When a business ceases to operate or fails to take off after incorporation, it may be labelled as a defunct company. These companies no longer engage in commercial activities and often hold no assets or liabilities.
To maintain transparency in the corporate ecosystem and avoid unnecessary regulatory burdens, the Ministry of Corporate Affairs (MCA) in India allows such companies to be officially removed from records through a process called Fast Track Exit (FTE).
The FTE scheme, launched on April 5, 2017, was designed to simplify the closure of companies that are no longer in business. This blog will help you understand what qualifies a company as defunct, how the strike-off process works, and why it matters.
What is a Defunct Company?
A defunct company refers to one that has ceased operations, failed to commence business, or gone bankrupt. Typically, such a company:
Has no assets or liabilities
Has not started a business within one year of incorporation
Has remained inactive for the past two financial years
The term “defunct” isn’t limited to companies alone- it can also refer to outdated laws, brands, or technologies that have lost relevance or utility.
Understanding the Fast Track Exit (FTE)
The Fast Track Exit (FTE) mode, introduced under Section 248 of the Companies Act, 2013, provides a quick and simplified process for shutting down inactive companies.
How it works-
The RoC may initiate the strike-off process suo motu if:
The company fails to commence business within one year of incorporation
The company has not carried out any business or operations for two consecutive financial years and has not applied for dormant status
A notice is issued to the company and directors of the company.
The company is given 30 days to respond or object.
If no valid response is received, the RoC proceeds to strike off the company’s name from the official register.
This process provides an efficient exit route for companies that are no longer operational, saving both time and cost.
What Causes a Company to Become Defunct?
A company becomes defunct when it stops functioning as a business entity. While some closures are involuntary due to financial issues, others are strategic. Key causes include:
1. Bankruptcy
Financial insolvency due to excessive debt or poor performance.
Inability to meet operating costs and obligations.
2. Internal Fraud or Misconduct
Mismanagement, fraudulent activities, or governance issues can erode trust and lead to shutdowns.
3. Loss of Market Trust
Companies that fail to adapt to changing customer needs or lose credibility often face closure.
4. Mergers and Acquisitions
Sometimes, companies shut down due to strategic consolidation.
The business may continue under a new entity, but the original company becomes defunct.
These causes highlight both internal and external pressures that can lead a company to cease operations.
Examples of Defunct Companies in India
Understanding defunct companies becomes easier with real-world examples. Here are a few notable Indian companies that shut down in recent years:
1. Atlas Cycles
Reason: Operational losses, outdated technology, and declining demand
Status: Shut operations in 2020 after 70+ years in business
2. Hike Messenger
Reason: Intense competition from WhatsApp, unclear monetisation
Status: Discontinued in 2021
3. Shuttl
Reason: Post-pandemic slowdown, funding challenges
Status: Ceased operations in 2022
Frequently Asked Questions
What are defunct companies?
A defunct company is a company that has ceased all commercial operations and has no significant assets or liabilities. It may have:
Failed to commence business within one year of incorporation, or
Remained inactive for two consecutive financial years without applying for dormant status.
Defunct companies are considered non-functional and may be struck off from the Register of Companies (ROC) by the Ministry of Corporate Affairs (MCA) through the Fast Track Exit (FTE) process.
What is the section of the defunct company under the Companies Act, 2013?
Section 248 of the Companies Act, 2013 – This section empowers the Registrar of Companies (RoC) to remove the name of a company from the register if it:
Has not commenced business within one year of incorporation, or
Has not carried on any business or operation for the two immediately preceding financial years.
Can I use the name of a defunct company?
Yes, you can use the name of a defunct company, but only after the name becomes available in the MCA database.
Once a company is struck off, its name is typically reserved or protected for a limited time (usually 20 years) to prevent misuse.
To use the name, you must check its availability on the MCA portal and ensure it is not under restriction or too similar to any active or recently struck-off company.
Can a defunct company be revived?
Yes, a defunct company can be revived under certain conditions.
The company or any interested party (like a shareholder, director, or creditor) can file an application for revival with the National Company Law Tribunal (NCLT) under Section 252 of the Companies Act, 2013.
The application must provide valid reasons and supporting documents (e.g., proof of continued business interest or error in strike-off).
If the NCLT is satisfied, it may order the restoration of the company's name to the Register of Companies, making it operational again.
