Dormant Company under Companies Act, 2013

Background

Under Companies Act, 1956, a company which does not submit its Annual Filings for three consecutive years would be declared as dormant company. However, there was no specific provision for the same.

But now under Companies Act, 2013, recognition has been given to dormant company u/s 455 read with Companies (Miscellaneous) Rules, 2014, i.e. a company that has been formed and registered under the Act:

For a future project or to hold an asset or intellectual property and, has no significant accounting transaction,

or

an inactive company,

is permitted to make an application to the Registrar to obtain the status of a dormant company.

Explanation of Key terms

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–

• Payment of fees by a company to the Registrar;
• Payments made by it 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.

Therefore, a dormant company is a company registered under the Companies Act for carrying business but has no transaction other than payments made under this act and maintenance of its office and records or a company which has not filed financial statements and annual returns for last two financial years consecutively,

In case of a company has not filed financial statements or annual returns for two consecutively financial years, the Registrar shall issue a notice to that company and enter the name of such company in the register maintained for dormant companies.

Benefits of Dormant Status

• Advantage to promoters who want to hold an intellectual property or an asset under the corporate shield for its usage at a later stage;
• Efficient in case the promoters wants to stop trading for a specific period of time;
• Boost Credit Worthiness;
• Exempted from enclosing cash flow statements in its annual accounts;
• The provisions of rotation of directors do not apply on dormant companies;
• At least one meeting of board of directors to be conducted in each half of a calendar year and the gap between the two meetings should not be less than 90 days to comply with the provisions.

Eligibility criteria for acquiring status of Dormant Company

The Company shall be eligible to apply only, if it complies with following requirements:

• No inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
• No prosecution has been initiated and pending against the company under any law;
• Neither having any public deposits which are outstanding nor default in payment thereof or interest thereon;
• No outstanding loan, whether secured or unsecured;
• No dispute in the management or ownership of the company;
• No outstanding statutory taxes, dues, duties etc. payable to the Central Government or any State Government or local authorities etc.;
• No default in the payment of workmen’s dues;
• Not listed on any stock exchange within or outside India.
• Appointment of minimum no. of 3 directors in case of public company, 2 directors in case of private company, 1 director in case of OPC.

Process for acquiring status of Dormant Company

Rule 3 provides the steps to be followed along with timelines for acquiring a dormant status. The same is described below:

1. Either pass Special Resolution in general meeting or obtain consent of atleast 3/4th of shareholders (in value) for this purpose
2. Application in E-Form MSC-1, subject to fulfilment of eligibility criteria as mentioned above, to file accompanying following documents:

• CTC of BR for authorising to make application
• CTC of SR authorizing for obtaining dormant status/ consent as above
• 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;

3.     The Registrar will issue the certificate of Dormant Company in Form MSC-2.

The Act also empowers the Registrar to strike off the name of the company from the Register if it remains dormant for five consecutive years.

Compliances by Dormant Company

Once the status of dormant company has been obtained, the company is required to file return of dormant company annually in E- Form MSC-3 within 30 days of end of each financial year along with following documents:

• CTC of BR showing authorization given for filing this return.
• Duly audited statement of financial position by a chartered accountant in practice.

Also any allotment and change in directors shall be reported as prescribed in the act.

It is to be noted, nevertheless, that a dormant company is not exempt from conducting audit of its books of accounts, holding meetings or other compliance under the Companies Act, 2013.

Regaining status of active company

Section 455(5) along with Rule 8 provides filing of application in E-Form MSC-4 for converting a dormant company into an active company along with following documents:

• CTC of BR authorizing for filing application;
• Return in E-Form MSC-3 of the financial year in which application in MSC-4 filed;

Upon Satisfaction, the Registrar shall issue a certificate recognizing the active status of the company under Form MSC-5.

In case, the dormant company does or omits to do an act under the grounds of application in Form MSC-1, the directors are required to file E-Form MSC-4 within 7 days of such an act or omission.

This overview will help those companies which are not doing any business activity and don’t want their company’s name to be struck off from the register of companies.

CS Ritika Ahuja, Knowledge Partner