Dormant Companies in India: Rules and Compliance

In India, dormant companies are governed under Section 455 of the Companies Act, 2013, with further specifics laid out in Rule 8 of the Companies (Miscellaneous) Rules, 2014, and the Secretarial Standard-3 (SS-3) of the Institute of Company Secretaries of India (ICSI). The concept of a dormant company applies to entities that are registered but not yet operational, such as those established for future projects or those that hold assets or intellectual property without engaging in active business transactions.

1. Definition of a Dormant Company

A company may apply to be classified as a dormant company if it meets any of the following criteria:

1. Registered for Future Project or Holds Assets/Intellectual Property: The company must have been formed with the intent to operate at a future date or to hold assets/intellectual property and should not engage in any significant accounting transactions.

2. Inactive Company: A company is deemed inactive if:

   • It is not carrying on any business operations, or
   • It has not conducted any significant accounting transactions for the last two financial years, or
   • It has not filed financial statements for the past two financial years.

2. Significant Accounting Transactions

For dormant company classification, "significant accounting transactions" exclude specific mandatory payments and filings. Any transaction is generally considered significant unless it falls into the following categories:

• Payments made to the Registrar of Companies (RoC): Regular compliance payments.
• Payments required to meet legal obligations: Payments made to comply with the Companies Act.
• Share Allotments to Fulfill Statutory Requirements: Allotments carried out solely to meet compliance needs.
• Office and Record Maintenance Expenses: Routine payments to keep the company's records and office functional.

3. Status Duration and Change Requirements

A dormant company must consider its status within a five-year period. Before the end of five consecutive years, the company is required to take one of the following actions:

• Revert to Active Status: File for active status if the company resumes business operations.
• Apply for Strike-off: Apply for the removal of the company's name from the register if it remains inactive.

4. Restrictions for Obtaining Dormant Status

A company cannot be granted dormant status if any of the following conditions exist:

1. Pending Inspection, Inquiry, or Investigation: If the company is subject to an inspection, inquiry, or investigation, it is not eligible for dormant status.

2. Outstanding Public Deposits: Dormant status is restricted if there are any outstanding public deposits or if the company is in default on such deposits or related interest payments.

3. Pending Legal Actions: Dormant status will not be granted if there is any prosecution pending against the company.

4. Outstanding Loans: If there are outstanding loans (secured or unsecured), the company cannot apply for dormant status. However, if there is an outstanding unsecured loan, the company may apply after obtaining lender consent or approval. This consent must be documented and submitted with Form MSC-1.

5. Disputes in Management or Ownership: If there is a dispute in management or ownership, the company must provide a certificate from the management confirming the absence of disputes. This certificate is to be included with Form MSC-1 and will be evaluated for dormant status, which, if approved, is granted in Form MSC-2.

6. Outstanding Statutory Taxes or Dues: A company is ineligible if there are any statutory taxes, dues, or duties payable to the central government, state government, or local authorities.

7. Unsettled Workmen’s Dues: Any pending dues payable to the company’s workers prevent the company from applying for dormant status.

8. Listed Companies: Companies listed either in India or abroad are ineligible for dormant status.

5. Filing and Compliance Requirements for Dormant Companies

Dormant companies have specific filing and compliance requirements to maintain their status:

1. Annual Return Filing: Dormant companies must file an annual return using Form MSC-3 within 30 days from the end of the financial year. This form acts as a declaration of the company’s continued dormant status and lack of business operations.

2. Application for Active Status: To resume active status, a dormant company must file Form MSC-4. If the application is approved, the company will be granted active status in Form MSC-5, allowing it to resume regular business operations.

Conclusion

The dormant company provision under the Companies Act, 2013, provides businesses with flexibility in maintaining legal existence while planning for future projects or safeguarding intellectual property without incurring the full compliance costs of an operational company. However, strict criteria and compliance requirements must be met to maintain dormant status. Businesses considering dormant status should ensure they meet the criteria outlined in Section 455 and adhere to the annual filing requirements, ensuring compliance with Indian company law.

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Article Compiled by:-

~Neel Lakhtariya

(LegalMantra.net Team)

Disclaimer: Every effort has been made to avoid errors or omissions in this material in spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition In no event the author shall be liable for any direct indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information Many sources have been considered including Newspapers, Journals, Bare Acts, Case Materials , Charted Secretary, Research Papers etc.