Dormant Status for Company

Pooja , Last updated: 11 December 2021
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INTRODUCTION

The Companies act 2013 has introduced new provision called Dormant Company. This concept is also known by profession as Asset Shielding Concept.

A Dormant Company lies on the core foundation of invest now and shine later. The concept of Dormant is inspired by the common phenomenon of corporate sector, which states that the longer a Company exists, the higher it will be valued. Therefore, the primary objective of retaining the dormant status for a Company is to maintain its corporate status regardless of not carrying out any business.

It is a perfect getaway of Company strike off or closure that results in permanent shut down of the business. This is an advantage to the promoter who holds assets or intellectual property for later usage.

For instance, the promoter can buy land at a lesser price through the dormant company for its future project.

Construction Companies/ Real Estates companies Incorporate New companies to Hold Land/ Properties for future projects. With this concept, they can obtain a status of the dormant company and purchase property/land in that company. Dormant company is beneficial for them as there are less compliance required which results in less cost on compliance.

WHAT IS DORMANT COMPANY?

The word "Dormant" means something that is temporarily inactive. So, the term "Dormant Company" means a Company that is currently inactive or inoperative.
As per the Companies Act, 2013, a dormant company has been defined as "Where a company is formed and registered under this Act for the below objectives:

incorporate 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 is Dormant Company

WHO CAN APPLY FOR DORMANT STATUS?

A Company Formed and Registered under Companies Act 2013:

- For a future project or to hold an asset or intellectual Property, and

- Has no significant accounting transaction.

A newly incorporated company can also apply for the status of a dormant company if it has not yet started its business activities.
An "Inactive Company" may make an application to the Registrar for obtaining the status of a dormant company.

BENEFIT/REASON TO OBTAIN THE STATUS OF DORMANT COMPANY

The company can reserve the name and hold it for certain time i.e. until commencement of operations.
When the business owners plan to restructure a business, they may obtain a dormant status for it.
If there is a requirement of an extended period off for the business owner due to reasons like illness, travel, maternity leave etc they may obtain a dormant status for it.
To protect your interest and reputation as a sole trader.
Retaining intellectual property rights until commencement of operations.
No Dormant Company is liable to pay any taxes until it is reactive.
No need to re-spend on Incorporation cost.
Company needs not to file two (2) forms for Annual filing i.e. MGT- 7 and AOC-4 each year;
No requirement to hold Annual General Meeting every year;
No need to hold and convene four (4) Board Meetings in a year, etc.
The provision which relates to the rotation of the auditors does not apply to a dormant company.
A dormant company does not have to show cash flow statements in the company's financial statements.
Easy to reactive and get the active status.
For reckoning the limit of directorships of twenty companies, the directorship in a dormant company shall not be included. {Section 165 (1) of the Companies Act, 2013}
For reckoning the limit of audit of twenty companies, the audit of a dormant company shall not be included. {Section 141 (3)(g) of the Companies Act, 2013}

CONDITIONS BEFORE APPLYING FOR A DORMANT STATUS?

A company can apply for the dormant status only if it meets the following requirements:

No ordering or carrying out the inspection, inquiry, or investigation against the company. Also, there is no initiation of the prosecution and pending against the company in any court of law.
There is no outstanding payment on public deposits or interests, in the name of the company.
There shouldn't be any outstanding loan on the company, secured or unsecured. In case there is an unsecured loan, the lender's consent should be enclosed with the form MSC-1.
A certificate to the effect of no dispute or difference among the management and promoters of the company has to be enclosed with Form MSC-1
There are no outstanding tax dues to the central or state government or local authorities in the name of the company.
There should be no default in the payment of the company' s workmen's dues.
The company should not list itself on the stock exchange, within or outside India. Hence, a Listed Company cannot apply under Section 455.

TENURE OF DORMANT COMPANY?

Dormant companies can enjoy status of dormant companies for consecutive 5 years. On completion of 5 years, Registrar shall initiate the process of striking of a name of the Company.
Where a dormant company does or omits to do any act mentioned in the grounds of application in e-form MSC-1, affecting its status of dormant company, the director shall file an application for obtaining the status of active company within 7 days from such event.
Where the registrar has reasonable cause to believe that any company registered as dormant company has been functioning in any manner, he may initiate the proceedings of enquiry and treat it as an active company.

PROCEDURE

1. Convene a Board Meeting to discuss the following items prior to proceeding with the application for obtaining the status of a dormant company

(a) To evaluate the proposal of obtaining the status of a dormant company.

(b) To approach the Auditor for a Certificate and Statement of Affairs duly certified by Chartered Accountant or Auditor(s) of the company to be enclosed as an attachment to e-form MSC-1.

(d) To approach creditors of the company, if any, to give their no objection for obtaining the status of a ‘Dormant Company'.

(e) To authorize any director(s) to do all such other acts, deeds or things as may be necessary.

2. Convene a Board Meeting to -

(a) Authorize a Director to make an application for obtaining the status of a dormant company.

(b) Fix date, time and place for convening of an Extra-Ordinary General meeting (alternatively, the Company may send a notice to all the shareholders of the company for this purpose and obtain consent of at least 3/4th shareholders in value).

3. Hold the Extra-Ordinary General Meeting and pass a special resolution and file MGT-14 with the ROC within 30 days.

4. After filing MGT-14, application for obtaining the status of a dormant company in form MSC-1 is required to be made to the Registrar.

5. The Registrar on consideration of the application shall allow the status of a dormant company to the applicant and issue a certificate in form MSC-2. Once the form is approved the status of the company shall be changed to ‘Dormant under section 455'.

6. The Registrar shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section.

DOCUMENTS REQUIRED FOR OBTAINING STATUS OF DORMANT COMPANY

Certified true copy of board resolution authorizing making of this application.
Certified true copy of special resolution authorizing for obtaining dormant status, to be filed with the registrar in Form MGT-14.
Auditor's certificate
Statement of affairs duly certified by Chartered Accountant or Auditor(s) of the company
Copy of approval or no objection certificate (NOC) from the regulatory authority in case company is regulated by such authority
Latest financial statement and annual return of the company is mandatory to attach in case the same is filed to Registrar
Consent of the lender if any loan is outstanding
Certificate regarding no dispute in the management or ownership.
Any other information can be provided as an optional attachment(s).

POST-COMPLIANCES AFTER INCORPORATING A DORMANT COMPANY

Minimum number of Directors: A Dormant Company shall have to maintain at least 3 Directors in case of a Public Company, 2 for Private Company and 1 for OPC.
No. of Board Meetings: The Dormant Company is required to conduct 1 Board Meeting in every half of a calendar year. Also, the gap amid the two Meetings should not be less than 90 days.{Section 173(5) of the Companies Act, 2013}
Filing of Annual Return: The Company shall have to file Annual Returns that indicate its financial position and it must be duly audited by a CA in practice in e-Form MSC-3 within 30 days from the end of each financial year.
Also, the Company shall continue to file the return of allotment (e-form PAS-3) and change in directors (e-form DIR-12) in the manner and within the time as specified under the Act.

CONVERSION OF A DORMANT COMPANY TO ACTIVE COMPANY

Prepare and file an application to attain the active status in Form MSC-4 which shall be accompanied by 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:
After proper assessment of filed Application, Registrar will issue a Certificate in Form MSC-5 confirming the active status of your Company.

Important terms as per Companies Act, 2013 for Dormant Company

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 -

(a) payment of fees by a company to the Registrar;
(b) payments made by it 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.

FORMS TO BE FILED

MSC 1 - Application for obtaining status of dormant company, certificate that there is no dispute in the management or ownership of the company, there is any outstanding unsecured loan obtaining concurrence of the lender.
MSC 2 - Certificate allowing the status of a Dormant Company.
MSC 3 - Return of dormant companies.
MSC 4 - Application for seeking status of an active company.
MSC 5 - Certificate allowing the status of an active company to the applicant.

CONCLUSION

There is an array of benefits of Dormant Company or registering under Section 455 of Companies Act, 2013. It renders a chance to temporarily take a break from the business and re-activate the business with better ideas & execution.

The author can also be reached at sclghyy@gmail.com

Disclaimer: The entire contents of this article have been prepared on the basis of relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. We assume no responsibility for the consequences of use of such information. This is only a knowledge sharing initiative and author do not intend to solicit any business or profession.