A company acquires the Dormant Company status when the Registrar approves an application in Form MSC-1 of Companies. There are several reasons why a company seeks dormant status. Please refer to our detailed discussion on the procedure to convert an active company as a dormant company; click here. A company can remain dormant only for up to five years, and if a company remains in dormant status beyond the five years, then the ROC shall strike off the company itself.
Hence the company should apply to the ROC for obtaining the Active Company Status within five years from the date the company was declared to be a Dormant Company. In case of any event in breach of conditions for a dormant company, the company’s directors must apply for the restoration of the company as an active company within seven days of such event.
The primary objective of the revisions made to the Companies Act 1956 was to have a simplified law that will be able to address the changes taking place in the national and international scenario, enable the adoption of internationally accepted best practices and also provide flexibility in response to the ever-changing business models. One such aspect which was introduced in the Companies Act 2013 was the concept of Dormant Companies in section 455 of this act.
In common parlance, the word “Dormant” means inactive or inoperative. A dormant company is an excellent opportunity to start a company for a future project or hold an asset/intellectual property without having significant accounting transactions. On the other hand if a company has not filed its annual returns for two consecutive years then such a company will also be called as a dormant company.
What is a Dormant company?
A Dormant company is one that does not have:
- Been undertaking or carrying on any activity,
- Carrying out any accounting operations,
- Saved financial statement
- Previous two years financial returns report.
The benefit of Dormant Company
- To Protect the Company Name during inactivity
- Board Meeting to be held once in every six month
- To Reduce Regular Compliance Burden
- Option to Revive when the company has business
- Few provisions of the company act apply
- Simplified Annual Return Filing
obtain the status of Dormant Company
- Suo-Moto (Voluntary): A company can apply Suo-Moto to the Registrar of Companies for ‘Dormant company’ status in Form MSC-1 along with the fee as specified in the Companies (Registration Authorities and Fees) Rules, 2014.
- ROC can declare a company a Dormant company; The Registrar can issue a notice to the company if the company has not filed financial statements or annual returns for two consecutive financial years. The ROC shall enter the name of such a company in the register maintained for companies that have acquired the status of dormant Company.
The exemptions enjoyed by the Dormant companies
- Dormant companies do not contain cash flow statement in its financial statements.
- The provision on the rotation of auditors does not apply.
- Dormant Company status remains for five consecutive years.
- Fewer legal requirements apply, resulting in lower compliance costs.
- The company can revive and operate as it intends to in the future.
- To protect the interests and reputation of the independent trader.
Stepwise Process To Convert an Active Company as Dormant
The Board of Directors shall pass a resolution approving the filing of an application for conversion of the company’s status as Dormant Company in the Board Meeting. The Board shall also authorise one director to act on this behalf and send Notices to all shareholders for the Extra Ordinary General Meeting.
Issue appropriate Notice calling the EGM along with an explanatory statement, clearly stating the reasons as to why the Board of directors proposes a change in status of the company and as “Dormant Company
While the EGM is scheduled, the authorised director needs to work with the Statutory Auditor or a Chartered Accountant in practice for certification of the Company’s Statement of affairs (Financials).
On the designated EGM Date, the meeting of shareholders to be conducted per secretarial standards and with the requisite quorum, a Special Resolution approving the filing of an application for conversion of the status from Active to Dormant Company need to be passed.
Every special resolution passed in EGM needs to be filed with the Registrar of Companies in the prescribed form MGT-14 with the certified true copy of the resolution along with EGM Notice within 30 days of EGM.
After the MGT-14 is filed with the ROC, an application in the Form MSC-1 along with the scan copy of all resolutions, declarations, consent of creditors and CA Certificate is filed with the ROC for its approval.
The registrar of companies examines the application made in MSC-1 and, if finds it in order, then issues a Certificate in form MSC-2. With the issue of the MSC-2 form the status of the company is changed as Dormant Company
Reactivation of Dormant
- Dormant companies must file an application for the conversion of Dormant company status to active company status by filling MSC-4 form.
- The fees recommended under the Companies (Registration Authorities and Fees) Rules, 2014, should also be paid along with the application for conversion of a dormant company into an active company. The MSC-4 should be accompanied by the Dormant Company Return Form MSC-3.
- After reviewing the application as for conversion, the registrar can approve the application and issue a certificate in Form MSC-5 that allows the conversion of Dormant Company status to be an active company.
List of Documents Required To Convert as Dormant Company
- Certified copy of the board resolution approving the application for active status (Mandatory)
- Return Form MSC-3 with the following documents:
- A certified copy of the board resolution authorizing the submission of this statement is required.
- A duly certified statement of financial situation by a chartered accountant in practice (mandatory)
- Any other optional accessories it deems appropriate.
Process of conversion of Dormant Company to active company
the conversion of a Dormant company into an active company is carried out by the Registrar of Companies (RoC):
- The conversion of a dormant company to an active company is done voluntarily.
- The Registrar of Companies converts a Dormant Company into an Active Company by striking it off.
- The conversion of a Dormant Company to an Active Company is done when the Dormant Company operates as an Active company.
In the event that the transformation of a dormant company into an active company is carried out voluntarily, the procedure is as follows:
- A Dormant Company should file an application for conversion of Dormant Company status to Active Company status on Form MSC-4.
- The fee prescribed under the Companies (Registration Authorities and Fees) Rules, 2014, should also be paid along with the application for conversion of a dormant company into an active company. The MSC-4 should be accompanied by the Dormant Company Return Form MSC-3.
- After considering the submitted application, the registrar may approve the application and issue a certificate in Form MSC-5, which will allow the status of the dormant company to be that of an active company.
In the event that the registrar dissolves the company, proceed as follows:
- If the company has been dormant for five consecutive years, the registrar will initiate the process of deleting the name of such a company from the dormant company register. In this case, the applicant should apply for the conversion of a dormant company into an active company, or the registrar will voluntarily delete the company from the register of dormant companies.
- After considering the submitted application, the registrar may approve the application and issue a certificate in Form MSC-5, which will allow the status of the dormant company to be that of an active company.
In the event that the dormant company is operating as an active company, the following steps should be followed:
- Whenever a dormant company takes any action specified in the justification for the application for Form MSC-1 that affects its status as a dormant company, The directors shall apply for the status of an active company within 7 days of the execution of this act.
- Once the Registrar has considered the application, he may issue a certificate in Form MSC-5.
- In the case of inquiries, if the registrar finds that a company that is registered as a dormant company is actually functioning and is within his jurisdiction, the registrar can initiate proceedings against the dormant company.
FAQs
What is a dormant company?
A dormant company is one that has had no significant accounting transactions during a specified period, typically a financial year. It’s a company that is inactive but still exists legally.
Why would a company become dormant?
There could be various reasons, such as lack of business activity, awaiting a suitable market opportunity, or strategic decisions to pause operations temporarily.
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