Understanding Dormant Companies under the Companies Act: A Comprehensive Guide

Have you ever wondered what happens to a company that is incorporated but has not yet commenced any business activities or operations? In the Indian context, such a company is known as a ‘Dormant Company’ under the Companies Act. In this comprehensive guide, we will delve into the concept of dormant companies, their classification, registration process, and implications under the Companies Act. We will also address some frequently asked questions related to dormant companies in India.

Table of Contents

1. What is a Dormant Company?
2. Why Do Companies Choose to Become Dormant?
3. Criteria for Classification as a Dormant Company
4. Registration Process for a Dormant Company
5. Compliances and Requirements for Dormant Companies
6. Reviving a Dormant Company
7. Frequently Asked Questions (FAQs)
8. Conclusion

1. What is a Dormant Company?

A dormant company is one that has been registered under the Companies Act, but is not currently carrying out any significant business activities or operations. The main purpose behind classifying a company as dormant is to preserve its name and legal status while it is not actively engaged in business. The concept of dormant companies is introduced under Section 455 of the Companies Act, 2013 in India.

2. Why Do Companies Choose to Become Dormant?

There are various reasons why a company may choose to become dormant. Some of these include:

• Preserving the company’s name: By becoming a dormant company, the company can ensure that its name is protected and not used by any other entity during the period of dormancy.
• Lower compliance requirements: Dormant companies have fewer compliances to adhere to compared to active companies, which can help reduce administrative burdens and costs.
• Future business plans: A company might opt for dormancy if it plans to commence operations or undertake significant business activities at a later date.

3. Criteria for Classification as a Dormant Company

According to the Companies Act, a company can be classified as a dormant company if it fulfills the following criteria:

1. It has not carried out any business activity or operation for the past two financial years.
2. It has not filed financial statements or annual returns for the past two financial years.

However, it is important to note that a company cannot be classified as dormant if it has any outstanding public deposits, unpaid dividends, or any charges that need to be satisfied.

4. Registration Process for a Dormant Company

If a company meets the criteria for dormancy, it can apply for a dormant status with the Registrar of Companies (ROC). The application process involves the following steps:

1. Pass a board resolution in favor of applying for dormant status.
2. Ensure that the company has no outstanding statutory dues or liabilities.
3. Submit an application in Form MSC-1 to the ROC, along with the prescribed fees and necessary documents, such as a statement of affairs, auditor’s report,board resolution, and a declaration from the company’s directors.
4. The ROC will scrutinize the application and, if satisfied, issue a certificate of dormancy in Form MSC-2.

Once the company has been granted dormant status, it will need to comply with specific requirements and obligations, as discussed in the next section.

5. Compliances and Requirements for Dormant Companies

While dormant companies have fewer compliance requirements compared to active companies, they must still adhere to certain obligations under the Companies Act. These include:

• Submitting annual financial statements and annual returns to the ROC.
• Appointing a minimum number of directors, as prescribed by the Act.
• Maintaining statutory registers and records.
• Conducting at least one board meeting in each half of the calendar year, with a minimum gap of 90 days between two meetings.
• Obtaining necessary approvals and consents from shareholders and other stakeholders, as required by the Act.

Failure to comply with these requirements can result in penalties and fines and may even lead to the company losing its dormant status.

6. Reviving a Dormant Company

If a dormant company wishes to resume its business activities, it can apply to the ROC for the same. The process for reviving a dormant company involves:

1. Passing a board resolution to revive the company and resume its business activities.
2. Submitting an application in Form MSC-4 to the ROC, along with the necessary documents and fees.
3. The ROC will scrutinize the application, and if satisfied, issue a certificate of active status in Form MSC-5.

Once the company has been granted active status, it must adhere to all the compliance requirements and obligations applicable to active companies under the Companies Act.

7. Frequently Asked Questions (FAQs)

Q: Can a newly incorporated company apply for dormant status?

A: Yes, a newly incorporated company can apply for dormant status if it is not planning to commence business operations immediately after incorporation. The process for obtaining dormant status remains the same as mentioned earlier in this guide.

Q: What are the consequences of non-compliance with the requirements of a dormant company?

A: Non-compliance with the requirements of a dormant company can lead to penalties, fines, and even the loss of dormant status. The company may also be subject to legal proceedings and regulatory action if it fails to meet its obligations under the Companies Act.

Q: Can a company with outstanding statutory dues or liabilities apply for dormant status?

A: No, a company with outstanding statutory dues, unpaid dividends, or unsatisfied charges cannot apply for dormant status. The company must first settle all its outstanding dues and liabilities before seeking dormant status.

8. Conclusion

Dormant companies play a vital role in the corporate landscape, allowing businesses to preserve their legal status and name while not actively engaged in operations. By understanding the concept of dormant companies, their registration process, and compliances, businesses can make informed decisions regarding their status and ensure they meet all necessary obligations under the Companies Act. Whether a company is considering dormancy due to future plans or a temporary pause in operations, being aware of the requirements and potential