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.
Significant accounting transactions would mean transactions other than the basic procedural transactions i.e the payment of fees by a company to the Registrar and also payments to fulfil the requirements of this Act or any other law, allotment of shares to fulfil the requirements of this Act and payments for maintenance of its office and records.
Concept of Dormant Company
A dormant company under Section 455 of the Companies Act 2013 is a registered entity that is inactive with no significant accounting transactions, existing for holding an asset, intellectual property, or for a future project, and has applied to the Registrar to obtain dormant status and successfully obtained the status of Dormant Company.
A dormant company may either be a public company or a private company or a one person company (OPC).
Invest now shine later serves as a core policy of dormant companies. The companies are in a position to hold assets or intellectual property and use it later and why would they do this? Cost Advantage is the reason for it. Well, the restart is always better than a fresh start and dormant companies offer this advantage. So if a company chooses to take a backseat for a good reason then they can always restart when they want to, without further procedures subject to certain conditions. The longer you exist the greater you are valued. So as a dormant company, the company may not be active but it still has a status of a company in the eyes of law.
Procedural Formalities to get the Status of a Dormant Company
- There should have been no inspection, inquiry or investigation ordered/taken up/carried out against the company nor any prosecution initiated/pending against the company under any law.
- The company should have no outstanding deposits nor should have defaulted in payment of the amount or interest.
- The company should not have any outstanding loan, whether secured or unsecured.The company may apply under this rule after obtaining the concurrence of the lender and enclosing the same with Form MSC-1
- There should be no dispute in the management or ownership of the company and a certificate in this regard is enclosed with Form MSC-1
- The company should not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government/State Government / local authorities etc.and also not defaulted in the payment of workmen’s dues;
- The securities of the company should not be listed on any stock exchange within or outside India.
Special provisions applicable to a dormant company
| Directors | Minimum number of directors: Public Company:3 Private Company:2 One Person Company:1 |
| Rotation of auditors | Not applicable |
| Return of Dormant Company-MSC-3 | Financial position duly audited by a chartered accountant should be filed within 30 days from the end of financial year |
| Return of allotment and change in directors | As specified in the act |
COMPLIANCES FOR DORMANT COMPANY
1) Company needs to have minimum number director as required by Companies Act, 2013 i.e. at least 3 Directors in case of a Public Company, 2 for Private Company and 1 for OPC.
2) The company shall continue to file the returns of allotment and change in directors, whenever the company allots any security to any person or there is any change in the directors of the company.
3) The Dormant Company is required to hold at least one meeting of the Board of Directors in every half year. The gap between two meetings shall not be more than 90 days.
4) The maximum tenure for which a company can remain dormant is 5 consecutive financial years. If a company remains dormant for more than 5 years, the Registrar commences the process of striking off the name of the company from the Records, i.e. the company will be removed.
5) A dormant company is required to file a “Return of Dormant Company” in Form MSC-3 annually, interalia, indicating financial position duly audited by a Chartered Accountant in Practice along with such annual fee as provided in the Companies (Registration Offices and Fees) Rules, 2014 within a period of thirty days from the end of each financial year.
6) No need not enclose cash flow statements in its annual accounts.
7) The provisions of the Act in relation to the rotation of auditors are not applicable to dormant companies.
Reactivation of a Dormant Company
In order to move from red(inactive) to green(active) the company will have to:
- File form MSC-4
- File MSC-3
- And pay a prescribed fee
Further,
- Once the above points are done, the Registrar will issue the fcertificate in form MSC-5 allowing the status of an active company.
- In some cases, If the registrar has a reason to believe that the company that has applied for the dormant company status has been actually functioning, after completing enquiry and also after giving the company a reasonable opportunity to be heard, may treat the company as an active one.
- If the company fails to comply with anything mentioned under the grounds of the application for status of the Dormant company, then the directors shall apply for obtaining the status of an active company within 7 days
Eligibility
i.Any inspection, inquiry or investigation has been ordered or taken up or carried out against the company.
ii. Any prosecution has been initiated and pending against the company under any law.
iii. There are public deposits which are outstanding or the company is in default in payment thereof or interest thereon.
iv. 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.
v. 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.
vi. 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-1 which is required to be filed with ROC.
vii. There are outstanding statutory taxes, dues, duties, etc., payable to the Central Government or any State Government or local authorities etc.
viii. There is default in payment of its workmen’s dues.
ix. The Company is a listed company within or outside India.
FAQs
What is a dormant company?
A dormant company is a company that is registered and has not conducted any business or significant transactions during a specified period. It remains inactive and does not generate income or engage in any commercial activities.
Why would a company choose to become dormant?
Companies may choose to become dormant for several reasons, including:
- To reduce compliance costs and administrative burdens while planning for future activities.
- To maintain the company’s name and structure for potential future use without incurring the costs of active operations.
- To avoid penalties or additional scrutiny from regulatory authorities.