Dormant V/s Defunct Companies

Article explains What is dormant Company, What is a defunct company, Status of a Defunct Company, Process To Apply For Dormant Status, Conditions for obtaining the status of dormant company, Dormant Company Compliances requirement, What are the benefits and exemptions provided to a dormant company and How to reactivate a Dormant company?

What is dormant Company?

In common parlance, the word ‘Dormant’ means inactive or inoperative. Dormant company is defined under section 455 of the companies act, 2013. 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.

What is a defunct company?

A defunct Company means a company which has Nil asset and Nil liability, and failed to commence business within one year of incorporation. 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 under section 248 of the companies act, 2013.

Status of a Defunct Company

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 which 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 as per section 149 of the companies act, 2013 and pay such annual fees as may be prescribed by the Registrar.

Process To Apply For Dormant Status

1) The company will fix and Convening the Board meeting for taking approval of Board and also approving the notice of General Meeting for taking approval of Members

2) Passing special Resolution into the General Meeting

3) Filing of MGT-14 form within thirty (30) from passing of Special resolution

4) Filing of E-Form MSC-1 to Registrar for making application for dormant status of company

5) Registrar shall issue certificate through e-mail confirming the application in Form MSC-2.

Conditions for obtaining the status of dormant company:

• no inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
• no prosecution has been initiated and pending against the company under any law;
• the company is neither having any public deposits which are outstanding nor the 0company is in default in payment thereof or interest thereon;
• the company is not having any outstanding loan, whether secured or unsecured:
• Provided that if there is any outstanding unsecured loan, the company may apply under this rule after obtaining concurrence of the lender and enclosing the same with Form MSC-1 ;
• there is no dispute in the management or ownership of the company and a certificate in this regard is enclosed with Form MSC-1;
• the company does not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government or any State Government or local authorities etc.;
• the company has not defaulted in the payment of workmen’s dues;
• the securities of the company are not listed on any stock exchange within or outside India.

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: minimum of 2 Director

3. OPC: minimum of 1 Director

• A dormant company shall file a “Return of Dormant Company” annually, duly audited by Chartered accountant in 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.

How to reactivate a Dormant company?

In order to move from inactive to green active the company will have to:

• File form MSC-4
• File MSC-3
• And pay a prescribed fee Further,
• Once the above points are done, the Registrar will issue the certificate in form MSC-5 allowing the status of an active company.
• In some cases, If the registrar has a reason to believe that the company that has applied for the dormant company status has been actually functioning, after completing enquiry and also after giving the company a reasonable opportunity to be heard, may treat the company as an active one.
• If the company fails to comply with anything mentioned under the grounds of the application for status of the Dormant company, then the directors shall apply for obtaining the status of an active company within 7 days.