An Overview of Dormant Company under the Companies Act, 2013

  • Setindiabiz Team
  • October 26, 2023
The Companies Act 2013 introduced a game-changing concept: dormant companies. Imagine a company that lays low, with no significant accounting transactions or remains inactive for a while but keeps its name registered for future adventures. 🕵️‍♂️ Lately, dormant companies have been all the rage because they allow businesses to maintain their formal status while reducing compliance requirements.
In this blog post, let’s dive into the captivating world of dormant companies, exploring their benefits and providing a step-by-step guide on how to register one under the Companies Act 2013. Get ready to be intrigued! 💼💤

What is a Dormant Company?

A dormant company is a registered entity recognized under the law but remains inactive for an extended period. This inactivity is not indicative of wrongdoing or financial distress; it is a strategic choice made by the company’s management or shareholders. A dormant company does not engage in regular business activities, trade, or significant accounting transactions, existing in a state of hibernation.
The concept of a dormant company provides a legal framework for businesses that are currently inactive but may commence operations in the future. Dormant companies maintain their legal status while minimising compliance and operational costs associated with active companies. Being dormant does not mean a company is defunct; it simply implies a hiatus from active business and financial transactions.

What is an Entrepreneur?

An entrepreneur is an individual who initiates, organizes, and manages a business venture with the aim of making a profit. They are risk-takers who are willing to invest their time, money, and energy in pursuing a business idea. Entrepreneurs are individuals who have the ability to identify opportunities in the market and turn them into profitable business ventures.

Legal Definition of a Dormant Company

A company can be declared dormant if it is formed and registered for a future project or to hold an asset or intellectual property and has not had any significant accounting transactions since its inception. The Section 455 of Companies Act, 2013, provides detailed criteria for a company to be classified as dormant and the procedure to obtain this status. Significant accounting transactions exclude transactions like payment of fees to the Registrar, payments made to fulfil legal requirements, allotments of shares, and payments for maintaining offices and records. Any company not performing activities other than these can be declared dormant.

Common Reasons Why Companies Choose to Become Dormant

  1. Preserving the Company’s Name and Brand: Businesses sometimes choose to go dormant, protecting their cherished name and brand identity. By doing so, Awaiting Investment or Funding: Startups and new businesses often play the waiting game, keeping operations dormant until they secure the much-needed funding or investment. This strategic approach allows for meticulous planning and preparation, ensuring a solid foundation for resounding success on their entrepreneurial journey.
  2. Preparing for a Future Project: Companies may embrace dormancy as they eagerly await future projects, strategically positioning themselves in the market. This phase allows for careful preparation, laying the groundwork for future endeavours with unwavering determination.
  3. Restructuring or Ownership Changes: During times of restructuring or ownership changes, company dormancy can provide stakeholders with the opportunity to strategize, evaluate organisational adjustments, and revamp business processes. With their sights set on seamless transitions and future growth, dormant periods prove invaluable.
  4. Economic or Market Downturns: In the face of economic uncertainty, businesses grappling with financial challenges may opt for strategic dormancy. By temporarily reducing costs, scaling back operations, and patiently awaiting a more favourable market environment, they conserve resources, maintain financial stability, and tactically plan for a triumphant comeback.
  5. Legal and Regulatory Compliance: At times, companies may enter dormancy to fulfil specific legal or regulatory requirements or to simplify compliance obligations during periods of relative inactivity. This enables them to navigate the complexities of the legal landscape with finesse.they shield against others infringing on their reputation and market presence. It’s a proactive way to maintain their position in the dynamic business landscape.

Eligibility Criteria for a Dormant Company

A company is considered dormant when it is not conducting any significant accounting transactions or operational activities over a period of time. However, not every inactive company qualifies as dormant; there are specific criteria that must be met. Below is an outline of the eligibility criteria for a company to be considered as dormant:
  1. No Significant Accounting Transactions: A dormant company must not have any significant accounting transactions during the period of dormancy. Significant accounting transactions refer to any transactions other than:
    1. Payment of fees by the company to the ROC.
    2. Payments made to fulfil the requirements under any law
    3. Allotment of shares to fulfil the requirements of the Companies Act.
    4. Payments for maintenance of the company’s office and records.
  2. Inactivity in Business Operations: The company should not have been carrying on any business or operations. This is assessed based on the lack of significant accounting transactions as well as any other evidence of business activities.
  3. Compliance with Financial Reporting: The company must be up to date with its financial reporting, having filed all necessary financial statements and annual returns up to the point of becoming dormant.
  4. No Outstanding Loans or Liabilities: The company should not have any secured or unsecured loans outstanding. Additionally, there should be no workmen’s dues pending, and the company must be clear of any legal liabilities.
  5. No Ongoing Legal Proceedings: There should be no ongoing legal proceedings, investigations, inquiries, or inspections against the company, either by regulatory bodies or third parties.
  6. No Outstanding Statutory Taxes and Dues: The company must have cleared all its statutory taxes, dues, and liabilities payable to both the central and state governments, as well as local authorities.
  7. No Disputes in Management or Ownership: There must be no disputes in the management or ownership of the company. A certificate to this effect may need to be submitted along with the application for dormant status.
  8. Compliance with Stock Exchange Requirements (If Applicable): If the company’s securities are listed on a stock exchange, it must comply with the requirements of the stock exchange and should not have any outstanding obligations in this regard.
  9. Minimum Number of Directors: For a dormant company, it is necessary to have a specific number of directors: Two directors for a private company, three directors for a public company, and one director for a One Person Company. This ensures compliance while allowing flexibility based on the company’s structure.

Stepwise Procedure to Declare a Company Dormant

  1. Special Resolution: Pass a Special Resolution in a general meeting or obtain consent from at least three-fourths of the shareholders of the company in terms of value. This resolution should clearly state the intention of the company to declare itself dormant and specify the duration for which the company intends to remain dormant.
  2. File Form MSC-1: Once the resolution is passed, an application must be submitted in Form MSC-1, along with the prescribed fees, to the Ministry of Corporate Affairs. This form should contain all the necessary details of the company, including its registered address, directors, and shareholders.
  3. Certificate of Dormant Status: The Registrar of Companies will review the application and verify the compliance with the relevant provisions of the Companies Act, 2013. If the Registrar is satisfied with the application and finds it in order, a certificate of dormant status will be issued. The company’s name will also be entered into the register of dormant companies maintained by the Registrar.

How to Reactivate a Dormant Company

To reactivate a dormant company, an application must be filed under Section 455(5) of the Companies Act, 2013. This can be done using Form MSC-4, along with a return in Form MSC-3 and the necessary fees. The application should clearly state the reasons for reactivation and provide updated information about the company’s directors, shareholders, and registered address. It is important to note that the reactivation process may involve additional steps and requirements depending on the specific circumstances of the company.

Compliance of a Dormant Company

Simply obtaining dormant status for a company through an application to the ROC does not imply freedom from compliance obligations. Even during a period of inactivity, there remain specific legal requirements and filings that must be followed to preserve the dormant status and ensure compliance with the law.
  1. Maintaining Corporate Status: Even though a company is dormant, it is still a registered entity under the law. Owners and directors are responsible for maintaining its corporate status and ensuring that all legal requirements are met to keep the company in good standing.
  2. Protecting Company Assets: If the dormant company holds any assets, it is the responsibility of the owners to ensure that these assets are protected and maintained, even during the period of dormancy.
  3. Compliance with Laws and Regulations: Directors must ensure that the company complies with all relevant laws and regulations, even when it is not actively trading. This includes adhering to any industry-specific regulations that may apply.
  4. Annual Returns and Financial Statements: A dormant company is required to file an annual return with the Registrar of Companies in Form MSC-3 within 30 days from the end of each financial year. The form requires information like the financial position, director details, auditor details (if applicable), shareholding pattern, registered office address, and other relevant info.
  5. Auditor’s Report: If the dormant company has a statutory auditor appointed, the annual return filed in Form MSC-3 must be accompanied by the auditor’s report on the financial statements of the company, even if there are no significant transactions.
  6. Maintaining Records: Even when inactive, dormant companies are required to maintain accurate records and documentation. This includes keeping a record of any transactions that do occur, as well as maintaining records related to the company’s directors, shareholders, and registered office.
  7. Income Tax Return (ITR): A dormant company, like any other company, is required to file its Income Tax Return (ITR) in Form ITR-6 annually, irrespective of whether it has engaged in any business activities or has any income to report. This is a mandatory requirement as per the Income Tax Act.

In conclusion, a dormant company status offers a unique solution for companies looking to pause their operations while preserving their legal and corporate identity. With the right knowledge and adherence to statutory requirements, companies can successfully navigate this state of dormancy, ensuring legal compliance, financial integrity, and the flexibility to spring back into action when the time is right.

Conclusion

FAQs

Q1: What is a dormant company under Section 455 of the Companies Act 2013?

A dormant company under Section 455 of the Companies Act 2013 is a registered entity that is inactive with no significant accounting transactions, existing for holding an asset, intellectual property, or for a future project, and has applied to the Registrar to obtain dormant status.

Q2: How do you define a dormant company?

A dormant company is defined under section 455 of the companies act as a legally registered business entity that is not actively engaged in business activities, trade, or significant accounting transactions. It can be a company formed for a future project, holding an asset or intellectual property, or an inactive company seeking to maintain its corporate standing while reducing compliance requirements.

Q3: What is the maximum time limit for a dormant company?

A company can remain dormant for a maximum period of 5 consecutive financial years. After this period, it must either apply to return to active status or face removal from the Registrar of Companies’ records, potentially leading to the dissolution of the company

Q4: What happens if a dormant company is not reactivated within 5 years?

If a dormant company is not reactivated within 5 years, the Registrar of Companies has the authority to strike off the company’s name from the register, leading to the dissolution of the company and the loss of its legal standing.

Q5: What is the difference between making a company dormant or striking off (STK-2)?

Making a company dormant allows it to retain its legal standing without active business operations, intending to resume activities in the future. Striking off (STK-2) under section 248 leads to the company’s closure and removal from the Registrar of Companies, ending its legal existence.

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