This article is written by Ronika Tater, from the University of Petroleum and Energy Studies, School of Law. In this article, she discusses the procedure required to obtain the status of a dormant company as per the provisions of the Companies Act and also defines the concept of other types of companies.

Introduction

Company means a company incorporated as per Section 2(20) of the Companies Act, 2013 or as per Section 3(1)(i) of the Companies Act, 1956. Company means an incorporated association which is an artificial person having a separate legal entity, with perpetual succession and different from its shareholders, a common seal and a common capital consisting of transferable shares and limited liability.

What is a dormant company as per the Companies Act?

The concept of the dormant company is defined under Section 455 of the Companies Act, 2013. In layman’s language, the word “Dormant” means inactive or inoperative. It is established and registered for an upcoming future project or to keep an asset or intellectual property and it has no significant transaction. Hence, it can make an application to the registrar of the company for obtaining a status of the dormant company under the Act. Significant Accounting Transaction means any transaction exclusive of the below-mentioned points:

• Payments of fees by a company to the registrar of the company,
• Payments on the condition to fulfil the requirement of the Act or any other provisions of the statute,
• Allotment of shares as per the Act,
• Payments for maintenance of its office and records.

Even if a company has made the above-mentioned transaction in the last two years still the company will fall under the ambit of the inactive company for the purpose of Section 455 of the Companies Act, 2013. It means a company that has not been carrying out any business or operation or has not made any significant accounting transaction as above-mentioned and has not maintained any financial statements and annual returns during the last two financial years. As per Section 2(40) of the Companies Act, 2013 the term financial statement states that the following:

• The balance sheet at the end of the financial years.
• In the instant case of applicability; Profit and Loss Account or Income or Expenditure account,
• Cash flow for the financial year, and 
• Or any explanatory note attached to any document as per the Act.

As per the Act, where a company has not filed or fails to maintain a financial record or annual return for two financial years continuously, the registrar of the company shall issue a notice to that company and mention the name of such a company in the register as Dormant Company.

The importance of a dormant company

In the case of a dormant company, investment is an excellent opportunity to state a company for a future project or hold assets or intellectual property and use it later without having significant accounting transactions. The reason is cost advantage and restart is better than a fresh start and in such circumstances, dormant companies come into existence and without any further procedures subject to the certain condition it can restart the company. However, the company may not be active but it has the status of a company in society and the longer the company exists, the greater is its value.

The procedural formalities to obtain the status of a dormant company

The following are the condition should be fulfilled before applying to a dormant company:

• There should be no prior inspection, inquiry or investigation ordered or taken up or carried out against the company;
• Neither should the company have any public deposits which are outstanding nor any default in payment or interest;
• There should be no prosecution proceedings have been started against the company under any provision of law;
• There should be no default in the payment of workmen’s dues;
• No resolved statutory taxes, dues, duties etc., payable to the central government or the state government or other local authorities;
• The procedural formalities for obtaining the status of a dormant company has not been made to deceive the creditors or defraud any other person;
• It should be excluded from any list of securities of the company on any stock exchange domestic or international countries;
• There should be no conflict in the management of the company or ownership of the company and a certificate should be attached under the Form MSC-1;
• The company should not have any dissolved loan in whether secured or insured form. The company may apply only after the consent of the lender and encompassing the same with Form MSC-1.

The following states the process to get the status of a dormant company:

• To call a Board Meeting or an Extraordinary general meeting.
• Authorization to the director to make an application with the registrar of the company.
• Issue notice of General Meeting.
• Facilitate an auditor or chartered accountant to issue the certificate.
• Pass a special resolution with the consent of three-fourths of the shareholders of the company.
• File an e-form under MGT-14 with the registrar of the company.

Attachments required in the process of obtaining the status

The following are the attachment required by the company to obtain the status of dormancy:

• Cost to the company (“CTC”) of the special resolution.
• Notice of extraordinary general meeting with an explanatory statement.
• CTC of Board resolution.
• CTC of Special resolution.
• File Form MSC-1 with the registrar of the company.
• Certificate issued by the auditor or chartered accountant.
• Statement of affairs certified by the auditor or the chartered accountant.
• Recent financial statement and the annual return of the company is mandatory.
• Certificate of no dispute in the management and ownership of the company.
• Consent of the lender. 
•  Necessary fees should be paid as mentioned under the Companies (Registration Offices and Fees) Rules, 2014.

After the approval by the registrar a certificate of status of a dormant company is sent to the user as an attachment in the email and once the form is approved the status of the company is changed as per Section 455 of the Act.

Transaction carried out in the period of dormant

The company may carry out the following business transaction in the period of inactive:

• Any payment of fees by a company to the registrar.
• Any payments required to be fulfilled as per the provisions of the Companies Act or any other Act.
• Allotment of shares to fulfil the requirement of the companies Act.
• Any payment for maintenance of its office and records.

Forms required to be filed with the registrar after the status of dormant

The following are the forms required after receiving a certificate of the dormant company:

• It should annually file a declaration in Form No. MSC-3 within thirty days from the end of each financial year.
• It should continue to file the annual returns or returns of allotment and any change in the directors of the company.
• To obtain the status of the active company the dormant company should apply Form No. MSC-4 with the registrar of the company and then obtain the status of an active company.
• If the company is engaged in any significant accounting transaction during the dormant period the director of the company is required to file an application within seven days to the registrar for obtaining the status of an active company.
• Further, if the registrar after the enquiry has reasonable reason to believe that the company applying for the dormant company status has been functioning and also after providing a reasonable opportunity to be heard and then after treating the company as an active one.

Other provisions required to obtain the status of a dormant company

• In the case of a public company, it shall have a minimum number of three directors and in addition to the case of a private company, it shall have two directors and one director in case of a one-person company.
• Apply for documents and pay such annual fee as may be authorized by the law to sustain its dormant status.
• It does not require to enclose cash flow statements in its annual accounts.
• It is required to convene at least one meeting of the Board of Directors within six months and the gap between the two meetings should be at least ninety days.

Other types of company

• Section 8 of the Companies Act–  states that a company that is registered as a limited company under this section and holds the license from the central government and includes the following:

1. For facilitating of commerce, art, science, sports, education, research, social welfare, charity, protection of environment or for any other object;
2. Plan to file to its profits, if any, or other income in promoting its objects; and
3. Plan to prohibit the payment of any dividend to its member.

• Government company- Section 2(45) of the Companies Act, 2013, states government company as any company in which not less than 51% of the paid-up share capital is held by the central government or by any state government. It may also include the subsidiary company of such a government company. Moreover, special privileges and exemptions are available to the government company under the Act.
• Small company- Section 2(85) of the Companies Act defines the small company as a company other than a public company, including:
  • Paid-up share capital of which does not exceed 50 lakh rupees or such higher amount but not exceeding more than 10 crore rupees, and
  • Turnover of which as per the profit and loss account for the coming financial year does not exceed 2 crore rupees or any such higher amount which shall not be more than 10 crore rupees, however, excluding the following:

1. A holding company or a subsidiary company.
2. A company registered under Section 8.
3. A company or body of corporate governed by any special Act.

• Subsidiary company- Section 2(87) of the Companies Act, 2013 states a subsidiary company or subsidiary as a company or a holding company which controls the composition of the Board of Directors or exercises or control more than one-half of the total voting power either at its own or together of one or more of its subsidiary companies. However, in such a case the composition of a company Board of Directors shall be controlled by another company if that other company has the power or at its discretion can appoint or remove all or majority of the directors. The expression company includes any body corporate.
• Holding company- Section 2(46) of the  Companies Act, 2013 states a holding company as one or more other companies or a company of which such companies are subsidiary companies. The expression company here includes anybody corporate.
• Associate company- Section 2(6) of the  Companies Act, 2013 states the associate company as a company in which that other company has a significant influence and is not defined as a subsidiary company having such influence and it also includes a joint venture company. Also:
  • Significant influence means control of at least 20% of total voting power or control or participation in business decisions under an agreement.
  • A joint venture means a joint arrangement whereby the parties that have recently joint control of the arrangement have rights to the net assets of the arrangement.
• Producer company-  In layman’s language, a producer company is denied as a legally recognized body of farmers or agriculturists to improve the standard of their living and ensure growth and support, income and profitability. Hence, a producer company means a body corporate having its aim or activities mentioned under Section 581B of the Companies Act and it is also registered as a producer company. Moreover, the Companies (Amendment) Bill, 2020 includes a new chapter and it mentions some condition producer companies as follows:
  • Only persons involved in an activity with primary produce can participate in the ownership.
  • The members mandatorily have to be primary producers.
  • The name of the company should end with “Producer Company Limited”.
  • After the registration, the producer company is the same as the private limited company for the law but it should comply with Part IXA until any specific provision is provided for the same.

References

• http://ebook.mca.gov.in/Actpagedisplay.aspx?PAGENAME=17381.
• https://indiankanoon.org/doc/154350/.
• http://www.mca.gov.in/MinistryV2/companyformsdownload.html.

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