Dormant company and defunct company

Dormant company and defunct company

What do you mean by dormant business?

In everyday language, the term “dormant” refers to something that is inert or inoperative. Section 455 of the Companies Act of 2013 defines a dormant corporation. According to the Companies Act, a dormant company is one that was created or registered for the following purposes:

  • Has no substantial transaction;
  • Incorporated for the purpose of a future enterprise;
  • Holds an asset or intellectual property;
  • Is a dormant corporation.

Such a company can apply to become a dormant company by filing an application with a registrar.

What do you mean by defunct company?

A defunct company is one that has no assets and no liabilities and did not begin operations within one year of establishment. 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.

Limited Liability Partnership in a Defunct Company:- Status of a Defunct Company:-

If a corporation goes out of business, a partnership between two parties comes to an end. It is no longer regarded to be operational.

In the above scenario, an inactive corporation is one that has not:

  • During the previous two financial years,
  • carried out any business or operations, or made any substantial transaction,
  • And filed financial statements and annual reports.

Any transaction done by the corporation that is not listed below is considered a significant deal.

  • Fees must be paid to the registrar.
  • Payment made to comply with any Act’s requirements
  • The distribution of shares to meet the provisions of any Act.
  • Payment made to keep its office’s records up to date.

The registrar may also give a notice to a firm that has not filed financial statements or annual reports for two consecutive financial years to enter its name into a dormant company registrar.

A business must have a minimum number of directors and pay the Registrar’s annual fees to preserve the status of a dormant company, according to section 149 of the Companies Act, 2013.

How to apply for dormant status:

 1) The corporation will schedule and convene a Board meeting for Board approval, as well as approve the notice of a General Meeting for Member approval.

2) Adoption of a special resolution by the General Assembly.

3) Submitting the MGT-14 form within thirty (30) days of the Special Resolution’s passage.

4) Submitting an E-Form MSC-1 to the Registrar in order to apply for the company’s inactive status.

5) The Registrar will send an e-mail certificate validating the application in Form MSC-2.

The following are the requirements for attaining the status of dormant company:

  • no inspection, inquiry, or investigation has been ordered, launched, or completed against the company;
  • no prosecution has been initiated or is pending against the company under any law;
  • The company does not have any outstanding public deposits, nor is it in default in paying them or the interest on them; the company does not have any outstanding loans, secured or unsecured:
  • If the firm has an outstanding unsecured loan, it may apply under this rule after getting the lender’s approval and enclosing it with Form MSC-1.
  • There is no dispute over the company’s management or ownership, and a certificate to that effect is enclosed with Form MSC-1;
  • the company has no outstanding statutory taxes, dues, duties, or other obligations to the Central Government, any State Government, or local authorities, and a certificate to that effect is enclosed with Form MSC-1; the company has no outstanding statutory taxes, dues, duties, or other obligations to the Central Government, any State Government, or local authorities, and a certificate to that effect is enclosed with.
  • 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 Corporation Requirements: A dormant company must have the following directors: if a business is:

  1. Public Limited Company: a minimum of three directors is required.
  2. A minimum of two directors is required for a private limited company.
  3. OPC: a minimum of one director is required.
  • A inactive business must file a yearly “Return of Dormant Company” in such form, duly audited by a Chartered accountant, together with the fees required by the statute.
  • If an inactive company fails to file an annual return for two years in a row, the Register may request that the status of the dormant company be changed.
  • The company has been dormant for five years. They can’t stay in the dormant company category for longer than 5 years.

What benefits and exemptions are available to an inactive business?

 Dormant companies benefit from lower compliance costs because just the bare minimum   of regulations apply to them.

  • The statement of cash flow is not required to be included in the financial statement of Dormant Company.
  • Dormant Company is only allowed to convene two board meetings each year, with a 90-day break between them.
  • Under the defunct corporation, the auditors are not required to rotate.

How do you restart a dormant business?

To transition from inactive to green active status, the company must:

  • Fill out the MSC-4 form.
  • MSC-3 is a file.
  • And you’ll have to pay a price. Further,
  • The Registrar will issue a certificate in form MSC-5 allowing the status of an active company once the aforementioned steps have been completed.
  • In rare situations, if the registrar has cause to think that the company that has requested for inactive company status has been actively operating, the registrar may treat the company as active after conducting an investigation and providing the company with a reasonable opportunity to be heard.
  • If the firm fails to comply with any of the conditions included in the application for Dormant Company Status, the directors must apply for Active Company Status within 7 days.

Author: Ankita Sharma,
Sharda University

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