When a company, whether private or public, ceases to exist or goes bankrupt and is forced to close down, it is said to be a defunct company. The term is not just used to indicate the closing down of a company or business. It applies to many economic entities such as currencies, organisations, practices, and brands. They can be deemed defunct if they are no longer functional or are now ancient in the current market.
A defunct company, for a multitude of reasons, can stop functioning and cancel all financial operations in the market. Financial difficulties, major geopolitical changes, and structural vulnerabilities can lead to such a situation for a business, depending on its strength and position in the market.
As per the Securities and Exchange Board of India (SEBI), a firm that has gone out of business or is deemed a defunct company may legally trade its shares until it delists them or cancels its registration entirely. In order to delist, the business and its owners are expected to follow the guidelines and protocols established by SEBI.
Some of the most common reasons for companies closing down include bankruptcy, business dissolutions, inability to meet market demands, or inability to compete with other businesses.
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Understanding the fast-track exit
A fast-track exit is a procedure that enables a defunct company to get its name struck off from the register of companies. This act allows a business to close down officially. It must be initiated by a company representative by providing the required documents and filing an application with the registrar. The prescribed fee for finalising an application is Rs. 5,000.
The following documents must be presented by the defunct company to fast-track exit successfully:
- Copy of the board resolution
- Indemnity bond
- An affidavit
- Statement of account
Certain conditions must be met for a company to be officially deemed a defunct company by the ROC for a fast-track exit. These conditions include:
- No business is done by the company for a period of one year since its incorporation.
- The company has not conducted any business activity in the last two financial years and hasn’t sought ‘Dormant Company’ status.
A company must be deemed dormant before becoming defunct. A dormant company is still legally active or present, but no business takes place. In the next section, we shall examine the differences between a dormant and a defunct company.
Also, it is essential to note that the ROC, or Registrar of Companies, sends a notice to the company and its directors to confirm the official removal of its name from the register. This notice should be responded to within thirty days.
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Difference between a dormant and defunct company
Let us first establish what the terms dormant and defunct mean in the context of businesses. Dormant companies are still active, and their legal status is maintained. They only minimise operational costs, pause all financial decisions, and take a break or hiatus from active business.
On the other hand, a defunct company does not exist anymore or has failed to commence any sort of business. In simple terms, comparing a dormant and defunct company is the same as comparing inactivity with the closure of a company.
When a company has not been operating for around two years or has not been operational (in any capacity) for at least a year, their names are added to the register of dormant companies. Even after doing so, if a company's owner does not step forward to alter the current situation, the company can eventually be struck off by the ROC and deemed a defunct company that simply ceases to exist.
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Conclusion
Different factors can trigger the closure of a business, deeming it a 'defunct company, with the most common being bankruptcy. This can be a challenging and stressful situation for any company. It is unfortunate when a company's debts exceed its assets, leading to bankruptcy and, ultimately, its closure. Secondly, when a company engages in illegal or fraudulent activities, which can damage its reputation and lead to customers leaving, it can be forced to close down under public pressure. Instances such as this can cause the company's market position to decline, resulting in it becoming a defunct company. A basic understanding of the difference between a dormant entity and a defunct company is also crucial for those looking to learn the nuances of investing.
