DORMANT COMPANY

The Companies Act, 2013 introduces a concept of a dormant company within its ambit. It is the first time that such a concept is thought of, i.e. company which is not active.

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”.

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. For instant if a promoter wants to buy lands now for its future project at a comparatively lesser price, he may do the same through dormant company so that he can use the land for its future project. Thus, dormant company status is a new phenomenon in the Companies Act 2013 and is an excellent tool for keeping assets in the company for its future usage. A dormant company may be either a Public Company, a Private Company or a One Person Company.

There are around 1.5 lakh dormant companies present in Indian corporate sector according to recent government data which are either incorporated for future project or to hold only IPRs or assets. Some are yet to carry out the operations or are in operational stage for a fair period of time. It is not always that by dormant companies it is meant that they are defunct they are just not in operation because of the nature of business they perform.

Certain companies, due to the nature of their business, may not be able to start any business, for a long time from the date of incorporation as for instance any business for creation of intellectual property or for a future project and has no significant accounting transaction. Such a company may be an “Inactive company”.

Construction Companies / Real Estates Companies incorporate new companies to hold land/ properties for future projects. This concept is beneficial for them, by this concept they can incorporate company and purchase property/land in that company and get status of dormant company, 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.

According to Section 455 of the Companies Act 2013, where a company is formed and registered under this Act for a future projector 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. 

PROCEDURE FOR OBTAINING STATUS OF “DORMANT COMPANY”:

Before discussion of process of obtaining status of dormant company let me explain you some important TERMS:

INACTIVE 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, 
• has not filed Financial Statements and Annual Returns During The Last Two Financial Years. 
• SIGNIFICANT ACCOUNTING TRANSACTION:  “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; and
• 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. 

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;
• As per Sub- Section 4 Section- 455:  Where a company not filed or fails to file Financial Statements or Annual Return for TWO (2) financial years consecutively, The Registrar of Company (ROC) shall issue a notice to that company and enter the name of such company in register maintain for Dormant Company.

BEFORE APPLYING FOR STATUS OF DORMANT COMPANY FOLLOWING CONDITIONS REQUIRED TO BE FULFILLED: 

1. No inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
2. No prosecution has been initiated and pending against the company under any law;
3. The company is neither having any public deposits which are outstanding nor the company is in default in payment thereof or interest thereon;
4. The company IS NOT HAVING ANY OUTSTANDING LOAN, WHETHER SECURED OR UNSECURED:
5. Provided that if there is any outstanding unsecured loan, the company may apply under this rule after obtaining concurrence of the lender and enclosing the same with E-form MSC-1;

6. There is NO DISPUTE IN THE MANAGEMENT OR OWNERSHIP OF THE COMPANY and a certificate in this regard is enclosed with E-form MSC-1;
7. The company does not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government or any State Government or local authorities etc.;
8. The company has not defaulted in the payment of workmen’s dues;
9. The securities of the company are not listed on any stock exchange within or outside India.
10. The application has not been made with an objective to deceive the creditors or to defraud any other person;

PROCEDURE FOR OBTAINING STATUS OF DORMANT COMPANY UNDER THE COMPANIES (MISCELLANEOUS) RULES, 2014:

1 Call a Board Meeting – to call EGM.

• Authorization to director to make application for Dormant with ROC.
• Issue Notice of General Meeting
• Engage an Auditor/ Chartered Accountant to issue certificate.

2 Hold Extra Ordinary General Meeting

• Pass Special Resolution (Obtain consent of at least 3/4th of the shareholders in value terms in the General Meeting)

3 Must file E-form MGT-14 with ROC.

        The following documents need to be Attachment to E-form MGT-14:

• Certified True Copy of Special Resolution.
• Notice of EGM along with Explanatory Statement.

4 After filling of form MGT-14, File Form MCS-1 with the registrar.

      The following documents need to be Attachment to E-form MSC-1:

1. Certified True Copy of Board Resolution.
2. Certified True Copy of Special Resolution.
3. Auditor’s Certificate.
4. Statement of Affairs duly certified by Chartered Accountant or Auditor(s) of the company.
5. Latest Financial Statement and Annual Return of the Company is mandatory to attach In Case The Same Is Filed To Registrar.
6. Certificate regarding no dispute in the management or ownership
7. Consent of lender, if any loan is outstanding.

Processing of the Application at ROC

The E-Form will be auto approved (STP). 

E-mail

When an E-Form 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.

CERTIFICATE OF DORMANT COMPANY

A system generated Certificate of status of a Dormant Company is issued by Registrar and sent to the user as an attachment to the email, after approval is granted. Once the form is approved the status of the company shall be changed to ‘Dormant under section 455’

REGISTER OF DORMANT COMPANIES

The Register maintained under the portal maintained by the Ministry of Corporate Affairs on its web-site http://www.mca.gov.in or any other website notified by the Central Government, shall be the register for dormant companies.

FEES FOR APPLICATION TO CENTRAL GOVERNMENT

FORMS REQUIRED TO BE FILED WITH ROC BY DORMANT COMPANIES:

After getting certificate of Dormant Company the following are the E-forms which need / can file with ROC:

1. A dormant company shall file a declaration annually in E-form MSC-3 within thirty days from the end of each financial year.
2. Company shall continue to file the return or returns of allotment and change in directors in the manner and within the time specified in the Act, whenever the company allots any security to any person or there is any change in the directors of the company Rule 7 of Companies (Miscellaneous) Rules, 2014. Change in directorships could occur upon the death or incapacity of a director.
3. If company wants to get Active status, the company need to file e-form MSC-4 with ROC, then gets the active company status.
4. If company carrying any “Significant transaction” during the dormant period, the directors shall within 7 days from such event, file an application with ROC in e-form MSC-4, for obtaining the status of an active company.

THE COMPANY MAY CARRY FOLLOWING BUSINESS TRANSACTION IN THE PERIOD OF DORMANT:

• 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; and
• Payments for maintenance of its office and records.

OTHER PROVISIONS:

A dormant company shall have such Minimum Number of Directors. {A dormant company shall have a minimum number of three directors in case of a public company, two directors in case of a private company and one director in case of a One Person Company}

File such documents and pay such annual fee as may be prescribed to the Registrar to retain its dormant status.

1. A Dormant Company need not enclose cash flow statements in its annual accounts.
2. A Dormant Company is required to convene 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. Section 173(5)
3. Rotation of auditors shall not apply to a dormant company.

APPLICATION FOR SEEKING STATUS OF AN ACTIVE COMPANY

An application, under sub-section (5) of section 455, for obtaining the status of an active company shall be made in E-form MSC-4 along with fees as provided in the Companies (Registration Offices and Fees) Rules, 2014 and shall be accompanied by a return in E-formMSC-3 in respect of the financial year in which the application for obtaining the status of an active company is being filed:

Provided that the Registrar shall initiate the process of striking off the name of the company, if the company remains as a dormant company for a period of consecutive five years.

According to the Companies (Miscellaneous) Rules, 2014, Rule 8(3), where a dormant company does or omits to do any act mentioned in the Grounds of application in E-formMSC-1 submitted to Registrar for obtaining the status of dormant company, affecting its status of dormant company, the directors shall within seven days from such event, file an application, under sub-rule (1) of this rule, for obtaining the status of an active company.

According to Rule 8(4) Where the Registrar has reasonable cause to believe that any company registered as ‘dormant company’ under his jurisdiction has been functioning in any manner, directly or indirectly, he may initiate the proceedings for enquiry under section 206 of the Act and if, after giving a reasonable opportunity of being heard to the company in this regard, it is found that the company has actually been functioning, the Registrar may remove the name of such company from register of dormant companies and treat it as an active company.

CONCLUSION:

A Dormant Company formation can prove useful when an individual wishes to stop trading for a specific period of time.

For Example: if an individual has been running a successful company but wishes to move abroad, he can choose to preserve his company so that he can restart it at a later date by just doing some negligible formalities like registering his company as a Dormant Company with the registrar. Since a Dormant Company remains in the books of registrar for a considerable time it provides the company with a sense of maturity and might help to boost its credit worthiness.