Dormant Company

When you have incorporated a Company but not able to start a business or plan is on hold, it becomes very difficult for a promoter to fund the regular expenses. Every company needs to hold minimum 4 Board Meeting every year, file its Accounts in AOC-4 and Annual Return in MGT-7.

So what if a Company is incorporated and it does not able to start a business? Either promoter can close the Company by filing an application under Section 248 of the Companies Act, 2013 or by filing winding up application. However, if Promoter/Director is not willing to wind up or close down the Company and have future plans? 

The concept of dormant company was introduced in Companies Act, 2013. A Dormant Company means a company, which:

1.       has not been carrying on any business; or

2.       does not have any ‘significant accounting transaction’ during last two financial years; or

3.       has not filed annual forms during the last two financial years.

What is a “significant accounting transaction”?

It means any transaction other than below mentioned transactions:

1.       payment of fees to the Registrar of Companies

2.       payment made to fulfill requirements of the applicable laws, acts, etc.

3.       allotment of shares

4.       payments made for maintenance of office records

Which Company can apply for dormant status?

Any Unlisted Company which is an inactive company or was incorporated for a future project or to hold an asset or an intellectual property can apply for dormant company. 

However, the company also needs to fulfill the following conditions:

1.       there are no significant accounting transactions in company;

2.       the company is not listed in India or outside India;

3.    no inspection, inquiry or investigation has been ordered or taken up or carried out against the company by any regulator;

4.       no prosecution has been initiated and pending against the company under any law;

5.    the company does not have any public deposits which are outstanding nor the company is in default in payment thereof or interest thereon;

6.       the company does not have any outstanding loan, whether secured or unsecured;

7.       there is no dispute in the management or ownership of the company;

8.    the company does not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government or any State Government or local authorities etc.;

9.       the company has not defaulted in the payment of workmen’s dues;

What are the advantages for the dormant company?

·       The biggest advantage of Dormant status is cost saving. Dormant status allows company to save on Compliance and Administrative Cost.

·       A dormant company does not have to enclose cash flow statement in its annual accounts.

·       The provisions for rotation of auditors do not apply to dormant company.

·       A dormant company need to hold only 1 board meeting in each half of calendar year. However, gap between the board meetings should be more than 90 days.

·       The company need not file the annual return and balance sheet every year. However, the company has to annually file “Return of Dormant Company” in form MSC-3 with MCA.

·       The company should ensure that at all times, it has the minimum number of directorsi.e. two directors in case of private company, three in case of public companies and one in case of One Person Company (OPC).

What is the process for application for dormant status?

The Company needs to take approval of the Board, Shareholder and all concerned regulatory authorities (like RBI, SEBI, etc) for applying for dormant status of the company. Once all the approvals are received, the Company can make an application in eform MSC – 1 with the MCA / RoC. 

Process for Application of Dormant Status:

1.       Hold a Board meeting and pass the following resolution:

a)    Approval of application

b)    Authorising a director to file the application

c)     Approval of notice for holding a general meeting.

2.       Hold a Board meeting and pass the following resolution:

3.       Send notice for general meeting.

4.   Hold a general meeting and pass a special resolution.The company can either pass special resolution or issue notice to all shareholders and get consent of 3/4th shareholders (in value).

5.       File form MGT – 14 for passing special resolution.

6.       File form MSC – 1. The challan number of form MGT – 14 has to be mentioned in form MSC – 1. There are certain declarations to be attached along with the form MSC – 1.

7.       You will receive an email from MCA for approval of application. The certificate of allowing status of dormant company with an effective date will also be attached in the email.

Is there any other compliance needed once Company applies for Dormant Status?

Yes. A Dormant Company has to:

·       Hold at least one board meeting in each half of calendar year and gap between two meeting should be more than 90 days.

·       File Return of Dormant Company in eForm MCS-3 annually within 30 days from the end of Financial Year.

·       Maintain the minimum number of directors required.

What is “Return of Dormant Company”?

Return of Dormant Company is a declaration of financial position of the Dormant Company. ROC will verify if there is any Significant Accounting Transaction during the year, if there are any such transactions, the company loses the status of dormant company.

Mandatory attachment to Form MSC-3:

1.       Certified true copy of the Board resolution giving authority to director to file the form

2.       Duly audited statement of financial position by a chartered accountant in practice

How long can a company enjoy “dormant” status?

There is no specific period mentioned in the Act or Rules. However, the Registrar will initiate the process for strike-off of name of the company from the records, if the company has dormant status for a continuous period of five years.

What if any significant event happens in the company, like buying machinery?

If any significant accounting transaction is done, the company loses the status of dormant company. The directors have to file an application to make the status of the company as “active”, within 7 days of the happening of the event.

In some case, if the RoC believes that the company is carrying on its business or is functioning, it will treat the company as an active company and remove the name of the company from the register of dormant companies.

How can Company become active again?

The Company need to make an application in form MSC – 4, to activate the dormant company.  The Company needs to ensure that the annual filings for all the years are completed, including filing form MSC- 3 for that financial year, before making application to cease the dormant status and make a Company activate again. Once the application is approved by the ROC, it will change the status of the company to “active”.

What is the difference between strike off of name of the company and application for dormant company?

Both the concepts are applicable to an inactive or a dormant company.

In strike off, the name of the company gets removed from the records of register of companies. It is one of the processes in winding up a company. Once the name is removed, the company is no longer in existence.

In case of a dormant company, the name of the company is temporarily removed from the records of the Registrar of Companies. You have to make an application, whenever you want to activate the company.

To conclude, if the company is inactive and or does not have any business to carry immediately, the Directors/Shareholders can make an application for ‘Dormant Status’. However, if the business is not viable, the Director/Shareholder can apply for strike off or winding up of the Company.