Foreward by Anisha Patnaik, Co-Founder
When one decides to discontinue their business operations, the first option that comes to the mind is shutting down the company. This almost always seems to be the way out, because, one doesn’t want to get into the hassle of maintaining compliances for an inactive entity. However shutting down or “winding up” as is referred to in the legal parlance, can be a long process involving paperwork. Moreover, what if you change your mind and want to restart operations again? If you have gone down the long winded route of “winding up”, you will have to incorporate a fresh company all over again.
It is for such situations, that the Indian law has provided for changing the status of a company from “Active” to “Dormant”. It is almost like putting a company in a deep freezer for some time, till you are ready to bring it out and start running again. The advantage of keeping a company dormant is that you do not have to comply with all the requirements under the Companies Act. The compliance requirement is minimal and hence the cost of running or keeping operational an otherwise unoperational company is low. And, you can almost immediately change the status of the company back to “Active” if you decide to revive it. Of course, one cannot keep a company in “dormant” state forever. The law prescribes 5 years as the maximum period for “dormant status” of a company, post which, if the company is not revived, the Registrar of Companies (Ministry of Corporate Affairs) will automatically strike off the company’s name from its records!
Read more, in detail about the “Dormant Status” in the below article, by our Compliance LexStar, Hamza Boxwala.
What is a dormant company?
Dormant Company is a company which is not carrying on any business or operation. As per Section 455 of the Companies Act, 2013 (“Act”), where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar of Companies (“RoC”) for changing it’s status to that of a dormant company.
When can a company be called “Inactive”?
“Inactive” means the company has not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years or has not filed financial statements and annual returns during the last 2 financial years.
“Significant accounting transaction” means any transaction other than
- Payment of fees to the Registrar.
- Payments made by it to fulfill the regulatory requirements.
- Allotment of shares.
- Payments made for maintenance of office and records.
When a voluntary application is filed with the RoC for dormant status or when a Company defaults in statutory annual filings for a consecutive period of 3 years, the RoC changes the status of the company from “Active” to “Dormant”.
Dormant status can be obtained for all type of companies. This includes private limited, public limited and OPC.
What are the conditions to be fulfilled before applying for dormant status?
- The company should not have been carrying on any business or operation, or not made any significant accounting transaction during the last two financial years or has not filed financial statements and annual returns during the last two financial years
- In case there is any unsecured loan in the Company then consent of the lender should be obtained.
- Statement of Assets and Liabilities should be obtained from Statutory Auditors of the Company.
- No dispute certificate should be obtained from the management or promoters of the Company.
Are there instances when a company may fulfill the above conditions, and yet be ineligible to apply for dormant status?
Set out below are few instances, when a company can be disqualified from converting to a “dormant” status, inspite of fulfilling the conditions prescribed under the Act:
- Where any inspection, inquiry or investigation has been ordered or taken up against the company or prosecution has been initiated against the company and pending under any court.
- Where it has any public deposit or interest thereon outstanding for payment.
- Where there is any secured creditors in the Company.
- Where the company has any outstanding tax dues either to central or state government or local authorities and has defaulted in payment of workmen dues.
- Where the company is listed in stock exchange.
Does a dormant company also have to comply with any filing requirements?
Yes, a dormant company will have to comply with certain compliance requirements, although these are very minimal. Listed below are the compliance requirements:
- A dormant company should file ”Return of Dormant Company” every year indicating the Company financial position duly audited by Chartered accountant in practice in Form MSC-3.
- A dormant company is required to convene at least one Board meeting in every six months.
What are the benefits of having dormant status?
- To revive and operate a company you intend to use in future.
- To protect your interest and reputation as a sole trader.
- To hold a fixed asset such as a property.
- Less compliance.
What is the procedure for conversion of status from dormant to active company?
If company that has been declared as “dormant” starts carrying out significant transactions, then within 7 days from the date of undertaking such transaction, the company will have to file an application with the RoC in form MSC-4 accompanied by a return in Form MSC-3 to get back the status active from the earlier status of dormant.
After considering the application, the RoC will issue a certificate in Form MSC-5 approving the change of status of the dormant company to active company.
For how long can a company continue in “dormant status”?
A company can continue in dormant status for a maximum period of 5 years. Before the expiry of 5 years, the company will have to apply for changing the status to “Active”, otherwise the name of Company shall be struck off by the RoC.
How long does it take to change the status of a company from “active” to “dormant”?
It takes around 1-2 months to complete the whole process of obtaining dormant status subject to the satisfaction of queries if any of the RoC.