Dormant (Inactive) Company: Meaning, Benefits, Compliances etc.

Ashish M. Shaji

24 Sep, 2021

Dormant Company was introduced under the Companies Act 2013, and it was not there earlier in the Companies Act of 1956. Section 455 of the Companies Act 2013 provides for the dormant company. As per this section, Dormant Company means inactive company. In this article, we shall discuss certain essential aspects about Dormant (inactive) Company.

What do you mean by Inactive Company?

Inactive company refers to a company which has not been carrying on any business or operation or a company that has not made any significant accounting transaction during the previous 2 financial years or didn’t file financial statement and annual return during the last two financial years.

So here comes the question as to what is the meaning of significant accounting transaction?

Here significant accounting transaction refers to the fact that the company has not been doing any transactions than making payment or fees to the ROC, making payment to meet regulatory requirements, making allotment of shares and effecting payments to maintain office and records.

How to obtain dormant status for a company?

Companies may get this status either by making an application on its own, or the ROC can initiate by issuing a notice in case of certain non-compliance and categorize the company as dormant company.

Obtaining the status of dormant company voluntarily-

The idea behind the concept of dormant company is to benefit a company to begin a future project or hold an asset/IP without having significant accounting transactions. As per the Companies Act, companies can make an application to obtain the status of dormant company, in case where the company is incorporated for a future project, incorporated for holding an asset or IP, company that has not filed any financial statement and annual return in the last 2 financial years and the company that is not carrying out any business or made any significant accounting transactions.

Action by ROC-

In case where a company fails to file financial statement or annual return for 2 financial years consecutively, the ROC shall issue a notice to such company and enter the name of the company in the register maintained for dormant company.

Pre-requisites for obtaining the status of Dormant Company

The pre-requisites for getting status of Dormant Company:

• No business operations/not made any significant transaction;
• No loan outstanding;
• No public deposit/no default in payment;
• No workmen dues;
• No statutory dues;
• Securities not listed;
• No prosecution proceedings;
• No inquiry/investigation ordered;
• No dispute certificate.

Compliances

A dormant company must fulfil the need for prescribed minimum directors, file prescribed documents and also pay the prescribed annual fee to the ROC to retain its dormant status in the register maintained by the registrar.

The following minimal compliances should be complied by a Dormant Company:

• A dormant company should have a prescribed number of directors which means 3 in case of public company, 2 in case of private and 1 in case of an OPC.
• The return of dormant company should be filed every year showing the Company’s financial position.
• Such return of dormant company should be duly audited by CAs in practice.
• Filing must be done in Form MSC-3^[1] within 30 days from the end of each financial year.
• Minimum of one board meeting should be done every 6 months by the company.
• A company may continue in dormant status for 5 years (maximum).
• Before the validity period expires, the company should apply for changing the status to active.
• The name of the company shall be struck off by ROC in case of not making above compliances.

What are the benefits of Dormant Company?

You may be surprised to know that there are benefits of Dormant Company. In this segment, we shall look at the benefits arising out of the status of dormant company.

• Company name protection

The Intellectual Property owned by the dormant company includes trademark of company name. The name of the company is protected, which prevents others to trade under the name of dormant company.

• Future project

A company can be made to prepare for a future project. It means the promoters intent to trade and also keep the domain name.

• Company History

It may not be the most significant benefit to establish a company that started and started a business later, it may be said to have been well established even it started a business later on. It enables the company to show a better image to customers and lenders.

Conclusion

Dormant (inactive) company is a new concept under the Companies Act 2013. This concept provides an opportunity to begin a future project or hold an asset without having significant accounting transactions. It is an innovative concept which allows one to take a break from business and again activate it.

Read our article:Conversion of Dormant Company into Active Company