar of Companies for striking off the name. The ROC shall satisfy him that all the amount due by the Company is discharged. ROC can also issue a show cause notice in case of default in filing returns or other obligations. After satisfaction, ROC shall issue a public notice and strike off the name of Company.

Following are the companies who cannot apply for fast-track exit:

• Companies Registered Under Section 8
• Listed companies
• Companies that have been delisted due to non-compliance with listing regulations or listing agreement or any other statutory laws;
• Vanishing companies;
• Any inspection or investigation is ordered and being carried out against Company
• Companies where notices have been issued by the Registrar or Inspector (under Section 234 of the Companies Act, 1956 (old Act) or section 206 or section 207 of the Act)and reply thereto is pending;
• Any prosecution for an offense is pending in any court against the Company;
• Companies whose application for compounding is pending;
• Companies which have accepted public deposits which are either outstanding or the company is in default in repayment of the same;
• Any charge satisfaction is pending against the Company.

Difference between above two:

As per Section 455 of the Companies Act 2013 the name of the company is entered in the register of dormant companies when the company is inactive (not carrying on business or operation) during the last two financial years. In other hand, when the company has failed to commence its business within one year of company incorporation or company is not carrying on any business or operation since last two immediately financial years and has not made any application within such period for obtaining the status of a dormant company under section 455,then the company is treated as defunct company and shall be entitled to go on strike off.

It can be interpreted that, as per the provisions mentioned ROC has the power to issue a notice to change the status of the Company from Active to Dormant or strike off of Companies after the trigger of above-mentioned conditions.