In today’s dynamic business environment, companies may not always be active in their operations. Some entities are formed for future projects, to hold assets, or to maintain intellectual property rights, without carrying on substantial business activities. To accommodate such types of situations, the Companies Act, 2013, introduced the concept of a “Dormant Company” in India.
A Dormant Company serves as a legal framework that allows businesses to remain registered without engaging in active operations, while enjoying certain compliance relaxations. This concept helps promoters and entrepreneurs maintain the corporate structure for future use without incurring heavy regulatory costs.
Meaning of a Dormant Company
According to Section 455 of the Companies Act, 2013, a Dormant Company is a company that is formed and gets registered under the Act for any such future project or to hold an asset or intellectual property and has no significant accounting transactions during a financial year.
If we put it simply, then it is an inactive company that has not carried out any business or accounting transactions during a specific period.
The idea is to provide a legal status for companies that are temporarily inactive but may be revived later when required.
Key Features of a Dormant Company
1. No significant accounting transactions: The company must not have any significant financial transactions except a few permitted ones, such as:
- Payment of fees to the Registrar of Companies (ROC).
- Payments to maintain the office or records of the company.
- Allotment of shares to fulfil statutory requirements.
- Payments for maintenance of the registered office.
2. Future purpose: It may be incorporated for a future project, intellectual property ownership, or to hold assets until operations begin.
3. Reduced compliance burden: Dormant companies enjoy exemptions from certain filings, board meetings, and other compliance obligations that apply to active companies.
4. Easy revival: The company can easily be reactivated (restored to “active” status) once it decides to commence business operations again.
Who Can Apply for Dormant Status?
The following types of companies can apply to obtain dormant status under Section 455:
- Companies that are not carrying on any business or operation.
- Companies are formed for a future project or to hold the intellectual property rights or assets.
- The Inactive companies that have not made any notable accounting transactions during the last two financial years.
However, it is important that:
- The company has no outstanding loans or liabilities, or
- Has obtained consent from lenders to apply for dormant status.
Procedure to Obtain Dormant Company Status
The process for the declaration of a company as dormant is governed by the Companies Act, 2013 and the Companies (Miscellaneous) Rules, 2014. Below are the steps: –
Step 1: Board Meeting
- A Board Meeting is the form to pass a resolution authorising the directors to make an application for the dormant status.
- A special resolution must then be passed in the general meeting of the shareholders.
Step 2: Filing of Application (Form MSC-1)
- The company must file Form MSC-1 with the Registrar of Companies (ROC).
- This form should include:
- A certified copy of the Board and Special Resolutions.
- Statement of affairs duly certified by a Chartered Accountant.
- Auditor’s certificate confirming no significant transactions have occurred.
- Consent of the creditors and no outstanding statutory dues.
Step 3: ROC Examination
- The ROC will examine the application and documents.
- If all the requirements are satisfied, then ROC will issue a Certificate in the Form of MSC-2, confirming the company’s status as a Dormant Company.
Compliance Requirements for Dormant Companies
Even though a dormant company is not active, it must comply with some minimal requirements to retain its status. These include:
- Annual Return (Form MSC-3): Every dormant company must file a return annually in Form MSC-3, providing details of directors, registered office, and financial position.
- Minimum Directors: A dormant company must have at least three directors (for a public company), two (for a private company), and one (for a One Person Company).
- Annual Board Meeting: It must conduct at least one Board Meeting in a year, unlike active companies, which must hold four.
- Maintenance of Registered Office: The company must continue to maintain its registered office as per the requirements of the Act.
- Payment of Annual Fees: Statutory fees, such as ROC charges, must be paid to maintain the dormant status.
How to Reactivate a Dormant Company?
When a dormant company decides to start the business or become active again, it can easily do so by following a simple process.
Procedure for Dormant Company Reactivation
- Application to ROC: The company must file Form MSC-4 with the Registrar of Companies to seek reactivation.
- Verification by ROC: The Registrar examines the application and compliance records.
- Issue of Certificate (Form MSC-5): Once satisfied, the ROC issues a certificate in Form MSC-5, changing the status from dormant to active.
Grounds for Dormant Status Cancellation
The ROC may strike off or cancel a company’s dormant status in the following cases:
- The company fails to comply with the provisions applicable to dormant companies.
- It does not file its annual return (Form MSC-3) for two consecutive financial years.
- The company starts carrying on business or significant transactions without changing its status to active.
In such cases, the ROC can remove the name of the company from the dormant register after giving due notice.
Benefits of a Dormant Company
- Reduced Compliance Cost: Since reporting requirements are minimal, it saves time and money.
- Preservation of Company Name: Keeps the company name reserved and protects it from being used by others.
- Asset and IP Protection: Ideal for holding intellectual property rights, trademarks, or assets for future ventures.
- Ease of Revival: Can be reactivated easily whenever business operations begin.
- Legal Existence Maintained: Even while inactive, the company retains its legal identity, protecting its rights and liabilities.
Difference Between Dormant and Active Company
| Aspect | Dormant Company | Active Company |
| Business Activity | Not engaged in active business | Actively conducting operations |
| Compliance Requirements | Minimal (Annual Return MSC-3 only) | Regular filings (AOC-4, MGT-7, etc.) |
| Board Meetings | One per year | Minimum four per year |
| Status under Companies Act | Inactive | Active |
| Conversion | Can become active anytime | Cannot become dormant unless inactive |
Conclusion
The concept of a Dormant Company under the Companies Act, 2013, provides an efficient and effective mechanism for entrepreneurs who desire to keep their business entities legally alive without engaging in regular operations. It is particularly beneficial for the purpose of holding the intellectual property, safeguarding a business name or planning future ventures.
By opting for the dormant status, businesses can notably minimise the compliance burdens while maintaining their legal structure for future purposes. Once it gets ready, they can easily reactivate the company and resume full-scale operations.
In essence, a Dormant Company can easily bridge the gap between inactivity and dissolution, also keeping the corporate entity ready for reactivation at the right time.
