Dormant Company

The primary objective of the revisions made to the Companies Act 1956 was to have a simplified law that will be able to address the changes taking place in the national and international scenario, enable the adoption of internationally accepted best practices and also provide flexibility in response to the ever-changing business models.

One such aspect which was introduced in the Companies Act 2013 was the concept of Dormant Companies in section 455 of this act. In common parlance, the word “Dormant” means inactive or inoperative. A dormant company is an excellent opportunity to start a company for 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.

*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 records.

Following are the answers to most relevant questions pertaining to Dormant Company in India.

1. What is a Dormant Company under Indian Laws?

As per Section 455 (1) of the Companies Act, 2013

“Where a company is formed and registered under this Act for a future project or 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.

Explanation.—For the purposes of this section,—

1. “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;
2. “Significant accounting transaction” means any transaction other than—
   1. Payment of fees by a company to the Registrar;
   2. Payments made by it to fulfill the requirements of this Act or any other law;
   3. Allotment of shares to fulfill the requirements of this Act; and
   4. Payments for maintenance of its office and records.
3. How to obtain status of Dormant Company?
   1. A Company in its general meeting is required to pass a special resolution with consent of at least ¾th of the majority in value.
   2. After satisfying the conditions mentioned in the section 455 and rule 3 and 6, the company may apply for obtaining the status (Certificate) of dormant company. The application to obtain dormant status shall be filed with the Registrar in Form MSC-1.
   3. the registrar after being satisfied shall provide the certificate in Form MSC-2 allowing the status of a Dormant Company to the applicant.
4. What are the compliances for a Dormant Company?
   1. No. of Board Meetings: As per Section 173(5) Dormant Company shall be deemed to have complied with the provisions of this section if 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.
   2. Minimum number of Directors: The Dormant Company shall maintain minimum no. of Directors, i.e. 3 in case of public company, 2 in case of private company and 1 in case of One Person Company (OPC).
   3. Annual Return: In comparison with the conventional annual filing where the active companies are required to file two detailed forms annually, a Dormant Company is required to file one simple form annually indicating financial position duly audited by a Chartered Accountant in practice in Form MSC-3 within a period of thirty days from the end of each financial year.
   4. Other Compliances: Further, the Company also needs to file requisite returns under Income Tax Act, 1961 and Goods and Services Tax, 2017.

Most of compliances under Companies Act, 2013 are event based and other compliances are to be fulfilled on regular intervals. A dormant company would have no/ very less compliances as it would have no/ fewer event based activities.

1. Can a Dormant company make allotment of shares? Also, can there be a change in Directors of such Company?

Yes, pursuant to Rule 7 of The Companies (Miscellaneous) Rules, 2014, a Dormant Company can make allotment of shares and effect a change in directorship as well. The Company shall report with ROC on such allotment or change in Directorship in a timely manner.

1. Can application for Dormant Status be filed by a company carrying on business which has not filed Financial Statement and Annual returns?

Section 455 (1) of the Companies Act, 2013:

“Where a company is formed and registered under this Act for a future project or 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.

Brief analysis: “such a company or an inactive company” may make an application for obtaining the status of a dormant company.

And explanation to Section 455 (1) states that

“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.

So, an inactive company is one which has not filed Financial Statement and Annual Returns for last two financial years and therefore, can apply for Dormant status.

Though technically, the application for Dormant status can be filed by a company carrying on business but has not filed Financial Statement and Annual Returns for last two financial years but it also depends on the satisfaction of the jurisdictional RoC. The grounds should justify the allowability and the applications are decided on merits.

1. How long can a company stay Dormant?

As per Rule 8 of The Companies (Miscellaneous) Rules, 2014, a company can continue with ‘Dormant status’ for a period of 5 years

Can a Dormant company apply for strike off?

As per Section 248(1)(C), a Company which has made an application to ROC for obtaining ‘Dormant’ status cannot apply for strike off. The company needs to obtain ‘Active’ status first to apply for strike off.

1. How to obtain Active status?

The application shall be made in e-form MSC-4 along with return in e-form MSC-3 in respect of the Financial Year in which the application for obtaining the status of ‘active’ company is being filed.

Conclusion: The option of obtaining ‘Dormant’ status is a tool to be utilized by inactive companies who don’t want to go for strike off and want to wait for their ideas to flourish eventually with minimal statutory compliances.