The Companies Act, 2013 introduces a concept of a dormant company within its ambit. It is the first time that such a concept is thought of, i.e. company which is not active. There is no definition of what constitutes a dormant company under the definition clause. A definition appears in section 455 of the Act and here also the concept is defined in a very roundabout manner.
Section 455 states
(1) Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.
So dormant company can be a company formed for a future project or to hold an asset or intellectual property without there being any significant accounting transaction OR an inactive company. Now inactive company has been defined in section 455 as under:
(i) “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;
So we get the definition of an inactive company from this definition which means that any company which has not been doing any business for the last two years OR (and here’s the doosra!!) they have not filed any financial statements and annual returns for the last two years. So it means any active company doing regular business and regular accounting transactions, but has failed to file its mandatory annual documents, then it can also be construed to become a dormant company!!
Significant accounting transaction is also defined in order to clear out any ambiguity, it means
(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.
So a company can apply for a “dormant company” to itself by making the necessary application in this behalf. And the Registrar shall maintain a Register of Dormant companies in its Records or Portal.
In case a company has not filed its annual mandatory documents for the last two years, then the Registrar can take it to the Dormant company status. It is not clear what happens when the company is taken to the dormant company status in such a scenario.
However a dormant company is still required to have minimum directors, hold minimum two Board meetings and file minimum one annual financial document with the Registrar.
A dormant company can apply to revert back to Active status company.
Now we come to the procedures for which we turn to the Companies (Miscellaneous) Rules, 2014
1) Application for obtaining status of dormant company is required to be made in form MSC-1 along with the fees. The fees ranges from Rs.2000/- for a company with a share capital upto Rs.25 lakhs to Rs.20,000/- for a company which has share capital more than Rs.10 crores;
2) Application for obtaining status of dormant company can be made only after obtaining special resolution approval of the shareholders or issuing notice to all the shareholders and obtaining consent of at least 3/4th of the shareholders in value terms;
3) Conditions : No inspection, inquiry, or investigation has been ordered or taken up against the company OR no prosecution has been initiated against the company and pending under any court
4) The company does not have any public deposits or interest thereon outstanding for payment
5) There is no outstanding loan, secured or unsecured. If there are unsecured loans then consent of the lender should be obtained and enclosed along with the form;
6) There should be no dispute or difference amongst the management or promoters of the company and a certificate to that effect is enclosed;
7) The company does not have any outstanding tax dues either to central or state government or local authorities;
8) The company has not defaulted in payment of its workmen’s dues;
9) It is not a listed company;
The Registrar shall after considering the application issue a “Dormant company” status to the company and enter its name in the Register maintained for the purpose.
The company shall continue to have minimum number of directors (i.e. 3 in case of a public company and 2 in case of a private company);
Rotation of auditors shall not apply to a dormant company.
A dormant company shall file an annual “Return of Dormant Company” in form MSC-3 which indicates the financial position of the company and which shall be duly audited by a chartered accountant in practice. This should be filed within 30 days from the end of each financial year. i.e. on or before 30th April every year.
However, there is a proviso to Rule 7 of Companies (Miscellaneous) Rules, 2014 which says that a dormant company shall continue to file its return of allotment or change in directorships if such events occur. Really, if such events are going to occur in a dormant company, then should the company be called a dormant company or an active status company. It is not clear and there is ambiguity in this matter. Change in directorships could occur upon the death or incapacity of a director so that is understood in that context.
Section 173(5) stipulates that a dormant company should hold two Board meetings in a financial year i.e one each in each half of the financial year and the gap between two Board meetings should not be less than 90 days. This stipulation is not clear because once a company is a dormant company then where is the need to hold a Board meeting, except perhaps to approve the annual financial statements. I guess two Board meetings in a financial year has been stipulated as a matter of abundant caution.
The dormant company can revert to an active status company by making another application under section 455(5) of the Act in form MSC-4 along with the requisite fees. This application should be accompanied by the return in form MSC-3.
Proviso to Rule 8 of the Companies (Miscellaneous) Rules, 2014 says that a dormant company cannot remain as a dormant company for more than 5 consecutive financial years. If it remains so, then the Registrar shall commence the process of striking off the name of the company from the Records, i.e. the company will be removed. So maximum tenure for a dormant company is 5 consecutive financial years.
Rule 8(4) ibid provides that where the Registrar has a doubt that a dormant company has been indulging in business activities and in fact it is not dormant then he can take necessary action to revert its status to an active company.
So the entire concept of dormant company while it is not clearly defined in the Act or Rules, means that any company which is not doing business for two financial years and is not intending to do any business in the near future for upto 5 years can make an application to place its status as a dormant company under the Records. What this will ensure that the legal status of the company is intact and the name is available to the company for any future business programs. However as mentioned above, it cannot remain as a dormant company in perpetuity. It should make a decision to revert to an active status within 5 years or the Registrar will be empowered to strike off the name of the company from its records.
Many a times, promoters incorporate companies but either there is dispute between the promoters or a major project fails through or it is formed for holding an intellectual property title or an asset, then this concept of dormant company comes into use. All the company has to do is to file one annual financial document duly certified by a CA and keep the Directors in tact in the company.