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Dormant Company- Most Important Aspects

May 10, 2019     by Prasanna Nagure

The Entrepreneurs/Promoters conceive an idea to start a business which later on flourishes. These potential ideas, for reasons such as market situations, idea being ahead of its time, etc. may not work as envisioned. So, it becomes imperative for the entrepreneur to hold on for dust to settle and carry the business after some point of time. The Companies may want to stop trading for a short while or wait for market conditions to move in their favour and restart at a later stage. Hence the idea of Dormant Company was brought in legal provisions.

It can also be a useful tool for those companies which have a future project or want to hold an asset or intellectual property. The Companies which are not generating revenues can cut down their business/ administrative expenditure by obtaining dormant status.

Concept of Dormant Company in Other Parts of the Globe

In the United Kingdom, a dormant company is a Company whose transactions have been limited to payment for shares taken by subscribers to the memorandum of association, fees paid to the Registrar of Companies for a change of company name, the re-registration of a company and filing annual returns and payment made in respect of civil penalties imposed by the Registrar of Companies for delivering accounts to the Registrar after the statutory time allowed for filing.

In Singapore, a dormant company is defined by two authorities: ACRA and IRAS. For ACRA the determining factor for dormancy is the lack of transactions. For IRAS, a company that does not generate income is considered dormant. The companies deemed dormant by the authorities can be exempted from filing annual financials and submitting tax return. For the latter, a waiver has to be issued by IRAS.

Following are the answers to most relevant questions pertaining to Dormant Company in India.

  1. What is a Dormant Company under Indian Laws?

  2. As per Section 455 (1) of the Companies Act, 2013

    “Where a company is 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 make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

    Explanation.—For the purposes of this section,—

    1. “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;

    2. “Significant accounting transaction” means any transaction other than—

      1. Payment of fees by a company to the Registrar;

      2. Payments made by it to fulfil the requirements of this Act or any other law;

      3. Allotment of shares to fulfil the requirements of this Act; and

      4. Payments for maintenance of its office and records.

  3. How to obtain status of Dormant Company?

    1. A Company in its general meeting is required to pass a special resolution with consent of at least ¾th of the majority in value.

    2. After satisfying the conditions mentioned in the section 455 and rule 3 and 6, the company may apply for obtaining the status (Certificate) of dormant company. The application to obtain dormant status shall be filed with the Registrar in Form MSC-1.

    3. the registrar after being satisfied shall provide the certificate in Form MSC-2 allowing the status of a Dormant Company to the applicant.

  4. What are the compliances for a Dormant Company?

    1. No. of Board Meetings: As per Section 173(5) Dormant Company shall be deemed to have complied with the provisions of this section if at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days.

    2. Minimum number of Directors: The Dormant Company shall maintain minimum no. of Directors, i.e. 3 in case of public company, 2 in case of private company and 1 in case of One Person Company (OPC).

    3. Annual Return: In comparison with the conventional annual filing where the active companies are required to file two detailed forms annually, a Dormant Company is required to file one simple form annually indicating financial position duly audited by a Chartered Accountant in practice in Form MSC-3 within a period of thirty days from the end of each financial year.

    4. Other Compliances: Further, the Company also needs to file requisite returns under Income Tax Act, 1961 and Goods and Services Tax, 2017.

    5. Most of compliances under Companies Act, 2013 are event based and other compliances are to be fulfilled on regular intervals. A dormant company would have no/ very less compliances as it would have no/ fewer event based activities.

  5. Can a Dormant company make allotment of shares? Also, can there be a change in Directors of such Company?

  6. Yes, pursuant to Rule 7 of The Companies (Miscellaneous) Rules, 2014, a Dormant Company can make allotment of shares and effect a change in directorship as well. The Company shall report with ROC on such allotment or change in Directorship in a timely manner.

  7. Can application for Dormant Status be filed by a company carrying on business which has not filed Financial Statement and Annual returns?

  8. Section 455 (1) of the Companies Act, 2013:

    “Where a company is 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 make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

    Brief analysis: “such a company or an inactive company” may make an application for obtaining the status of a dormant company.

    And explanation to Section 455 (1) states that

    “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.

    So, an inactive company is one which has not filed Financial Statement and Annual Returns for last two financial years and therefore, can apply for Dormant status.

    Though technically, the application for Dormant status can be filed by a company carrying on business but has not filed Financial Statement and Annual Returns for last two financial years but it also depends on the satisfaction of the jurisdictional RoC. The grounds should justify the allowability and the applications are decided on merits.

    Question for the readers: In such a case, if application made under this criterion, whether the ROC would require filing of financial statements and annual returns for past period? For the very fact that the annual filings were not done for past period, the applicant was eligible to make application under this criteria?

  9. How long can a company stay Dormant?

  10. As per Rule 8 of The Companies (Miscellaneous) Rules, 2014, a company can continue with ‘Dormant status’ for a period of

  11. Can a Dormant company apply for strike off?

  12. As per Section 248(1)(C), a Company which has made an application to ROC for obtaining ‘Dormant’ status cannot apply for strike off. The company needs to obtain ‘Active’ status first to apply for strike off.

  13. How to obtain Active status?

  14. The application shall be made in e-form MSC-4 along with return in e-form MSC-3 in respect of the Financial Year in which the application for obtaining the status of ‘active’ company is being filed.

    Conclusion: The option of obtaining ‘Dormant’ status is a tool to be utilized by inactive companies who don’t want to go for strike off and want to wait for their ideas to flourish eventually with minimal statutory compliances.

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