Dormant Company

Dormant Company

In case of a company is formed and registered under Companies Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, those companies or an inactive company may make an application to the Registrar for obtaining the status of a dormant company.

“Inactive Company” means a company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years, or has not filed financial statements and annual returns during the last two financial years;

Dormant Company is extremely advantageous to those who want to implement any future project or hold an asset or intellectual property under a corporate name for its future purpose. The Dormant status is extremely helpful for those who want to invest in an asset a much affordable price for future projects.

Further, when a company needs to discontinue its business due to certain reason and restart later on, it may apply for obtaining dormant status so that it’s exempted from complying the mandatory filing requirements and other rules. This helps the company to maintain the company name without having to go through winding up and incorporation process whole again. A public company or a private company or a one person company may apply for dormant company status.

A dormant status may be obtained by following the provisions laid under Section 455 of the Companies Act, 2013 and Rules made under Companies (Miscellaneous) Rules, 2014.

According to Section 455 of the Companies Act 2013, a company formed and registered under this Act for a future project or to hold an asset or intellectual property and “has no significant accounting transaction”, such a company or An Inactive Company may obtain the status of a dormant company by making an application to the Registrar.

Few companies may not be able to start any business for a long time since incorporation due to the nature of their business and hence has no significant accounting transaction. Such a company may be called as an “Inactive company”.

Inactive Company:   

As per Section 455(1)(i) of the Companies Act, 2013, “Inactive Company” means a company which

• Has not been carrying on any Business or Operation, or
• Has not made any Significant Accounting Transaction during the last two financial years, 
• Has not filed Financial Statements and Annual Returns during the last two financial years. 

Significant Accounting Transactions:

As per Section 455(1)(ii) of the Companies Act, 2013, Significant Accounting Transaction means any transaction other than,

• Payment of Fees by a company to the Registrar
• Payments made by it to fulfill the requirements of this Act or any other law
• Allotment of shares to fulfill the requirements of this Act
• Payments for maintenance of its office and records

A dormant company status may be retained in the register by maintaining minimum number of directors, filing documents and paying annual fee as may be prescribed to the Registrar.  The company may become an active company on an application accompanied by such documents and fee to the registrar.

The registrar shall after issuing a notice enter the name of the company in the register of dormant companies if such a company fails to file financial statements or annual returns for two financial years consecutively. 

Pre-Requisites: 

A company shall apply for dormant status only if it satisfies the following: 

1. No inspection, inquiry or investigation has been ordered or taken up or carried out against the company
2. No prosecution has been initiated or pending against the company under any law
3. The company is neither having any public deposits which are outstanding nor is the company in default in payment thereof or interest thereon
4. There is no dispute in the management or ownership of The Company;
5. The company does not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government or any State Government or local authorities etc.
6. The company has not defaulted in the payment of workmen’s dues
7. The securities of the company are not listed on any stock exchange within or outside India
8. The company is not having any outstanding loan, whether secured and unsecured. If the company has any outstanding unsecured loan then the company may apply for status of dormant only after obtaining consent from the lender. 

The application has not been made with an objective to deceive the creditors or to defraud any other person 

Procedure for obtaining status of Dormant Company:

1. Make sure the company is eligible to apply for the dormant status by checking the eligibility criteria in above Pre-Requisites.

2. Convene Board Meeting by issuing seven days notice and pass the resolution

• Authorization to director to make application for dormant with ROC.
• Fix date, time and venue general meeting and to issue notice.
• Engage an Auditor/ Chartered Accountant to issue certificate. 

3. Convene an Extra Ordinary General Meeting and pass

• Pass Special Resolution and to make application in Form MSC-1
• Authorize to file E-form MGT-14 with ROC.

4. File Form No. MGT-14 within 30 days of passing special resolution

5. Make an application in Form No. MSC-1 within 30 days of passing special resolution along with:

• Certified true copy of board resolution authorizing making of this application.
• Certified true copy of special resolution authorizing for obtaining dormant status
• Auditor’s certificate
• Statement of affairs duly certified by Chartered Accountant or Auditor(s) of the company
• Copy of approval or no objection certificate (NOC) from the regulatory authority in case company is regulated by such authority
• Latest financial statement and annual return of the company is mandatory to attach in case the same is filed to Registrar
• Consent of the lender if any loan is outstanding
• Certificate regarding no dispute in the management or ownership;

6. The Registrar on consideration of the application shall issue a certificate in Form No. MSC-2 allowing the status of a dormant company to the applicant. 

Conditions required to be fulfilled for maintaining the status of Dormant:

1. A dormant company must have minimum of directors which is 3 in case of public, 2 in case of private and 1 in case of an OPC.
2. A dormant company shall file a “Return of Dormant company annually in Form No. MSC-3 within 30 days from the end of each financial year attaching financials audited by a CA in practice. The provisions relating to rotation of auditor is not applicable to a dormant company.
3. The company shall continue to file the returns of allotment and change in directors, whenever the company allots any security to any person or there is any change in the directors of the company. 

Procedure to make a Dormant Company Active: 

1. If company wants to get Active status, it has to make an application in Form No. MSC-4 with ROC, along with the return in Form No. MSC-3 for the financial year in which the application is made.
2. The registrar shall strike off the name of the company which remains as a dormant company for 5 consecutive years.
3. The Registrar on consideration of the application shall issue a certificate in Form MSC-5 allowing the status of an active company to the applicant.
4. If company carries out any significant transaction or any act affecting its dormant status during the dormant period, the directors shall within 7 days from such event, file an application with ROC in Form No. MSC-4, for obtaining the status of an active company. 

Other provisions:

1. A dormant company must minimum of directors which is 3 in case of public, 2 in case of private and 1 in case of an OPC.
2. The provisions relating to rotation of auditor is not applicable to a dormant company.
3. A Dormant Company need not enclose cash flow statements in its annual financial statement.
4. A Dormant Company is required to convene only one meeting of the Board of Directors in each half of a calendar year and the gap between the two meetings shall not be less than 90 days.
5. A dormant company shall pay an annual fee and File return in MSC-3 along with attachments.
6. Dormant companies shall not be counted for taking into account the ceiling limit of 20 companies applicable for an auditor.

Annual Fee payable by a dormant company

Filing Fee Payable by a Dormant Company

Conclusion

The status of dormant company is helpful for those where not carrying out business for last 2 financial years and is not intending to continue nearly up to 5 years. 

This means that the maximum number of years for which a company shall remain dormant is for 5 consecutive years, beyond which the registrar shall strike off the name of the company. 

Further, the Registrar may also remove the name of dormant company and make it active if it has reasonable cause to believe that a dormant company has been carrying out business operations. Hence, it is important that, dormant company is either making efforts to carry out its business in coming 5 years and become active, which shall otherwise cause the registrar to strike off.