Dormant Company- A Quick Overview Under Section 455 of Companies Act, 2013
Introduction
In the dynamic landscape of corporate governance, understanding the concept of dormant companies is crucial. The Companies Act, 2013, introduced several provisions to regulate and govern companies, including provisions related to dormant companies. In this article, we delve into the intricacies of dormant companies and shed light on the significance of this legal status.
What is a Dormant Company?
The terms “Dormant Company” and “Inactive Company” are usually considered synonymous. According to Section 455(1) of the Companies Act, 2013 a dormant company or 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.
In short, a company needs to fulfil any of the following conditions to apply for dormant status:
- The company has not commenced any business since incorporation; or
- The company has not carried out any business activity or operation for the past two financial years; or
- The company has not filed financial statements or annual returns for the past two financial years.
What are Significant accounting transaction?
Significant accounting transaction means any transaction other than the following:
- Payment of fees by the company to the Registrar of Companies; or
- Payments made by the company to fulfil the requirements under the any act or any other law; or
- Allotment of shares to comply with the requirement of this Act; or
- Payment for the maintenance of its office and records
Why do Companies become Dormant?
If a company is formed and registered under the Companies Act, 2013 for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such an inactive company may apply to the Registrar in the manner prescribed under the act for obtaining dormant company status.
To obtain the status of a dormant company, an application in E-Form MSC-1 must be filed with the Registrar. Following consideration, the Registrar may issue a certificate in Form MSC-2 granting the status.
Benefits of Dormant Status
- Cost Saving: Dormant status allows companies to save on compliance costs, especially when they are not actively engaging in business activities.
- Preservation of Name: It helps in preserving the name of the company for future use, preventing the possibility of another entity using the same name.
- Ease of Revival: It can be easily revived when there is a need to resume business operations.
Requirements for Applying the Status of Dormant Company
The company before applying in E-Form MSC-1 for obtaining the status of dormant company shall take a note of the following points and shall apply only when they fulfil the below mentioned conditions:
- There is no inquiry, investigation or inspection ordered or taken up or carried out against the Company.
- There must be no secured or unsecured outstanding loan in the name of the company. But if there is any outstanding loan, the company may apply after obtaining agreement of the lender. Such letter of agreement must be attached in the E-Form MSC-1.
- There must be no dispute regarding the ownership or management of the Company and a certificate in this regard must be submitted along with E-Form MSC-1.
- No statutory duties, dues, or taxes etc. which are payable to the State Government or the Central Government or any local authorities must be pending.
- The Company must not have defaulted in payment of workmen dues.
- There must be no prosecution either initiated or pending against the Company under any law in the country.
- The Company shall not have any outstanding public deposits, and must have not made any defaults in the payment of such deposits or its interest.
- The Company’s securities shall not be listed on any stock exchange either within or outside India.
Process for Applying the Status of Dormant Company
In order to achieve the status of a dormant company or an inactive company the following steps need to be followed:
- Conduct a Board Meeting and pass a board resolution for conducting an Extra-ordinary General Meeting for passing a Special resolution to apply for Dormant Company Status.
- Conduct the Extra-ordinary General Meeting and pass the Special resolution to apply for Dormant Company Status.
- File E-Form MGT-14 within 30 days of passing the Special Resolution.
- File application to Registrar of Companies in E-Form MSC-1.
- The Registrar of Companies will provide the Certificate under MSC-2 upon approval of the application.
Compliances of a Dormant Company
A dormant company also needs to do certain compliances. These are mentioned below:
- The dormant company needs to maintain the minimum number director as required under Companies Act, 2013 i.e. at least 3 Directors in case of a Public Company and at least 2 directors in case of a Private Company and 1 director for One Person Company.
- The provisions of the Companies Act, 2013 in relation to the rotation of auditors are not applicable to dormant companies.
- Whenever the company allots any security to any person it shall file the returns of allotment and whenever there is any change in the directors of the company relevant forms are required to be filed.
- The Dormant Company is required to hold at least one board meeting in every six months. The gap between two meetings shall not be more than 90 days.
- A company can remain dormant for maximum tenure of 5 consecutive financial years. If a company remains dormant for more than continuous 5 years, the Registrar shall commence the process of striking off the name of the company.
- A dormant company is required to file an annually “Return of Dormant Company” in Form MSC-3 duly audited by a Chartered Accountant within a period of thirty days from the end of each financial year. Cash flow statements is not required.
How to Reactivate a Dormant Company?
In order to reactivate a dormant company, the following steps need to be followed:
- Conduct a Board Meeting and pass a board resolution for applying to the ROC to change the status of the Dormant Company to Active.
- File the return of the dormant company in Form MSC-3.
- File application to ROC to change the status of company from dormant to active in Form MSC-4.
- The Registrar of Companies upon satisfaction will provide the Certificate under MSC-5 upon approval of the application.
Conclusion
Understanding the concept of dormant companies under the Companies Act, 2013, is vital for businesses navigating the complexities of corporate regulations. While dormant status provides certain benefits, it comes with responsibilities that companies must fulfill to stay compliant. By carefully considering the conditions and advantages, companies can make informed decisions about whether obtaining such status aligns with their strategic goals.
In conclusion, the Companies Act, 2013, recognizes the need for companies to remain dormant under specific circumstances, offering them a legal framework to maintain their status without actively engaging in business operations. This provision not only facilitates cost savings for companies but also ensures the preservation of their names for potential future use. However, companies must remain vigilant about meeting the conditions and responsibilities outlined by the law to navigate the regulatory landscape effectively.
