There are various circumstances under which a company is formed but no regular business is carried out in same due to various reasons such as:
- Business is formed for the future and only research work is carried out,
- Company is formed to launch a new product line in different segments in coming years and formed to preserve name;
- Company has been formed but can’t commence business operations due to some circumstances like travel to another place for a long period, medical illness, etc.;
- Company is formed to hold any fixed asset only and no regular business is required to be carried out etc.
In such a case, regular annual compliances involve lots of efforts and costing and a person may find it difficult to run such a company without any operations.
Therefore, Companies Act, 2013 provides an option to declare such a company as a dormant company. Dormant companies are required to carry out less compliances as compared to active companies. Further, Status of dormant company can be changed to regular on filing an application with RoC.
Let’s find out how you can get the status of dormant for your company, any pre-conditions required to be met, what formalities you will need to do while remaining a dormant company, etc. in this article.
1. Meaning of dormant company
- Provisions related to dormant companies are given in Section 455 of Companies Act, 2013.
- As per Section 455, company satisfying following conditions can apply for status of dormant company to RoC:
- Company is formed or registered for a future project or to hold an asset of Intellectual property rights; and
- Company is having no significant accounting transactions; or
- Inactive Companies
- “Inactive Companies” means a company:
- Which has not been carrying on any business or significant accounting transactions in last 2 Financial years; or
- Which has not filed Financial statements and annual returns during the last 2 Financial years.
- “Significant accounting transaction” means any transaction other than:
- payment of fees by a company to the Registrar;
- payments made by it to fulfil the requirements of any law;
- Payment made for allotment of shares to fulfil the requirements of the Act; and
- payments for maintenance of its office and records
- Therefore, if a company has not carried out any significant accounting transactions in last 2 years or has not filed financial statements or annual return during last 2 financial year then such company can obtain status of dormant company.
- Further, If a company has not filed any Financial statements or Annual returns for 2 financial years consecutively, then the register may issue notice on its own to mark the company as a dormant company.
2. Conditions to be satisfied before declaring a dormant company
As per Rule 3 of The Companies (Miscellaneous) Rules, 2014, Any company can apply for status of Dormant company only if satisfies following conditions:
- any inspection, inquiry or investigation has not been ordered or taken up or carried out against the company;
- No prosecution has been initiated and pending against the company under any law;
- The company is neither having any public deposits which are outstanding nor the company is in default in payment thereof or interest thereon;
- The company is not having any outstanding loan, whether secured or unsecured. However, if Company has any outstanding unsecured loan, the company may apply for dormant company after obtaining concurrence of the lender and enclosing the same with Form MSC-1.
- There is no dispute in the management or ownership of the company and a certificate in this regard is enclosed with Form MSC-1.
- The company does not have any outstanding statutory dues;
- The company has not defaulted in the payment of workmen’s dues;
- The securities of the company are not listed on any stock exchange within or outside India.
3. Process of declaring a company as Dormant Company
Once the management and board of directors decide to go for acquiring dormant company status, following process should be adopted to get the certificate of dormant company status from the Registrar:
- The Company shall hold the board meeting by giving a notice of at least 7 days and decide the matter of obtaining dormant company status.
- Call a General Meeting of shareholder and pass a special resolution to this effect; or The Company may, after issuing a notice to all the shareholders of the company for this purpose, obtain the consent of at least 3/4th shareholders (in value).
- File an application with the Registrar of Company in Form MSC-1 for acquiring dormant company status with required documents;
- Once the application is vetted and the Registrar is satisfied with the documents, The registrar shall issue the certificate in Form MSC-2 granting status of dormant company.
- The registrar shall put the name of the Company in register of Dormant Companies and shall update the status on MCA portal
4. Benefits of converting to a dormant company
After declaring yourself as a dormant company, following benefits your company will have:
- The main advantage is that the status of a dormant company gives an opportunity to maintain corporate status even if no business is carried out
- The name of the company remained protected through trademark and no other company can have an identical name.
- Dormant company status allows the company to hold the company’s status for a future period when it will actually start the project.
- The company gets more period from its establishment to say it has a long history and is well established even though business started later on.
- Less compliances are required as compared to active companies.
5. Documents required for dormant company
Before applying for obtaining status of dormant Company, Following documents should be ready:
- Certified copy of board resolution for acquiring status of dormant company.
- Copy of special resolution
- Auditor’s certificate
- No objection certificate of regulatory authority for that company, if any.
- Copy of latest financial statements and annual return.
- Confirmation from the lender in case of any outstanding loan of the company.
- Certificate of no dispute between management and owners.
- Statement of affairs duly certified by a Chartered Accountant or Auditor(s) of the company.
6. Special provisions applicable to Dormant Company
A Dormant Company is required to follow the following provisions to maintain the status:
- Annual Return: Dormant Company is required to file “Return of Dormant Company” in Form MSC-3 by 30th April of the following year.
- Return of Change in Directors and Allotment of shares: In case of change in directors and allotment of any shares, the company is required to file regular returns.
- Minimum Number of Directors: Dormant company has to maintain a minimum number of:
- Rotation of Auditors: Provisions related to rotation of auditors does not apply on dormant companies.
- Board Meetings: Unlike active companies, dormant company are required to hold only 1 Board Meeting in each half calendar year and gap between 2 meetings should not be less than 90 days.
- Income Tax return: The dormant company has to file an income tax return even though there is no income generated.
7. Other Provisions
a. Consequences of Non-compliances:
- If a dormant company fails to comply with provisions of Section 455 of Companies Act then the Registrar of Company may strike off the name of the company.
b. Maximum period of Dormant Company
- The Registrar is empowered to initiate the process of striking off the name of a dormant company if it remains dormant for 5 consecutive years. So, one can say that any company can hold the status of a dormant company for a maximum of 5 years.
c. Conversion of Dormant company to Active company
- A Dormant company has to apply in Form MSC-4 to regain status of active company.
- The company will be issued a certificate of active company in Form MSC-5.