How to put your inactive company to sleep and save cost..

“Kruti, you had helped me float a company a year ago… and the company has not commenced business since then. You know that the company was formed for a particular project… unfortunately it didn’t take off as planned,” my friend Vivek informed me.

“Oh yes, how is it going now?” I asked.

“The project is still under development. It may take a year or two.”

“OK. So what do you want to do? Do you want to close the company?” I asked

“No. No. We have future plans. We don’t want to close the company. But is there a way out where we are exempted from filing forms, etc? You had told me about the annual and ongoing compliance; that a company needs to file various forms with MCA. Now, if we are not doing any business can we get an exemption for these filings or other compliance. I had read somewhere that penalties for non-compliance are quite high.”

I nodded. Vivek looked little worried. He repeated, “So, is there a way out?”

“Yes, there is. We can apply for a ‘dormant status‘ for your company.” I told him.

He said “What is a dormant company? Tell me more.”

“Sure Vivek. I will take you through the concept as well the procedure to apply for status of dormant company.”

The concept of dormant company was introduced in Companies Act, 2013. It is sort of a relief for companies which have been incorporated for a specific project or for companies who want to stop doing business for a temporary period. It reduces the administrative and the compliance cost for you.

Section 455 of the Companies Act, 2013 and Companies (Miscellaneous) Rules, 2014 are applicable to dormant companies.

What is a dormant company?

A dormant company is a company which is inactive. It means a company, which:

1. has not been carrying on any business; or
2. does not have any ‘significant accounting transaction’ during last two financial years; or
3. has not filed annual forms during the last two financial years.

What is a “significant accounting transaction”?

It means any transaction other than the ones mentioned below:

1. payment of fees to the Registrar of Companies
2. payment made to fulfill requirements of the applicable laws, acts, etc.
3. allotment of shares
4. payments made for maintenance of office records

So, if the company appoints a director or changes the registered office, they may not be treated as significant accounting transactions. However, if the company purchases some asset or borrows money, it will be treated as significant accounting transaction.

Can I apply for dormant status for my company?

Any company which is an inactive company or was incorporated for a future project or to hold an asset or an intellectual property can apply for dormant company. If your company falls under any of the above criteria, you can apply.

However, the company also needs to fulfill the following conditions:

1. there are no significant accounting transactions in company;
2. the company is not listed in India or outside India;
3. no inspection, inquiry or investigation has been ordered or taken up or carried out against the company by any regulator;
4. no prosecution has been initiated and pending against the company under any law;
5. the company does not have any public deposits which are outstanding nor the company is in default in payment thereof or interest thereon;
6. the company does not have any outstanding loan, whether secured or unsecured;
7. there is no dispute in the management or ownership of the company;
8. 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.;
9. the company has not defaulted in the payment of workmen’s dues;

What are the advantages for the dormant company?

One of the biggest advantages of application for a dormant status is that it reduces the administrative and compliance cost of the company.

Some of the advantages are:

• A dormant company does not have to enclose cash flow statement in its annual accounts.
• The provisions for rotation of auditors do not apply to dormant company.
• A dormant company need not have one board meeting in each quarter as required by other companies. It will be sufficient if the company has only one board meeting in each half of calendar year. However, gap between the board meetings should be more than 90 days.
• The company need not file the annual return and balance sheet every year. However, the company has to annually file “Return of Dormant Company” in form MSC-3 with MCA.
• The company should ensure that at all times, it has the minimum number of directors i.e. two directors in case of private company, three in case of public companies and one in case of one person company (OPC).

What is the process for application for dormant status?

The Board, the shareholders as well as the concerned regulatory authorities (like RBI, SEBI, etc) have to approve the proposal for applying for dormant status of the company. Once all the approvals are received, the application has to be made in form MSC – 1 with the MCA / RoC. So here is the process:

1. Hold a Board meeting and pass the following resolution:
   1. Approval of application
   2. Authorising a director to file the application
   3. Approval of notice for holding a general meeting.
2. Send notice for general meeting.
3. Hold a general meeting and pass a special resolution.The company can either pass special resolution or issue notice to all shareholders and get consent of 3/4th shareholders (in value).
4. File form MGT – 14 for passing special resolution.
5. File form MSC – 1. The challan number of form MGT – 14 has to be mentioned in form MSC – 1. There are certain declarations to be attached along with the form MSC – 1.
6. You will receive an email from MCA for approval of application. The certificate of allowing status of dormant company with an effective date will also be attached in the email.

What do I have to take care of, post dormant status?

You have to ensure certain compliance as mentioned below.

• You need to have at least one board meeting in each half of calendar year.
• File Return of Dormant Company” in Form MCS-3 annually.
• Maintain the minimum number of directors required.

What is “Return of Dormant Company”?

Return of dormant company is a declaration of financial position of the dormant company. It is basically for the RoC to know if there are any significant accounting transactions in the company. If there are any such transactions, the company loses the status of dormant company.

For return of dormant company, form MSC – 3 has to be filed annually. It should be filed within 30 days of the end of financial year.

The company has to mention details of the board meetings held during the year in the form.

You also have to attach the following with the form:

1. Certified true copy of the Board resolution giving authority to director to file the form
2. Duly audited statement of financial position by a chartered accountant in practice

How long can a company enjoy “dormant” status?

There is no specific period mentioned in the Act or Rules. However, the Registrar will initiate the process for strike off of name of the company from the records, if the company has dormant status for a continuous period of five years.

So, if you want to continue with your company, you should activate the company within five years of the status of dormant company.

What if any significant event happens in the company, like buying machinery?

If any significant accounting transaction is done, the company loses the status of dormant company. The directors have to file an application to make the status of the company as “active”, within 7 days of the happening of the event.

In some case, if the RoC believes that the company is carrying on its business or is functioning, it will treat the company as an active company and remove the name of the company from the register of dormant companies.

How can my company become active again?

You have to make an application in form MSC – 4, if you want to activate the dormant company.  You have to make sure that the annual filings for all the years are done, including filing form MSC- 3 for that financial year, before making application to activate the company. Once the application is approved by the RoC, it will change the status of the company to “active”.

What is the difference between strike off of name of the company and application for dormant company?

Both the concepts are applicable to an inactive or a dormant company.

In strike off, the name of the company gets removed from the records of register of companies. It is one of the processes in winding up a company. Once the name is removed, the company is no longer in existence.

Read more : Do you want to close your company?

In case of a dormant company, the name of the company is temporarily removed from the records of the Registrar of Companies. You have to make an application, whenever you want to activate the company.

To conclude, if your company is inactive and you want to carry on a business after couple of years, you should make an application for dormant status. But if you have decided to NOT start any business in your inactive company, you should go for strike off of the name of the company.

“This is great Kruti. Let’s apply for the dormant status.”

“Sure.”

Vivek was relieved and happy.

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If you are planning to apply for DORMANT status for your company, send me an email at kruti@cskruti.com