Dormant Company: Explore Meaning, Status, Process & Benefits

A dormant company is incorporated in accordance with the provisions of the Companies Act. But it does not involve active trades. The main goal of the changes to the Companies Act 1956 was to create a simpler law. This law can handle new changes both in the country and around the world. It also aimed to support accepted best practices. It allows for changes in the business model. One new idea was added in the Companies Act 2013. This is commonly known as Dormant Companies under Section 455. Read this blog to know more about a dormant company.

What is a Dormant Company?

The word ‘Dormant’ means not active or not working. A dormant company is a good chance to start a business for a future project. It can also be used to keep an asset or idea without many accounting tasks. When a company fails to carry on business or operations for two consecutive financial years, it becomes an inactive company. It can obtain dormant company status only after applying to the Registrar of Companies by filing Form MSC-1 under Section 455 of the Companies Act, 2013 and receiving approval. Besides this, a significant accounting transaction means any transaction other than the payment of fees to the Registrar, payments made to comply with the requirements of the Companies Act or any other law, allotment of shares to meet statutory requirements, and payments for maintenance of office and records. These basic activities mean a company pays fees to the Registrar. Or it is making payments to comply with this law or any other law. Thus, it gives out shares to meet legal requirements and pays for office and record maintenance.

Dormant Company Meaning

The dormant company means ‘invest now, shine later’. It serves as a core policy of this company. It can hold assets and intellectual property. A dormant company can use this asset later. This provides a vital cost advantage. Restart is better than a fresh start, and dormant companies work on this principle. If you are choosing to take a break, a dormant status offers flexibility to restart when you want. It requires no further procedure, subject to some conditions. Existing for a longer period gives you greater value. So, the dormant company might not be active in trades. However, it holds a status in the eyes of the law.

Dormant Status under the Companies Act

The Companies Act of 2013 explains the rules for companies that are not active in India. A dormant company has not done any business for two straight years. This means it hasn't had important financial activities. Also, it is not involved in buying or selling things to make revenue.

Pre- requisites for becoming a Dormant company

Before applying for getting this status, you need a clean chit. There should not have been any checks, questions, or investigations done on the company. No legal action should have been started or is pending against the company under any law. The company must not have any unpaid deposits. The company must not miss any payments of the loan or interest to the bank. To be a dormant company, you must not have outstanding loans. The application can be made under this rule after getting a lender and enclosing it with Form MSC-1. One must not have any disputes in ownership and management. You must not have any outstanding statutory taxes, dues and duties. The company must not default in the payment of workmen’s dues. The securities of the company must not be listed on stock exchange (within or outside India).

Is there any special provision for the dormant company?

The special provisions apply to a dormant company.

How to file for a dormant company?

To file for a dormant status, a business needs to follow a process. The Companies Act outlines it. These steps are

Step 1: Board Resolution

It is the first step to get a dormant status. The board needs to state the intention to apply for dormant status.

Step 2: Shareholders’ Approval

The company needs to prepare relevant documents. It includes financial statements, directors' declaration. The other corporate records need to be submitted.

Step 3: Fill out the MSC-1 Form

File form MSC-1 with the Registrar of Companies (RoC). It is done to request the change to the dormant status.

Step 4: RoC Review

After submission, the RoC reviews the documents. You receive the dormant status after all the conditions are met.

This process ensures that the company complies with all the legal requirements. After this, the company gets a dormant status. It is in alignment with the Companies Act, 2013. The reactivation takes place by submitting Form MSC-4 to the RoC.

Can a dormant company participate in Trade?

The dormant company cannot participate in trades. It cannot generate any revenue or income. In case the company involves itself in buying, selling or providing services, it loses the dormant status. Hence, the business needs to meet the requirements for an active company. However, the law allows a dormant company to engage in limited activities. It does not cause them to lose the dormant status. It includes the following:

• They can pay the statutory fees that the government charges
• File the important forms and maintain corporate records
• Activities of internal governance, like holding meetings or issuing charges
• Dormant companies can hold intellectual properties and business
• The law does not allow generating revenue through trade activities.

Though a dormant company can not trade, but they can hold assets like patents and trademarks. One can reactivate this company at any time. The owners can start operations when they decide to. The reactivation process is simple. One needs to inform the RoC and comply with the formalities to resume operations.

The reasons a company achieves a dormant status

A company aims to achieve a dormant status due to many reasons. The reasons include:

(A) Protecting Intellectual Property: Companies use a dormant status to protect trademarks, business names or patents. This offers them the ease of avoiding commercial operations.

(B) Saving costs: Operating under a dormant status allows a company to save the costs of being an active company. They can save taxes, annual audits and operational costs.

(C) Future Business Plans: Sometimes, business owners choose to operate in a dormant company. It helps them to plan for future expansion.

(D)Flexible Regulations: A dormant company does not face the same compliance as an active company. It makes it easier for you to focus on the priorities. It helps to keep the company’s corporate status intact.

(E) Protecting reputation: Often, businesses use dormant status to retain their brand name. In case this case, there is no risk of it being taken by other competitors.

Thus, becoming a dormant company acts as a strategic decision for a business. It gives time to the new entrepreneurs who are not ready to engage in full-scale business yet. At the same time, it helps to retain the corporate identity.  

Annual compliance for a dormant company

A dormant company must fulfil the annual requirements. It includes the following documents:

• Form MSC-3: You need to file an annual return with the RoC. It is applicable for the business who don’t involve in business activities.
• Financial Statement: Dormant companies should file a statement of accounts and a balance sheet. It displays no financial transactions generally.
• KYC of directors: The directors need to ensure that their DIN (director identification number) is up to date annually.
• GST Return: If the company is registered under GST, it needs to file the returns. It applies even if there are no transactions.

These rules help the company stay aligned with the RoC and avoid fines. If your inactive company is registered under GST, you must file the GST return. Even if there has been no business activity, the company still needs to file the return to avoid fines.

Dormant company reactivation

To reactivate a dormant company, the company must file Form MSC-4 with the Registrar of Companies. Upon satisfaction, the Registrar issues Form MSC-5, restoring the company to active status. The fee payment needs to be done. After this, the Registrar of Companies (RoC) issues the certificate, MSC-5. It allows the status of an active company. In some cases, if a dormant company undertakes any business activity or significant accounting transaction, it must apply for active status within 7 days by filing Form MSC-4, as continuation of business violates Section 455. The register treats the company as an active one. If the company does not follow the rules for being a Dormant company, the directors must apply to become an active company. The application has to be made within seven days.

Closing section

A dormant company status is a beneficial option for businesses. It helps in keeping a structure and legal status. It allows businesses a break if they want to plan for the future. The dormant status offers reactivation when the business owners want. Understanding the process can be the best choice for you. For more updates, contact Online Legal India today.

FAQs

1. How long can a company retain dormant status?

A company cannot remain dormant indefinitely. If a company continues to remain dormant for five consecutive years, the Registrar of Companies may initiate strike-off proceedings under Section 248 of the Companies Act, 2013.

2. Can a dormant company have bank accounts?

Yes, the dormant company can maintain bank accounts. But they must not conduct any business activities.

3. When does a dormant company lose its status?
When a dormant company starts active trade, it loses its dormant status.

Disclaimer

This article is for informational purposes only and does not constitute legal advice. Online Legal India is a digital platform. If you require legal assistance, we strongly recommend consulting a qualified lawyer or law firm.