DORMANT

In this article, Roshni Ranganathan pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the process to get the status of Dormant Company under Companies Act, 2013.

Understanding the concept of Dormant company

The idea of a dormant company is a newly introduced concept in the Companies Act 2013, previously absent in the 1956 Act. The Indian legislature seems to have borrowed it largely from the legal principles of company law applicable in the U.K. However, certain significant differences exist such as the duration of dormancy, etc. In line with India’s investor-friendly policies, the provision regarding dormant companies can be seen in the light of promoting and facilitating the procedure of incorporation and functioning of a company.

  1. What is a dormant company?

A dormant company is a company that has been registered under the Companies Act but is not carrying out any “significant accounting transaction.” As per Companies Act 2013, a company that has been formed and registered under the Act,

a) For a future project or to hold an asset or intellectual property and,

b) Has no significant accounting transaction, is permitted to make an application to the Registrar to obtain the status of a dormant company.

  1. Why go for Dormant status? What are its benefits?

The immediate question that arises upon understanding the meaning of a dormant company is this – why would anyone create a company and register it only to get it declared as dormant? The main purpose 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.

The benefits derived from such a status may be summarized under the following heads –

  1. Protection of the Company Name – The intellectual property that the dormant company holds includes trademark of the company name. The name of the company is protected so that others are prevented from trading under the name of the dormant company.
  2. Future Project – A company may have been formed in preparation of a future project. This signifies the intention of the promoters to trade and therefore retain the domain name. A good example of this as stated in Ramaiya is a company that has obtained a lease of land but waiting further approvals before commencing the business. (p. 5755)
  3. Company History – Although this is not a very significant benefit, by establishing a company that is initially dormant and later begins business, can claim to be have been well-established since its incorporation though it may have started its business much later. It helps a company to project a better image to prospective clients and/or creditors.
  4. When to apply for a dormant status?

As per Section 455 of the Companies Act, 2013, a company which has not been carrying out any business or has not had any significant accounting transaction may apply to the Registrar for granting of the status of a dormant company. The Explanation to the provision defines “significant accounting transaction” and “inactive company.”

The relevant portion of the provision reads as follows:

“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–
  • 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.”

Therefore, if a company carries out any transaction that does not fall within the above-mentioned four heads, it stands the chance of losing its dormant status.

According to the renowned author Ramaiya, a newly incorporated company can also apply for the status of a dormant company if it has not carried out any business or operation since its inception, except for filing of returns with the Registrar of Companies or any other payments to comply with the conditions under Company Law or any other law.

  1. How to get status of Dormant Company

The below-mentioned steps are followed while granting/acquiring a dormant status:

  1. The Company must pass a Special Resolution in the general meeting of a company or notify its shareholders and obtain the consent of at least three-fourths of shareholders in value.
  2. The Company must file an application through From MSC – 1 to the Ministry of Corporate Affairs and pay the prescribed fees under Companies (Registration Offices and Fees) Rules, 2014.
  3. Upon satisfaction, the Registrar will issue the certificate of Dormant Company. (Note that the Registrar must be satisfied that the company fulfills the criteria laid down under Section 455 and the relevant Rules prior to granting of the certificate.)
  4. The Registrar shall maintain a Register of Dormant Companies.

An existing company that has not had any significant accounting transaction or carried on any business for the last two years or has not filed its financial statements or annual returns in the last two financial years/last two years will be termed as an inactive company for the purpose of Section 455. Under the Act, the Registrar can declare a company as dormant upon suo moto action as well. The Act also empowers the Registrar to strike off the name of the company from the Register if it remains dormant for five consecutive years. This is different from the situation in U.K. where a company is permitted to remain dormant for an unlimited period of time. However, such a provision would invite trouble too and prone to be misused in India’s corporate scenario that is gradually moving towards a more investor friendly economy.

  1. What are the conditions to be fulfilled for acquiring a dormant status?

The proviso to 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.

The conditions laid down under the Rules are discussed below.

  • No inspection, inquiry or investigation should have been ordered or taken up or carried out against the company.
  • No prosecution should have been initiated and pending against the company under any law.
  • 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.
  • 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 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.
  • The securities of the company should not be listed on any stock exchange within or outside India.

Another requirement under the Companies (Miscellaneous) Rules 2014, Rule 6 is that that a dormant company should have a minimum number of 3 directors in case of a public company, 2 in case of private and one in case of a One Person Company.

  1. What is the procedure for suo moto action by the Registrar?

Step 1- The Registrar must issue notice to the company that has not filed its financial statements for two consecutive years.

Step 2- The Registrar must record /enter the name of the company in the register of dormant companies.

Step 3- The Registrar shall strike off the name of a dormant company from the register of dormant companies maintained by him if the company fails to comply with the requirements of Section 455.

It is to be noted, nevertheless, that a dormant company is not exempt from conducting audit of its books of accounts, holding meetings or other compliances under the Companies Act, 2013.

  1. Once dormant, can it become active again?

Yes. The Act of 2013 provides for converting a dormant company into an active company, for which an application under Section 455(5) must be filed, seeking the status of an active company. The said application shall be made in Form MSC-4 together with the prescribed fees and also with a return in Form MSC-3 with respect to the financial year in which the application seeking active status is being filed. As per Rule 8 of the Companies (Miscellaneous) Rules 2014, the Registrar shall issue a certificate recognising the active status of the company under Form MSC-5.

In case the dormant company does or omits to do an act under the Grounds of application in Form MSC-1 (submitted while seeking dormant status), the directors have a duty under the Act to file an application under Rule 8(1) for obtaining active-company status, within 7 days of such an act or omission.

Besides this, the Registrar is empowered to take suo moto action in case he is satisfied that the dormant company has been functioning directly or indirectly. In such a case, he can initiate proceedings for enquiry under Section 206 of the Companies Act, 2013 and provide the company with reasonable opportunity of being heard. If after such hearing, he finds that the company has been functioning, he has the power to remove the name of the company from the register of dormant companies and treat it as an active one.

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