Defunct Company: Methods to Fast track exit

Introduction

Defunct Company is a company which does not have any asset or any liability. The Defunct company that fails to commence business in its first year of establishment.

On the 5th of  April 2017, the most awaited procedure of Fast track Exit is activated. Section 248 of the Companies Act 2013 deals with the fast-track exit procedure. Strike Off mode was introduced by the Ministry of Corporate Association to give an opportunity to the Defunct Company to get them struck off from the Register of Companies.

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Two methods to Fast track exit:

Suo moto by Registrar:

The Registrar can remove the company if:

  • The company has failed to commence any business in a year of its incorporation.
  • If a company has not carried out 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.

The Registrar of Companies will send a notice to a Company and to all the directors of the Company. Stating his intention to remove the name in the notice. Seek the representation of the Company in 30 days.

Voluntary removal of the name:

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

Companies which cannot apply for fast track exit

  • Section 8 Companies.
  • Those Companies which are already registered by the government.
  • Companies which are delisted due to non-compliance with listing regulations or listing agreement or any other statutory laws.
  • Companies that are on the verge of vanishing.
  • Although if a company is being investigated then also it cannot apply for a fast track exit.
  • If the company has a letter issued by the registrar and the reply is still pending then it is not eligible to apply or fast track exit.
  • If the company is having any pending cases in the court.
  • The company’s application for compounding is pending.
  • Companies that are unable to pay the money to the public if they have taken public deposits.

Dormant company

Dormant Company is a company that is an inactive Company. Section 455 of the Companies Act 2013 deals with the provisions of Dormant Company. As per Companies Act, 2013 Dormant company is registered to keep the following objectives in mind:

  • Formed with an idea for the future.
  • Have a hold on an asset or intellectual property.
  • Do not have a significant transaction.
  • the company being inactive.

Procedure to obtain Dormant Company

  • You have to call a Board Meeting to fix the date and time of the Extraordinary General Meeting.
  • Have to ask the chartered accountant to issue a certificate.
  • You have to hold an extraordinary general meeting.
  • The company has to pass a special resolution to get the status of a dormant company.
  • The director of the company should be authorized to make an application for Dormant with ROC.
  • The company should file E-form MGT-14 with ROC for filing of the special resolution.
  • After the filling of the form MGT-14, File Form MCS-1 with the registrar along with the required attachments.
  • Registrar will be sending an e-mail to the approval of the application.

Benefits and Drawbacks of Dormant Company

  • The company which registers themselves as Dormant Companies gets an advantage of fewer rules and regulation cost as there are only minimal rules which are applicable to the dormant company.
  • Dormant Company does not require to include a statement of cash flow in its financial statement.
  • Dormant Company has to organize two board meetings in a year with a gap of 90 days between them.
  • There is no need to rotate auditors every 5 years. There is no rule for the auditor rotation.

Also read: Audit an Auditors Amendment rules 2018

Difference between Dormant and Defunct Company

According to Section 455 of the Companies Act, 2013 the name of the company is entered in the register of dormant companies when the company has been inactive (not carrying on any business or operation) for the preceding two financial years.

On the other hand, when the company fails to :

  • successfully run its business within one year of the company’s establishment
  • or company is not carrying any business or operation since the two preceding financial years
  • has not applied for obtaining the status of a dormant company under section 455

then the company is treated as a defunct company and should be made to go on strike off.

Conclusion

In the end, we say that as per the provisions mentioned Registrar of Companies has the power to issue a notice to change the status of the Company. From an Active company to a Dormant company or strike off of Companies after the trigger of the above-mentioned conditions.

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About the Author:

Himanshu Jain is the founder of LegalRaasta – India's top portal for registration, trademark, return filing and loans. Himanshu is a CFA (US) & MBA (ISB). He has over 8+ years of corporate / consulting experience with top firms like McKinsey