Best Practices for Dormant Company Registration

As defined under the Companies Act of 2013, a dormant company is registered but not engaged in any significant business activity or operations. It may have been established for future ventures or to hold assets without active trading. Dormant status filing allows these companies to minimise compliance requirements and maintain their registered status without the full spectrum of operational reporting obligations. If your company is in a similar state and you're considering transitioning to a dormant status to reduce compliance burdens, IndiaFilings is here to assist. Our team specialises in navigating the dormant status filing process, offering expert guidance to ensure a seamless transition. Ready to simplify your company's compliance landscape? Contact IndiaFilings today to get started.

What is a Dormant Company?

A Dormant Company, also known as a Dormant Entity or Dormant Corporation, refers to a registered business entity not currently engaged in significant business activities or operations. Dormant status typically arises when a company has temporarily ceased its operational activities due to strategic reasons such as awaiting a future project, not yet commencing substantial business operations, or primarily existing to hold or manage intellectual property rights without directly engaging in revenue-generating activities. Such companies can apply to the Registrar to obtain the status of a Dormant company, with objectives including:

  • Being incorporated for a future project.
  • Serving as an asset or intellectual property.
  • Having no significant transactions in a specific financial year.
  • Remaining inactive.

It's important to note that while Dormant companies have limited activity, they can apply to revert to active status and cannot retain Dormant status for more than five consecutive financial years.

Overview of Dormant Status Under the Companies Act of 2013

When a company is established under the Companies Act of 2013 for purposes such as launching a future project, holding assets, or managing intellectual property and hasn't carried out any significant financial activities, it can be considered inactive. Such a company can apply to the Registrar for a change in status to become a dormant company, as outlined in the Companies Act.

Meaning of Inactive Company

  • An "Inactive Company" refers to a company that has not engaged in any business activity or conducted significant accounting transactions during the last two financial years.
  • It also includes companies that have not filed their financial statements or annual returns with the Registrar of Companies (ROC) during the preceding two financial years.

Significant Accounting Transactions

Significant accounting transactions include all company financial activities, with the following exceptions:

  • Payments to the ROC or for fulfilling requirements under the Companies Act or any other applicable laws.
  • Transactions related to the allotment of shares.
  • Payments for the maintenance of the company's office or records.

Reasons for Obtaining the Status of a Dormant Company

  • Name Reservation: Business owners may register their company as dormant. At the same time, they prepare to launch their business, serving as a means to reserve the company name.
  • Business Restructuring: In cases where business owners plan to restructure their operations, obtaining dormant status for the company can be beneficial.
  • Extended Absences: If business owners anticipate an extended period away from operations due to illness, travel, maternity leave, sabbatical, etc., they may choose to obtain dormant status for the company.

Benefits of Opting for Dormant Company Status

Exploring the advantages of transitioning an active company to a dormant status under the Companies Act, 2013.

  • Preservation of Company Name: Ensures the company name is protected during inactivity, preventing others from registering the same or a highly similar name.
  • Reduced Compliance Requirements: Significantly lowers the regulatory burden and compliance obligations under the Companies Act 2013, making maintaining the company easier and more cost-effective.
  • Opportunity for Reactivation: Offers the flexibility to quickly resume business activities when opportunities arise without establishing a new corporate entity.
  • Limited Applicability of Company Act Provisions: Only a select few provisions of the Companies Act apply to dormant companies, simplifying legal compliance.
  • Easier Annual Return Filing: Streamlines the process of filing annual returns, requiring less detailed information compared to active companies.
  • No Auditor Rotation: Exempts the company from the obligation to rotate auditors, which is required for active companies to ensure auditor independence.
  • Bi-Annual Board Meetings: Requires only one board meeting every six months, reducing the administrative burden associated with more frequent meetings required for active companies.

Mandatory Requirements for Obtaining Dormant Status

To qualify for dormant status under Section 455(5) of the Companies Act and Rule 6 of the Companies (Miscellaneous) Rules, 2014, a company must meet the following prerequisites:

Minimum Number of Directors

  • For a public company: 3 Director
  • For a private company: 2 Director
  • For a One Person Company: 1 Director

Special Resolution or Shareholder Consent

A special resolution must be passed in a general meeting, or a notice must be issued to all shareholders to obtain the consent of at least three-fourths of shareholders (in value) to obtain dormant status, as per Rule 3 of the Companies (Miscellaneous) Rules, 2014.

Application Conditions

The following conditions are to be satisfied before applying for dormant company status:

  • No ongoing inspections, inquiries, or investigations against the company.
  • No ongoing prosecutions under any law.
  • No outstanding public deposits or defaults in payments or interest thereof.
  • Absence of outstanding secured or unsecured loans.
  • No disputes regarding the management or ownership, accompanied by a certificate with the application.
  • All statutory taxes, dues, duties, etc., to the Central, State Government, or local authorities are cleared.
  • The company’s securities must not be listed on any stock exchange within India or internationally.

Note: If there are outstanding unsecured loans, the company can still apply for dormant status after obtaining consent from the lender and including this consent with the Form MSC-1 application.

Procedure for Dormant Status Filing

Converting an active company to a dormant one involves a specific procedure under the Companies Act of 2013. Here's a simplified overview of the steps involved:

Step 1: Board Meeting

The Board of Directors should pass a resolution to apply for the company’s status conversion to dormant. One director must be authorised to handle the process and notify all shareholders about the forthcoming Extraordinary General Meeting (EGM).

Step 2: EGM Notice

Send out a detailed notice for the EGM, including an explanatory statement. This statement should outline why the Board proposes changing the company's status to dormant.

Step 3: CA Certification of Statement of Affairs

Before the EGM, the designated director should collaborate with the Statutory Auditor or a practising Chartered Accountant. This collaboration certifies the company's Statement of Affairs, essentially the financials.

Step 4: Conducting the EGM

Conduct an Extraordinary General Meeting (EGM) per Section 96, 100, and Secretarial Standard-2 (SS-2) to pass a special resolution for obtaining dormant status. The procedure for conducting an EGM should be followed as outlined.

Step 5: Filing of MGT-14

File the special resolution passed at the EGM with the Registrar of Companies using Form MGT-14. This filing should include a certified true copy of the resolution and the EGM notice and must be done within 30 days of the EGM.

Step 6: Application for Dormant Status

After securing a special resolution or obtaining consent from at least three-fourths of the shareholders (by value), submit Form MSC-1 to the Registrar. The requisite fee should accompany this application as per the Companies (Registration Offices and Fees) Rules, 2014 and include the following documents:

  • A certified true copy of the board resolution for dormant status.
  • A certified true copy of the special resolution for dormant status.
  • Auditor’s certificate.
  • Statement of affairs verified by a Chartered Accountant or the company's auditors.
  • Approval or No Objection Certificate from any regulatory authority, if applicable.
  • If filed with the ROC, the company's latest financial statement and annual return.
  • Consent from lenders if there are outstanding loans.

Step 7: Issuance of Certificate of Dormant Status

Upon reviewing the application, the Registrar will issue a certificate in Form MSC-2, granting dormant status to the company as per Section 455(2) of the Companies Act and Rule 4 of the Companies (Miscellaneous) Rules, 2014.

Dormant companies must file an annual return in Form MSC-3 within 30 days of the end of each financial year. This return should include a duly audited financial statement and be accompanied by the annual fee as prescribed.

Even while dormant, the company must file returns for any allotment of securities or changes in directorship as specified by the Act in the prescribed manner and timelines.

Note: The register maintained on the Ministry of Corporate Affairs portal is the official register for dormant companies, as per Section 455(3) of the Companies Act and Rule 5 of the Companies (Miscellaneous) Rules, 2014.

ROC Forms a for Dormant Company Registration

To obtain Dormant status, the specified forms must be submitted as mentioned above:

S.No Form Name Explanation
1 e-Form MGT-14 This form is submitted to the Registrar of Companies within 30 days of passing a Special Resolution to officially record the resolution as mandated by section 117 of the Companies Act.
2 e-Form MSC-1 This form is used to apply for the change of company status to Dormant. It must be filed with the ROC within 30 days after the special resolution for the status change is passed.

Annual Compliance for Dormant Company

There's a common misconception that transitioning to a dormant company status absolves businesses from all compliance responsibilities. While it's true that dormant companies are granted certain relaxations under the Companies Act, this does not eliminate the need for annual compliance. The annual compliance for a dormant company encompasses four key areas: accounting practices, statutory audits, tax return filings, and Registrar of Companies (ROC) returns. Let's delve into each component:

Accounting & Financial Statements

Companies must maintain accurate records and conduct bi-annual board meetings despite their dormant status. The company's registered address must also be upheld. As a result, administrative expenses will still be recorded in the company's accounts, necessitating ongoing accounting activities and the preparation of financial statements.

Statutory Audit

Although dormant companies are exempt from auditor rotation requirements, they must still undergo a statutory audit of their financial statements. This entails thorough preparation of the company's books, complete with supporting documentation for all expenses, to facilitate the audit process.

Tax Returns

Obligations such as filing TDS and GST returns remain applicable to dormant companies. Furthermore, these entities are required to file Income Tax Returns in the same manner as active companies.

ROC Filings: Annual Returns

Dormant companies benefit from a streamlined process for annual ROC filings. They must submit a simplified Annual ROC Return using Form MSC-3, which presents the company's financial position. This return, verified by a practising Chartered Accountant, must be filed with the ROC within 30 days following the conclusion of each financial year.

The filing should also include:

  • A certified true copy of the Board resolution authorising the filing.
  • A duly audited financial position statement by a practising Chartered Accountant.
  • Any other documents deemed necessary.

In summary, while dormant company status may offer some regulatory leniency, it does not exempt businesses from fulfilling essential annual compliance tasks.

Simplify Dormant Status Filing with IndiaFilings

At IndiaFilings, our team of experts is dedicated to assisting you with Dormant Status filings, ensuring a seamless transition for your company. From initiating the application process to navigating the necessary documentation, we handle it precisely and efficiently. Additionally, we provide comprehensive support for all your annual compliance needs, including accounting, statutory audits, tax filings, and ROC returns.

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Dormant Status Filing FAQ's

What is a dormant company?

A dormant company is a registered entity that isn't engaged in significant business activities, often established for future projects or to hold assets.

How does a company become dormant?

A company can apply for dormant status through the Registrar of Companies if it's inactive, by following a specific procedure outlined in the Companies Act, 2013.

What are the benefits of dormant company status?

Benefits include reduced compliance requirements, preservation of the company name, and the ability to quickly reactivate the business when needed.

What defines an inactive company?

An inactive company hasn't conducted significant business or financial transactions in the last two financial years and hasn't filed financial statements or annual returns.

What are significant accounting transactions?

These include financial activities excluding payments for maintaining the company, share allotment, and compliance-related payments.

Why might a company seek dormant status?

Reasons include name reservation, business restructuring, or preparing for extended periods of inactivity due to various reasons.

What are the mandatory requirements for dormant status?

Requirements include a minimum number of directors, passing a special resolution, and ensuring no ongoing legal issues or financial obligations.

What is the procedure to file for dormant status?

The process involves a board resolution, an Extraordinary General Meeting (EGM), filing of Form MGT-14, and submission of Form MSC-1 along with necessary documents to the ROC.

What forms are needed for dormant company status application?

Forms include e-Form MGT-14 for recording the special resolution and e-Form MSC-1 for applying for dormant status.

What is the annual compliance for a dormant company?

Dormant companies must maintain accounting records, undergo statutory audits, file tax returns, and submit a simplified annual ROC return using Form MSC-3.

How long can a company remain dormant?

A company cannot remain dormant for more than five consecutive financial years.

Can a dormant company revert to active status?

Yes, a dormant company can apply to become active again by meeting certain conditions and filing the necessary paperwork with the ROC.

Are there any financial transactions allowed for a dormant company?

Yes, but they are limited to payments for maintaining the company, share allotment, and compliance-related payments.

Does a dormant company need to hold board meetings?

Yes, but only one board meeting is required every six months, reducing the administrative burden.

Are dormant companies exempt from auditor rotation?

Yes, dormant companies are exempt from the requirement to rotate auditors.

What happens if a dormant company fails to comply with annual requirements?

Non-compliance can lead to penalties and may result in the company losing its dormant status.

Can any company apply for dormant status?

Not all companies are eligible; they must meet specific criteria like having no significant financial transactions and no ongoing legal issues.

What is the role of the Registrar of Companies in dormant status filing?

The ROC processes applications, issues certificates of dormant status, and maintains the official register of dormant companies.

How does dormant status affect company taxes?

Dormant companies must still file tax returns, including TDS and GST returns, similar to active companies.

How can IndiaFilings help with dormant status filing?

IndiaFilings offers expert assistance in navigating the dormant status filing process and ensures compliance with all annual requirements.

What steps should a company take before applying for dormant status?

A company should review its financial and operational status, settle any outstanding obligations, consult with stakeholders, and prepare the required documentation. It's also advisable to seek professional advice to ensure that all legal requirements are met.

What are the annual filing requirements for a dormant company?

Dormant companies must file a simplified annual return in Form MSC-3, including a statement of the financial position audited by a practicing Chartered Accountant, within 30 days of the end of each financial year.

Are there any financial transactions allowed for dormant companies?

Yes, dormant companies can still undertake certain financial transactions such as payments towards compliance with laws, allotment of shares to fulfill incorporation obligations, and maintaining the registered office.

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