The significant difference between a dormant company and a defunct company can often cause much confusion in the mindset of people.Generally, a dormant company as well as a defunct company are almost significantly the same; nevertheless, as per the Companies Act (2013), there are certain significant differences between the two types of companies discussed in this article.
What is a Dormant Company?
The term "dormant" mostly refers to anything which is not usually active or is usually functioning. The Companies Act (2013), in its Section 455, mostly defines a dormant company. According to this act, a dormant company is one in a kind that was established or registered with the following purposes or objectives in mind, such as:
- it is mostly incorporated for any future projects;
- it is in possession of any assets or intellectual property;
- it is not involved in any kind of noteworthy transactions;
- it is not an active company.
A company of this kind might apply to the registrar to be granted or allowed the status of a dormant company.
What is a Defunct Company?
- "Defunct" refers to non-functioning or outdated.
- An organization is considered defunct if it does not start a business during a year of its incorporation and has no assets and no obligations.
- These companies are viewed as worthless as they don't advance society.
- A defunct company is defined under the Companies Act (2013) as a company which is inactive in conducting any business operations. The names of such companies are however struck from the Register of Firms.
- Section 248 of the Companies Act of 2013 addresses the fast-track exit process. To enable the removal of dormant companies' names from the Register of Corporations, the MCA developed the Strike Off mode.
Dormant Company and Defunct Company: Difference
- A dormant company is usually registered but does not conduct any business operations whereas a defunct company is usually ceased or stopped its business operations and is closed.
- A dormant company in a legal sense is active but is not conducting any business operations whereas a defunct company in a legal sense is no longer in operation and is ceased.
- A dormant company is however kept for future purposes, protection of intellectual rights, as well as holding of assets whereas a defunct company no longer serves any kind of purpose as it has ceased its business operations.
- A dormant company cannot get automatically struck off as it is legally active but non-operational whereas a defunct company can get automatically struck off with the help of the registrar as well as by voluntary means.
- A dormant company can be revived again with proper filings whereas a defunct company cannot be revived until and unless it is reinstated through legal procedures.
Obtaining Dormant Company Status: Conditions to be Fulfilled
- The company will not submit to any inspections, inquiries, investigations, or start any legal action against it that is still pending in court.
- The company won't have any interest or public deposits that need to be paid back.
- The company should have an outstanding loan, whether it is secured or not. If there are any unsecured loans, the lender's approval must be sought and included with the form.
- Any disagreement or conflict between the company's promoters and management is excluded, and an enclosed certificate was given to that effect.
- There shall be no unpaid tax obligations for the Company.
- The company shouldn't have to be listed; there should be no default in the payment of its labour dues.
Obtaining Dormant Company Status: Procedure
- Determine the day and time of the EGM and call a board meeting.
- Request a certificate from a chartered accountant or auditor.
- Assemble an extraordinary general assembly.
- Adopt and pass a special resolution to grant the company the special status of a dormant company.
- The director will have the authority to apply to ROC for dormant status.
- Send the Registrar of Companies the E-form, i.e., MGT-14 to file and pass a special resolution.
- Fill out the form, i.e., MGT-14, and then file the form, i.e., MCS-1 with the registrar, by ensuring to include all important attachments.
- The registrar will then send an email attaching a certificate by verifying the application.
Re-activating a Dormant Company: Procedure
To convert from inactive to green active, the company must:
- Submit form MSC-4
- Submit form MSC-3 file and
- Pay the designated amount
- Furthermore, the Registrar will provide the certificate in form MSC-5 permitting the status of an active company after the aforementioned points are completed.
- After carrying out the investigation and providing the company with a fair chance to get heard, the registrar may, in some specific circumstances, treat a company that has been sought to be an inactive company status as active if there is a reason to think that the company has been operating as such.
- If the company ignores any of the conditions specified in the application for inactive company status, the directors have seven days to submit an application to become an active company.
Fast-Track Exit Process for Defunct Company
1) Suo moto by the Registrar:
The Registrar may, in its sole discretion, delete the company's name only in the following cases:
- A company has not started operating within a year of its incorporation;
- A company has not operated for the previous two fiscal years and has not applied to be classified as a dormant company following Section 455 of the Act.
The ROC will notify the Company and each of its directors that he intends to have the Company's name removed and request representation within a 30-day period.
2) Voluntary Name Removal:
- The Company may apply on its own to the Registrar of Companies to have the name removed.
- He will be satisfied by the ROC that the Company has paid all outstanding debts.
- In the event that returns or other obligations are not filed on time, ROC may also issue a show cause notice.
- Following the satisfaction, ROC will remove the company name and publish a public notification.
Conclusion
Understanding the differences between a dormant company and a defunct company is very important to comprehending their operational, financial, as well as any legal situations. Specific regulatory restrictions apply to both companies, especially in connection to online visibility, filing requirements, as well as the possibility of reactivation or revival.Comprehending such distinctions can aid entrepreneurs, financiers, as well as legal experts in managing the complexities of company status as well as guaranteeing appropriate adherence to regulatory frameworks.
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