This article is written by Yash Bagra, a student of the Institute of Law, Nirma University.
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 is not operational for a long period of time. However, dormant companies does not necessarily mean that they are defunct; it includes companies which does not have significant operation or transactions because of the nature of business they perform.
A dormant company provides an excellent advantage to promoters who want to hold an intellectual property or an asset under the corporate shield for its usage at a later stage. For instance, if a promoter wants to buy a property now for the purpose of some future project at a comparatively affordable price, he can purchase the property through a dormant company so that he use the property for the project later on. A dormant company formation can also 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 for a short time, he can choose to preserve his company so that he can restart it at a later date. 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. Dormant companies or asset holding companies also helps in limiting the liabilities of the holding company and protect the assets of the group company from the operation of other subsidiary company. In case one of the subsidiaries goes bankrupt, unless the holding company has co-signed the debt, the holding company will not be liable for the loss.
Recognisition of dormant company
Under the Companies Act, 1956 a company which had not submitted its annual filings for three consequitive years were declared as dormant company. However, there was no specific provision under the old Companies Act, which allowed for registration as a dormant company, which led to companies which were established for the certain purposes (which did not had any significant transactions) to comply with all the compliances required for a normal company. The typical compliance of a company added to the cost and time for the officer of such companies, and acted as deterrence for incorporating such companies, which are incorporated for a very specific purpose of holding intellectual property, assets of the company as a strategy.
Which companies can obtain the status of a dormant company?
Companies Act, 2013 has come up with new regulations for dormant companies. Section 455 of Companies Act, 2013 deals with companies which are dormant in nature. It provides certain conditions to be fulfilled before getting a tag of dormant company. Companies may apply for a dormant status if the company is incorporated for a future project, incorporated for holding an asset or intellectual property, company which has not filed financial statement and annual returns during the last two financial years and a company which is carrying out any business or has made any significant accounting transactions. An application has to be made to the registrar of companies to get a dormant company certificate.
Important conditions to be fulfilled for acquiring dormant company status
Apart from the above criteria, a company can acquire the status of a dormant company, only if it has fulfilled the following conditions:
i) The company is neither having any public deposits which are outstanding nor is the company in default in payment thereof or interest thereon;
ii) No inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
iii) No prosecution has been initiated or pending against the company under any law;
iv) The company is not having any outstanding loan or if there is any, the concurrence of the lender has been obtained and is enclosed with the application;
v) The company has not defaulted in the payment of workmen’s dues;
vi) 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.;
vii) There is no dispute in the management or ownership of the company;
viii) The application has not been made with an objective to deceive the creditors or to defraud any other person;
ix) The securities of the company are not listed on any stock exchange within or outside India.
Exemptions or privileges for dormant companies
A Dormant Company is exempted from enclosing cash flow statements in its annual accounts.
Section 173(5) of the Act states that a Dormant Company shall be deemed to have complied with all the provisions of this section if at least one meeting of board of directors has been conducted in each half of a calendar year and the gap between the two meetings should not be less than ninety days. However, a dormant company shall file a “Return of Dormant Company” 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.
A dormant company must have minimum number of three directors in case of a public company, two in case of private company and one in case of one Person Company. Even the provisions of rotation of directors do not apply on dormant companies.
How to apply for a dormant company status?
Step 1: The company must pass a special resolution in the general meeting of the company or after issuing a notice to all the shareholders of the company and obtaining consent of at least 3/4th shareholders (in value) for the purpose of obtaining dormant company status.
Step 2: A company can get a status of dormant company by filing an application before the MCA in Form MSC -1.
Step 3: If the registrar finds that application by the company fulfills all the conditions, it can give company a certificate of Dormant Company.
It is important to note that the registrar has the power to strike off the name of the company from the register if the Company remains dormant for five consecutive years.
How to seek the status of an active company or de-notify dormant company status ?
Any company willing to seek the status of an active company must file an application in Form MSC- 4 along with the prescribed fees with the MCA. Moreover, if any company has contravened any of the conditions mentioned in the grounds of application for obtaining the status of dormant company, should within seven days of such contravention should file an application for obtaining the status of an active company. The Registrar can take action to remove the company from the list of dormant companies, after giving a notice if it finds out that the company has contravened the conditions for granting the dormant company status.