Dormant Company Section under the Companies Act

Introduction

Section 455 of the Companies Act 2013 introduced the concept of Dormant Company into Indian law, which was absent in the previous Companies Act of 1956. The term “dormant” connotes a temporary condition of inactivity or non-operation.

A dormant company has been registered under the Companies Act 2013 but has not engaged in any “significant accounting transaction” or is classified as an “inactive company” that has asked the Registrar to recognize it as dormant.

Meaning of Dormant Company

Section 455 of the Companies Act 2013 defines a dormant company as one formed and registered under the Act for a future project, to hold an asset or intellectual property, and with no significant accounting transactions. 

Additionally, an “inactive company” has not conducted any business or operations, made any significant accounting transactions in the past two financial years, or filed financial statements and annual returns during that period.

The term “Significant Accounting Transaction” is explained under the same section and excludes the following:

• Payment of fees by the company to the Registrar;
• Payments made to comply with the requirements of this Act or any other law;
• Allotment of shares to comply with the provisions of this Act; and
• Payments for the maintenance of the company’s office and records.

A company that conducts no other transactions beyond those listed above may be classified as dormant. However, engaging in other transactions would result in losing its dormant status.

The section also defines an “Inactive Company” as one that has not conducted any business or operations, made no significant accounting transactions in the past two financial years, or failed to file financial statements and annual returns during the same period.

Section 455 further empowers the Registrar to take suo moto action against companies that have not filed annual returns or financial statements for two consecutive fiscal years. In such cases, the Registrar may issue a notice to the company and subsequently enter its name in the register of dormant companies. 

The Registrar also has the authority to strike a company’s name from the register if it fails to meet the requirements of Section 455 or has remained dormant for the past five consecutive fiscal years.

Additionally, a newly incorporated company can be declared dormant if it has not conducted any business since its incorporation but has filed returns with the Registrar of Companies. There are several advantages to obtaining dormant company status.

Even in a dormant state, the company’s name and trademark remain its exclusive property, preventing others from using them. A dormant company formed for a future project also indicates its intention to trade, allowing it to reserve and retain its domain name.

Requirements for Declaring a Dormant Company

To be declared a Dormant Company, specific criteria must be met as specified under the Companies (Miscellaneous) Rules, 2014. The proviso to Rule 3 outlines the following conditions that a company must satisfy:

1. No Investigation or Inquiry: The company should not be subject to any investigation, inquiry, or inspection that has been ordered or conducted against it.
2. No Outstanding Loans: The company must not have any secured or unsecured outstanding loans.
3. Payment of Workmen’s Dues: The company must not have failed to pay dues to its workmen.
4. No Prosecution: No prosecution should be initiated or pending against the company under any law.
5. No Outstanding Public Deposits: The company must not have any outstanding public deposits, nor should it have defaulted in paying such deposits.
6. No Outstanding Statutory Dues: The company must not have any outstanding statutory dues, taxes, or other obligations payable to the State, central, or local governments.
7. Securities Not Listed: The company’s securities must not be listed on any stock exchange within India or internationally.
8. No Ownership or Management Disputes: There must be no disputes regarding the company’s ownership or management. A certificate confirming this must be submitted along with Form MSC-1.

Additionally, Rule 6 of the Companies (Miscellaneous) Rules, 2014 stipulates that a dormant company must have at least two directors for a private company, three directors for a public company, and one director for a One-Person Company.

Procedure for Declaring a Company as Dormant

To obtain dormant company status under Section 455 of the Companies Act, 2013, a company must follow these steps:

1. Pass a Special Resolution: The company must pass a Special Resolution (SR) in a general meeting or obtain the consent of at least three-fourths of the shareholders by value after duly notifying them.
2. File an Application: The company must file an application using Form MSC-1 with the Ministry of Corporate Affairs, along with the required fee as specified under the Companies (Registered Offices and Fees) Rules, 2014.
3. Registrar’s Review: The Registrar will review the application to ensure it meets the requirements outlined in Section 455 of the Companies Act 2013. If satisfied, the Registrar will issue a certificate confirming the company’s dormant status.
4. Register as Dormant: The Registrar will enter the company’s name in the register of dormant companies.
5. Correct Omissions: If any omissions or errors are discovered while filing Form MSC-1, the directors must file a corrective application within seven days of the omission under Rule 8(1) of the Companies (Miscellaneous) Rules, 2014, to restore the company’s active status.

In conclusion, Section 455 of the Companies Act, 2013 introduced the concept of dormant companies into Indian law. A dormant company is one that, although incorporated and registered under the Companies Act, 2013, does not engage in any significant accounting transactions or is an inactive company that has applied to the Registrar for dormant status. 

Additionally, a company that has failed to file annual returns or financial statements for two consecutive fiscal years may also be declared dormant by the Registrar through suo moto action. 

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