Dormant Company under Companies Act 2013

A company which is a registered entity but is not currently active is called as a Dormant company. But The Company has to apply for this status.

Section-455 of Companies Act, 2013

Talks about a New Provision Calls “DORMANT COMPANY”. This concept was not there in Companies Act, 1956. Another Name of this concept by Professionals is “ASSET SHIELDING CONCEPT UNDER COMPANIES ACT 2013”.

Dormant Company Meaning?

As per the Section 455 of the Companies Act 2013 the dormant company means a company which is formed or registered for the below objectives:

Incorporated for future project;
Hold an asset or intellectual property;
Has no significant transaction;
Is an inactive company.

A Dormant company:

Can apply to revert to an active status company
Cannot remain with the status of a Dormant company for more than five consecutive financial years.

A Dormant Company offers excellent advantage to the promoters who want to hold an asset or intellectual property under the corporate shield for its usage at a later stage.

If a company get status of dormant company there are less compliance in dormant company in comparison of active company. It will help to save cost of compliances for inactive companies.

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

above Mention Transactions are excluded from Significant Accounting Transactions. If a company has made above mention transactions in last two year then also that company will fall under definition of Inactive Company.

“The Company May Carry Following Business Transaction In The Period Of Dormant:”

FINANCIAL STATEMENT: The term “FINANCIAL STATEMENT” as per section 2(40) mean;
Balance-Sheet at the end of Financial year;
Profit & Loss Account or Income or Expenditure account, as may be applicable;
Cash Flow for the Financial year; and
Explanatory note attached to any document in sub-clause (i) or (ii) above;

Which company can apply for dormant status?

Any company that is incorporated for a future project or owns an asset or an intellectual property and does not have a substantial accounting transaction or an inactive company may apply for the dormant status of the business.

Notice that “Inactive Company” means a company that has not been engaged in any activity or operation or that has not carried out any substantial accounting transactions in the last two financial years or that has not filed financial statements and annual reports in the last two financial years.

Condition for applying for Dormant Company Status:

No inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
Not having any public deposits which are outstanding nor is the company in default in payment thereof or interest thereon;
No prosecution has been initiated or pending against the company under any law;
Not defaulted in the payment of workmen’s dues;
The Company shall not have any outstanding tax dues
an application has not been made with an objective to deceive the creditors or to defraud any other person;
The Company should not be listed company.
The company is not having any outstanding loan, whether Secured and Unsecured- But if company has any Outstanding Unsecured Loan then the company may apply for status of DORMANT only after obtaining NOC from the lender. Such NOC required to be attached in the Form which require to file with ROC.
There is No Dispute in the Management or Ownership of The Company; A certificate in this regard required to taken from Management. Such Certificate required to be attached in the Form which require to file with ROC.
A dormant company may be either a public company or a private company or a one-person company.

Reasons For Obtaining Status Of Dormant Company

A company is given dormant status for a variety of reasons, such as:

when business owners are planning to start a business, to reserve a name for a company, it may be registered as dormant.
If company owners intend to restructure a company, they may be given a dormant status.
If an extended period of time is needed for the owner of the company on grounds of sickness, travel, maternity leave, sabbatical, etc.

Advantages of a dormant company

The advantages of dormant company are :-

The company does not need to file two (2) forms for annual filing, i.e. MGT-7 and AOC-4 each year;
no need to hold annual general meetings every year;
no need to conduct and convene four (4) annual meetings of the Board of Directors, etc.
A dormant company does not have to show cash flow statements in the company’s financial statements.
the provision which relates to the rotation of the auditors does not apply to a dormant company

Compliances for Dormant Company:

File Annual return in Form MSC-3 within 30 days of the end of the financial year.
Company needs to have minimum number director as required by Companies Act, 2013
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.
The Company shall hold at least one meeting of the Board of Directors in every half year. The gap between two meetings shall not be more than 90 days.
The maximum tenure for which a company can remain dormant is 5 consecutive financial years. If a company remains dormant for more than 5 years, the Registrar commences the process of striking off the name of the company from the Records, i.e. the company will be removed.

Procedure for obtaining status of Dormant Company:

Check Eligibility: Ensure that the company is eligible to apply for dormant status by testing the eligibility requirements set out in the Pre-Requisites above.
Call a Board Meeting- to call EGM– Convene the meeting of the Board of Directors by giving a seven-day notice and passing the resolution
- Authorization to the Director to make the ROC dormant application.
- Set the date, time and place of the General Meeting and give a note.
- Engage the auditor / certified accountant to issue the certificate.
Hold Extra Ordinary General Meeting– Convene an Extra Ordinary General Meeting and
- Pass Special Resolution and to make application in Form MSC-1
- Authorize to file E-form MGT-14 with ROC.
File Form MGT-14 for SR– File Form No. MGT-14 within 30 days of passing special resolution.
File Form MSC-1- Make an application in Form No. MSC-1within 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;
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.
Processing Type– The eForm will be auto approved (STP).
Confirmation on Approval of Form– When an eForm is approved/ rejected by the authority concerned, an acknowledgement of approval/rejection with related documents is sent to the user in the form of an email to the email id of the company.

DORMANT TO ACTIVE COMPANY

Procedure of getting Active status again by a Dormant Company

A company can apply for active status by submitting E-Form MSC-4 to the Registrar. along with fees to obtain the status of an active Company.
The application shall be accompanied by the MSC-3 return of the financial year in which the application is being filed.
After verification of the submission, the Registrar shall issue the certificate in Form MSC-5 and the company shall return to active status again.

Applying the Sleeping Status to a company has its pros and cons, which should be weighed before continuing with it.

When to apply for Active status by a Dormant Company

Time of 5 Years of dormant status have been expired.
If a dormant company fails to file an annual return for consecutive two financial years Register may ask to change the status of a dormant company.
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.

DISCLAIMER: The entire contents have been developed on the basis of relevant information and are purely the views of the authors. Though the authors have made utmost efforts to provide authentic information however, the authors expressly disclaim all or any liability to any person who has read this document, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this document. Reader should seek appropriate counsel for their own situation. I shall not be held liable for any of the consequences directly or indirectly.

Any other suggestions /opinions are welcomed.

Regards

Author: CS Megha Sharan (Company Secretary in Practice)

Contact No 9650082009

Email: ezzusindia@gmail.com

Ezzus India Team