• By ADMIN
• Posted 22 Jun, 2023
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Dormant Companies under Companies Act, 2013

About Dormant Company

Companies are generally classified on the basis of their incorporation, number of members, size, basis of control and motive. Sometimes due to various reasons, the promoters of a company may feel the need to temporarily close down the company but they don’t want to dissolve it. In such cases, the company may become dormant as against an active company which carrying on business.

What is meaning of dormant company?

A dormant company is an inactive company i.e., not carrying on business activity and has applied to the Registrar of Companies (“ROC”) to change its status in the Register of Companies maintained by the said Registrar of Companies from “Active Company “to “Dormant Company”.

A company may become dormant immediately after its registration or after a few years of its incorporation. There are many reasons as to why a company may change its status from “active “to “dormant”.

Explanation for Inactive company

For the above purposes, ‘inactive company’ means a company which:

(a) has not been carrying on any business or operation; or

(b) has not made any significant accounting transaction during last two financial years; or

(c) has not filed financial statements and annual returns during the last two financial years.

‘Significant Accounting Transaction’ means any transaction made by the company except transactions mentioned below:

(a) payment of fees by a company to the Registrar;

(b) payments made by the company to fulfil the requirements of this Act or any other law;

(c) allotment of shares to fulfil the requirements of this Act; and

(d) payments for maintenance of its office and records.

All the transactions, apart from the above-mentioned transactions, will be considered as significant accounting transactions. If a company has made only the above-mentioned transactions in the last two financial years, then that company will fall under the definition of ‘Inactive Company’

Obtaining Dormant Status

A Company can obtain its status as Dormant Company by applying suo-moto or the ROC may declare a company as Dormant.

• Suo-Moto application: A company which meets the criteria mentioned above, can apply suo-moto to ROC for the status of a “Dormant company”. The form prescribed for this is in Form MSC-1.

• Dormant by ROC: In case of a company which has not filed financial statements or annual returns for two financial years consecutively, the ROC shall issue a notice to the company and enter the name of such company in the register maintained for dormant companies following due procedure of law.

Hence, it is not always the company which applies for the status of the dormant company; even the ROC is empowered suo moto to change the status of a company into a dormant company.

The Registrar may initiate the process of striking off the name of the company, if the company remains as a dormant company for a period of five consecutive years.

Thus, Maximum period for which the company can be in the dormant status is five consecutive years. Before completion of five years as dormant company, such a company may apply for activation or strike off.

Prerequisite for Obtaining the Status of Dormant Company:

The Registrar shall not grant the status of a dormant company if:

(a) any inspection, inquiry or investigation has been ordered or taken up or carried out against the company.

(b) any prosecution has been initiated and pending against the company under any law.

(c) there are public deposits which are outstanding or the company is in default in payment thereof or interest thereon.

(d) there is any outstanding loan, whether secured or unsecured. In case the company has any outstanding unsecured loan, the company must apply for the status of a dormant company after obtaining the concurrence or approval of the lender which is required to be enclosed with Form MSC-1.

(e) if company has any Outstanding Unsecured Loan then the company may apply for status of Dormant only after obtaining NOC from the lender. Such NOC is required to be attached in the Form which is required to be filed with ROC.

(f) there is no dispute in the management or ownership of the company. A certificate in this regard is required to be taken from the management. Such a certificate is required to be enclosed with Form MSC-1which is required to be filed with ROC.

(g) there are outstanding statutory taxes, dues, duties, etc., payable to the Central Government or any State Government or local authorities etc.

(h) there is default in payment of its workmen’s dues.

(i) the Company is a listed company within or outside India.

Compliance Requirements by Dormant Company

The compliance requirements to retain the status of a dormant company are as follows:

1. A dormant company shall have a minimum number of three directors in case of a public company, two directors in case of a private company and one director in case of a One Person Company.

2. A dormant company is required to file a “Return of Dormant Company” in form MSC-3 annually, along with statement of affairs duly audited by a chartered accountant in practice along with such annual fee and filed within a period of thirty days from the end of each financial year.

3. A Dormant Company is required to convene at least 1 meeting of the Board of Directors in each half of a calendar year and the gap between the 2 meetings is not less than 90 days.

4. A Dormant Company shall continue to file the return or returns of allotment and change in directors in the manner and within the time specified in the Act, whenever the company allots any security to any person or there is any change in the directors of the company.

Benefits / Exemptions Provided to a Dormant Company

By obtaining the status of a dormant company, the company enjoys the following exemptions/benefits:

(a) Dormant Company shall hold only two board meetings in a year with a gap of 90 days in between the two board meetings.

(b) Dormant Company is not required to include the statement of cash flow in its financial statement.

(c) The provision of rotation of auditors is not applicable in case of a dormant company.

(d) Dormant companies enjoy the advantages of lower statutory compliance cost as there are few statutory compliances applicable to dormant company as compared to active company, for example, a dormant company need not hold Annual General Meeting every year.

(e) Dormant status is an advantage to promoters who want to hold intellectual property or an asset under the corporate shield for its usage at a later stage.

(f) Companies can enjoy the status of dormant company for a period of 5 consecutive years.

(g) Dormant Company is not liable to pay any taxes until it reacquires its active status.

(h) It is easier for dormant companies to reacquire its active status and it also reduces the cost of incorporation of a new company

Procedure to obtain the status of a Dormant Company

The following procedure to be followed by a company for obtaining status as a ‘dormant company’:

1. The company shall call a board meeting to fix day, date, time and venue for General Meeting of the members of the company to pass a special resolution for making application to the ROC to obtain status of a dormant company.

2. The company shall obtain Statement of affairs from the Auditor of the company. The statement of affairs shall give the financial position of the company at the time of passing said resolution in the shareholders meeting.

3. The company shall hold the General Meeting at the appointed time, place and date as per the notice calling the said meeting. The notice shall propose the resolution as a special resolution.

4. The company shall pass a special resolution for obtaining the status of a dormant company and authorize the director(s) to make application to ROC after issuing a notice to all the shareholders of the company for this purpose and obtaining consent of at least 3/4th shareholders (in value). After passing the special resolution, the company shall file Form MGT-14 with ROC for filing special resolution within 30 days from passing of the said special resolution.

5. After filing of Form MGT-14, the company shall file Form MSC-1 with the ROC along with the copy of the special resolution, copy of statement of affairs, declarations by the directors and other necessary documents.

6. On being satisfied with the merits of the application, the ROC shall issue a certificate in Form MSC -2

Procedure to obtain the status of an Active Company from Dormant Company

The dormant company shall follow the below procedure for obtaining status of an active company on its own:

1. An application for obtaining the status of an active company is required to be made in Form MSC-4 along with a return in Form MSC-3 in respect of the financial year in which the application for obtaining the status of an active company is being filed.

2. The ROC after considering the application filed for obtaining the status of the active company from dormant company shall issue a certificate in Form MSC-5 allowing the status of an active company.