Dormant Company: Strategic Inactive Companies

What is Dormant Company?

In general term dormant means a state where normal activity is slowed down for a period of time or suspended for some time. This dormant concept is also used in the corporate structure, when Company does not carries any business activities in the given period of time then they obtain the status as of Company as Dormant Company.

Why to set up a Dormant Company?

Dormant companies are those Companies which are incorporated with the intention to not start any immediate business in such Company. Now question arises why someone will incorporate a Company when he/she is aware that no business will conducted after incorporation, why not set up business when operations will take place after few years. Rationale behind such incorporation is given below:

• Companies willing to hold some asset on which operations will be conducted later on. For Example Company has purchased some land/asset on an ongoing auction and will start to set up business on such land or use asset after few years after working all feasibilities of the operations in such case a company can seek for dormant status that will hold such asset.
• Companies who holds an Intellectual Property Right (IPR) like patent, copyright, trademark but any specific work on such IPR has not yet commenced, in such case owner of IPR resorts to hold IPR for few years without carrying any significant activity in the Company except for holding such IPR.
• Businessman sometimes create a Company to undertake some future project, for instance a Company has participated in Government Tender for setting up of food park with some specification which the applicant company may possess. Government tenders are generally awarded after a long period of time thus applicant will continue to run the Company without having any activity. In such cases company can make application to get status as dormant company.

Conditions to seek status of Dormant Company

To provide a gateway for above mentioned situations, Companies Act, 2013 (“Act”) has introduced concept of Dormant Company, which was not given under erstwhile Companies Act, 1956.

Section 455 of Companies Act, 2013 deals with all the provisions of a Dormant Company and clearly states when a Company will be considered as a Dormant Company, what are the conditions, criteria, and how a Dormant Company would operate. These provisions are summarised below:

Section 455(1) of the Act states:

• Company formed for a future project
  OR
• Company formed to hold asset including IPR
  AND
• Company having no significant accounting transaction

Such Inactive Companies can make application to the Registrar for obtaining status of dormant Company

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;

(ii) “Significant accounting transaction” means any transaction other than—

(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.

If Company has incurred any other transaction apart from activities mentioned above, during two financial years than Company will not be eligible to apply for dormant company.

Other Pre Requisites

As per rule 3 of the Companies (Miscellaneous) Rules, 2014 Company who satisfies below given conditions can make application for status of dormant company.

1. No inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
2. No prosecution has been initiated and pending against the company under any law;
3. The company is neither having any public deposits which are outstanding nor the company is in default in payment thereof or interest thereon;
4. The company is not having any outstanding loan, whether secured or unsecured:
5. There is no dispute in the management or ownership of the company ;
6. 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.;
7. The company has not defaulted in the payment of workmen’s dues;
8. The securities of the company are not listed on any stock exchange within or outside India.

Grounds of Application

Summarising above given provisions, below are the grounds of application to seek dormant status of Company:

Minimum Number of Directors for Dormant Company

Company being dormant doesn’t permit it to have directors below than what is required as per Act and this is particularly mentioned in rule 6 of the Companies (Miscellaneous) Rules, 2014.

Dormant One Person Company: 1
Dormant Private Company: 2
Dormant Public Company: 2

However exemption has been granted to dormant companies for provisions of rotation of auditor as applicable on certain public and private company.

Procedure to apply for Dormant Status

1. Any director or person authorised by the Board will dispatch a notice to call for Board Meeting, notice shall be given as per section 173 of Companies Act, 2013 read with secretarial standard 1 on Board Meetings.
2. Conduct Board Meeting to consider the proposal of obtaining dormant status.
3. After assent of the board members, call for a general meeting for approval of members and dispatch notices for calling an Extra Ordinary General Meeting (EGM)/ Annual General Meeting (AGM) to all the members in accordance with provisions section 101 of Companies Act,2013 read with secretarial standard 2 on General Meetings
4. Accord approval of Members through Special Resolution (in value) at Extra Ordinary General Meeting (EGM)/Annual General Meeting (AGM).
5. File E form MGT-14 to submit special resolution with the Registrar of Companies.
6. Post approval of MGT-14, Company to file Form MSC-1 to seek status of Dormant Company.
7. After scrutiny of Form, the Registrar of Companies will issue the certificate in Form MSC -2 allowing the status of a Dormant Company to the applicant.