What is the Meaning of a Dormant Company?

The concept of a Dormant Company was not explicitly defined under the Companies Act, 1956, and was introduced under the Companies Act, 2013. Under the provisions of the Act, it’s a company that is registered under the Act, but not carrying any significant business or financial transitions.

Several portions of the sections and rules pertaining to a dormant company are similar to the corresponding UK law. However, certain policies have been framed in a manner to promote better functioning of companies.

The Act specifies that a dormant company is one that:

  • Has no significant business operations or accounting transaction
  • Is formed to hold an asset or intellectual property
  • Is formed for a future project

Benefits of a Dormant Status

The first question that most people ask is that – Why incorporate a company only to get a dormant status for it? The primary reason for securing the status of a dormant company is to ensure that the company continues to remain a ‘legal entity’ despite not carrying out business activities.

Here are a few benefits of getting the dormant status:

  1. Retaining Company Name: The unique name of the company can be retained, along with other intellectual property assets that the company holds such as trademarks. The dormant status will ensure that others can’t trade under this name, and the name remains protected.
  2. For a Future Project: This could signify the intention of a company to start a business, but has chosen to remain dormant to wait for the completion of other formalities. For instance, a company can be created to buy a land or property for running its business but can remain dormant until other formalities are complete.

More on: How to close the Private Limited Company in India?

When and How to Apply for a Dormant Status?

Under Section 455 of the Companies Act, a dormant company is one that has not been carrying out business or has not made any significant financial transactions or is inactive. To apply for the status of a dormant company an application can be made by the company to the Registrar to request grand of dormant status.

A company that is inactive means:

  • Not carrying any business activities or operations
  • No Significant transactions in the previous two financial years
  • Has not filed financial statements, including annual returns in the preceding financial years.

Non-Significant transactions mean:

  • Fee payment to the Registrar of Companies
  • Any payment made for the requirements of the Act
  • Payments made for the allotment of shares under the provisions of the Act
  • Any payment made for the maintenance of the office and official records

Any transactions made beyond this might lead the company to lose the status of a dormant company.  A newly incorporated company can also apply for the status of a dormant company if it has not yet started its business activities.

The registrar of companies maintains the record of all dormant companies

Related: How to Register as a Dormant Company?

3 Steps for Securing Dormant Company Status

Below is the process for securing the status of a Dormant Company

  • Step 1: Pass a Special resolution in the general meeting of the company by securing the consent of at least 75% of the shareholders (in value)
  • Step 2: File form MSC – 1 with the Ministry of Corporate Affairs and submit the same to the Registrar of Companies (RoC)
  • Step 3: Once the approval is secured from the Registrar, the certificate for dormant companies will be issued.

How can a Dormant Company become Active?

A dormant company can convert itself into an active company by filing form MSC – 4 along with returns under MSC – 3. When the registrar is satisfied, a certificate recognizing the active status of the company will be issued under Form MSC-5

Conditions to get the status of Dormant Company

Certain conditions are laid downed under the Rule 3 of the Companies (Miscellaneous) Rules 2014:

  • There should not be any investigation, inspection, legal proceeding or civil/criminal inquiries against the company
  • Should not hold any public deposits.
  • No deposits should be outstanding or in default.
  • No unpaid loans
  • No unsettled disputes between the management, ownership, and employees.
  • No overdue payments to the central, state government and local authorities in the form of fees, statutory taxes and duties.
  • The stocks of the company should not be listed in India or abroad.

Under the provisions of the Act, the Registrar can also pass a suo moto action to deem any company as dormant. Also, when a company is dormant for a period of more than five consecutive years, the Registrar can ‘Strike-Off’ the company.

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