Concept of Dormant Company

Dormant Company Concept

As per the companies act 2013, if the company files an application Form MSC-4 under section 455(5) seeking active status of the company along with prescribed fees and form MSC-3 with respect to the financial year in which the application seeking active status is being filed .The Registrar will issue a certificate of recognizing active status of the company in form MSC- 5

In case company has not filed application in form MSC -1 , the directors are entitled to file application under Rule 8(1) for obtaining active status of the company within 7 days of such an act or omission.

Further the Registrar on suo moto, if he is satisfied that the dormant company has been functioning, can order an enquiry under section 206 of companies Act ,2013 and after providing reasonable opportunity of being heard and after hearing in  enquiry, if  it is observed  that the company has been functioning, then he can remove the name of the company from the dormant list and treat the company as active company

The idea of a dormant company is new concept under companies act 2013 and was not there in the companies Act 1956.

Contents

  • What is Dormant Company
  • Why Dormant companies?
  • Who can apply for a dormant status?
  • Procedure for obtaining dormant status
  • Maximum period allowed the company to retain the dormant status
  • Conditions necessary to be fulfilled for acquiring the status of dormant
  • The Registrar on suo-moto apply for dormant status for the company
  • Dormant company can be made active?

WHAT IS DORMANT COMPANY

Section 455 of companies Act explain about the dormant company. The meaning of Dormant Company means inactive or inoperative. The basic idea of dormant company is for the benefit of a company to start a future project or hold an asset/intellectual property without having significant accounting transactions. On the other hand if a company has not filed its annual returns for two consecutive years then such a company will also be called as a dormant company. Companies may apply for a dormant status if the company is incorporated for a future project, incorporated for holding an asset or intellectual property, company which has not filed Financial Statement and Annual Returns during the last two financial years and the company which is not carrying out any business or has made any significant accounting transactions

*Significant accounting transactions would mean transactions other than the basic procedural transactions i.e the payment of fees by a company to the Registrar and also payments to fulfil the requirements of this Act or any other law, allotment of shares to fulfil the requirements of this Act and payments for maintenance of its office and books

WHY DORMANT COMPANY?

The object of dormant company is invest now and enjoy the fruits later is the concept under which the idea of dormant company emerges. If the company wants to hold assets or intellectual properties and use it later when the formation of company has been completed .Suppose Company wants to start the operations after three years but the land prices today are very cheap and the same would be very costly after three years. Hence company will buy the land and hold it for three years and thereafter start the company, until that time, company apply for dormant status.

Similarly the company will complete all formalities at present and actual commencement of operations will take some more time. To avoid procedural delays, the company will complete all formalities and apply for dormant status until commencement of operations After formation of company, the company will apply for dormant status until commencement of operations.

The immediate question that arises why would anyone create a company and register it only to get it declared as dormant? The main object of obtaining or retaining the dormant status of a company is so that the company retains its corporate status despite not carrying out any business.

So restarting dormant company is easier than fresh start of company. So Company with dormant status can always have an option to start operations whenever it wants without following further procedures and subject to certain conditions need to ful fill. Well, the restart is always better than a fresh start and dormant companies offer this advantage. So if a company chooses to take a backseat for a good reason then they can always restart when they want to, without further procedures subject to certain conditions. So as a dormant company, the company may not be active but it still has a status of a company in the eyes of law.

There are some benefits that can be derived from the concept of dormant company. Some of such benefits are

1. The company can reserve the name and hold it for certain time i.e. until commencement of operations

2. Retaining intellectual property rights until commencement of operations

Who can apply for a dormant status ?

As per the section 455 of the companies Act 2013,a company which has not been carrying any business or not having any significant accounting transactions for last two years , the company can apply for dormant status.

The Registrar on suo-moto apply for Dormant status if the company is not filing annual or financial statements for the last two years and not submitted reasonable explanation to the ROC , then the Registrar can declare the company as 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 filing during the last two 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 this Act or any other law;
  • Allotment of shares to fulfil the requirements of this Act; and
  • Payments for maintenance of its office and records.”

So if company carrying any transaction other than listed above, will get a chance of losing its dormant status

Procedure for obtaining dormant status

The following are the procedure to be adopted for obtaining dormant status

Step 1 Company should call for shareholders meet and ensure passing of special resolution with ¾ majority.

Step 2 After Passing special resolutions; file form miscellaneous form -1 with MCA along with prescribed fees

Step 3 Registrar if satisfied and if the terms and conditions of section 455 are satisfied, issue certificate of Dormant Company

Step. 4 Registrar will maintain the list of dormant companies

Maximum period allowed the company to retain the dormant status

The company applies for dormant status only for five years. The Companies Act 2013 empowers the Registrar of companies to strike off the name of the company from the Register if it remains dormant for more than five years.

Conditions necessary to be fulfilled for acquiring the status of dormant

As per rule 3 of Companies (Miscellaneous) Rules 2014 lays down several conditions that a company must fulfil before it can acquire the status of a dormant company.

  • No prosecution should have been initiated and pending against the company under any law.
  • No inspection, inquiry or investigation should have been ordered or taken up or carried out against the company.
  • The company should neither have any public deposits which are outstanding nor should it be in default in payment thereof or interest thereon.
  • The company should not have any outstanding loan, whether secured or unsecured.
  • The company should not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government or any State Government or local authorities etc.
  • The company should not have defaulted in the payment of workmen’s dues
  • There should be no dispute in the management or ownership of the company and a certificate in this regard should be enclosed with Form MSC-1.
  • The securities of the company should not be listed on any stock exchange within or outside India.

The Registrar on suomoto apply for dormant status for the company

The Registrar on suomoto apply for dormant status to the company if the company fails to submit annual /financial statements for the last two years. Immediately after declaring the status of dormant to the company, the Registrar will enter the details of the company in the Register of dormant companies and  Registrar will strike off the name of the company, if the company has not submitted a reasonable explanation and fails to comply with section 455.of the companies Act 2013.  The dormant company is not exempted from the statutory compliance of submission of annual returns and also holding annual meetings etc.

Dormant company can be made active ?

As per the companies act 2013, if the company files an application Form MSC-4 under section 455(5) seeking active status of the company along with prescribed fees and form MSC-3 with respect to the financial year in which the application seeking active status is being filed .The Registrar will issue a certificate of recognizing active status of the company in form MSC- 5

In case company has not filed application in form MSC -1 , the directors are entitled to file application under Rule 8(1) for obtaining active status of the company within 7 days of such an act or omission.

Further the Registrar on suo moto, if he is satisfied that the dormant company has been functioning, can order an enquiry under section 206 of companies Act ,2013 and after providing reasonable opportunity of being heard and after hearing in  enquiry, if  it is observed  that the company has been functioning, then he can remove the name of the company from the dormant list and treat the company as active company.

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Swapnil S

CA in Mumbai

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