CONCEPT OF DORMANT AND INACTIVE COMPANIES UNDER COMPANIES ACT

2013

1. MEANING OF DORMANT COMPANY

2. ORIGIN
3. WHY BROUGHT IN EXISTENCE?
4. DIFFERENCE BETWEEN DORMANT AND INACTIVE COMPANIES
5. PROVISIONS AND RULES OF THE COMPANIES ACT
6. REGISTRATION AS A DORMANT COMPANY
7. BENEFITS

In this article well look at the 5 main reasons why you might choose to have a dormant
company:

1To set up a company you intend to use in the future

You might have a new trade in mind and want to get everything set up in advance. Alternatively,
you could have preparation to do before you can actually start trading. By forming a company,
you can be ready to trade at short notice, and in the meantime it can remain dormant. As a
company can remain dormant indefinitely so long as it meets certain requirements, you could set
the company up a few months or even years before starting to trade.

Having a dormant company ready to use in this way was more important in the past, when
forming a new company could take several weeks after sending paper forms in the post.
Thankfully, forming a new company can now be done online and Companies House will usually
approve new companies in a matter of hours. However, there might still be good reason to form
the company in advance.

In particular, you might want to ensure the company name is registered to prevent your
competitors from doing so. Weve looked elsewhere at the value of a good company name so, if
you have a valuable name in mind, it can be worth registering the company in advance and
thereby reserving the name our free company name checker will let you see if a name is
available. Be aware, however, that as well as forming a dormant company you would need also
to trade mark the name for full protection.

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Furthermore, if the company remains dormant for a period of time before starting to trade, the
business may also gain a valuable sense of continuity and maturity.

2To protect your interests and reputation as a sole trader

You might prefer operating as a sole trader, self-employed rather than a director of a company.
For some people, the reasons to consider setting up your business as a limited company wont be
persuasive enough and they can get along just fine as they are.

However, strange as it may seem, a lot of sole traders still set up a dormant company. Thats
because, unless you register a dormant company, there is nothing stopping someone else forming
a limited company with the same name as your business.

Example scenario
You can just imagine the situation. Youve been self-employed, trading for several years as
Make Your Mark Consultancy. Business is good and youve spent a lot of time and energy
building up an excellent reputation. Then someone registers a new company called Make Your
Mark Consultancy Limited, which would be legal for them to do. They arent particularly good
and develop a poor reputation, leaving a trail of dissatisfied customers in their wake. Some of
those customers leave bad reviews online, which your potential clients discover when trying to
find you.

This type of confusing scenario could cause your business all sorts of damage. You might end up
having to spend a lot of time and money distinguishing your business from the company with the
same name. Otherwise, you could easily miss out on new work and face an unfairly damaged
reputation if people associate the bad stories with your business.

If, instead, the sole trader chose to form a dormant company with the same name as his sole
trader business, he could rest assured that no one else can form a company of that name. As a
dormant company is comparatively straightforward to form and maintain, its an easy way to
prevent anyone else taking advantage of your success or damaging your reputation.

3To hold a fixed asset such as a property

The main example is a freehold property or the head lease to a property

Dormant companies are often used to hold a particular types of asset.

The main example is a freehold property or the head lease to a property, with the dormant
company option used by companies who deal with flat management. For such flat management
companies, a separate Residents Association Company will usually handle management income,
expenses and legal issues, meaning that the flat management company itself should meet the
conditions required of a dormant company.

An investment holding company may be set up as a dormant company on the same basis and for
much the same reason, to protect certain assets or intellectual property.

4Taking a break from trading

Sometimes you might have been actively operating as a limited company but decide to
completely cease trading for a period of time. For example, the owner may be taking a career
break, be moving abroad temporarily or events may just get in the way of trading.
 If youre stopping trading permanently, youll generally wind up the company. But what if you
intend to trade again in the future or are undecided about whether to resume trading? In that case,
you have a number of options:

Continue to maintain the company as an active trading entity. The main disadvantage here is
the fact that full company accounts would need to be submitted to Companies House each year,
with the associated cost of producing them. However, if the company trades at all or for other
reasons doesnt meet the strict criteria required of a dormant company, the company will have no
other choice but to do so.
Close the company and form another if required later. This provides a clean break and means
therell be no need to pay continuing accounting and other fees. However, if you later decide to
trade again youd have to form a new company, with no guarantee that the name of your former
company will be available.
Maintain the company as a dormant company. This simplifies the administration of the
company, hopefully meaning that costs are reduced. It also saves the cost and effort of closing
down the company, only to form another in the future. The company can remain dormant as long as
required (so long as Companies House requirements are met) and its then straightforward to
resume trading with the company when the time comes.
5When a company is being wound up
Lastly, some companies may be dormant for a period while being wound up. Remember that to
be eligible to submit dormant company accounts, the company must have met all
the requirements for dormant status for the whole period covered by the accounts.

8. LIST OF DORMANT COMPANIES IN INDIA

9. CONVERSION OF DORMANT COMPANY INTO AN ACTIVE COMPANY
10. CONCEPT OF DORMANT COMPANY IN FORIEGN COUNTRIES
Companies Act, 1956

The 1956 Act did not have any provision corresponding to s. 455 of the 2013 Act Companies
Act, 2013: Section 455

Section 455 of the 2013 Act notified vide SO 902(E), and has been in effect from 04-2014.

Notes on Clauses, Companies Bill, 2011

Clause 455. This is a new clause and seeks to deal with dormant company. It provides that a
dormant company shall be one which has not been carrying any business or has not made any
significant accounting transaction in the last two financial years. Such a company may make an
application to Registrar for obtaining the status of a dormant company. The Registrar shall
maintain the register of dormant company, which shall keep the minimum number of directors
and pay annual fees. This clause further provides which has not filed Balance Sheet, Profit and
Loss Account or annual return for two financial years, the Registrar shall enter the name in the
register maintained for dormant company. However, if the dormant company fails to comply
with the requirements of this clause then the Registrar shall have the power to strike off its name.
This clause also provides all the definition of inactive company, and significant accounting
transaction.

Section 455 of the 2013 Act lays down the law for companies which have been registered for a
future project or to hold an asset or intellectual property but do not enter into any major
accounting transactions to retain their corporate status by obtaining the status of a dormant
company. Section 455 of the 2013 Act also enables such companies to become active companies
by making an application to the Registrar.

An inactive company or a company formed for a future project to hold an asset or intellectual
property and has no significant accounting transaction may apply to the Registrar for being
registered as a dormant company. The Registrar shall consider such application and allow the
status of a dormant company.

An existing company which has not carried on any business or has no significant accounting
transaction for the last two financial years or has not filed any financial statements or any annual
returns in the last two years shall be called an inactive company. However, an existing company
which has not filed financial statements and annual returns during the last two financial years but
has assets and liabilities will not be declared dormant.

Significant accounting transaction means any transaction other than what is necessary to carry on
existence of a company under law. The 2013 Act specifically covers four categories of expenses
- payment of fees to the Registrar, payment made to fulfill requirements of the 2013 Act or any
other law, allotment of shares and payment for maintenance of office and records. Any expense
other than those mentioned above shall be considered as significant transaction.
Objects and scope of section 455 of Companies Act, 2013

As per the provision of s. 455 of the 2013 Act, a company has not been carrying any business or
has not had any major accounting transactions, in other words, an inactive company may apply
to the Registrar for granting it the status of a dormant company. An inactive company, as per
Explanation Il to sub-section (l) of s. 455 of the 2013 Act, is the one has not been on any
business or operation or has not made any significant accounting transaction during the last two
financial years or has not filed financial statement and annual returns for the last two financial
years. A newly company may also apply for the status of a dormant company if it has not carried
out any business or operation since save and except. filing of with the Registrar of companies or
payment to comply with requirements of any other law or allotment of shares or for payment for
maintenance of office and records. It must, be noted that, as per Rule 3 of the Companies
(Miscellaneous) Rules, 2014, a company before obtaining the status of a dormant company must
pass a special resolution to this effect or notify all its shareholders and obtain the consent of at
least three fourth of the shareholders in value. In addition, the company must also meet other
criteria as mentioned in proviso to Rule 3.

It appears from the plain reading of s. 455 of the 2013 Act that an inactive company should not
have any employees on its payroll. An existing company which ceases to have operation may
also apply to be declared as a dormant company. It must, however, be noted that only a company
which has no significant accounting transactions can become a dormant company under the 2013
Act.

A company may have been formed to protect a company name or to be in a state of readiness for
a future project or to hold an asset or an intellectual property. The company may have obtained
lease of land but may be awaiting further approvals before starting operations. Under all these
circumstances a company is said to be inactive and therefore can apply for dormant status.
Although in the U.K. a company may be kept dormant for as long as necessary, in India, as per
the proviso to Rule 8 of the Companies

(Miscellaneous) Rules, 2014,the maximum period during which a company can remain dormant
is a period of consecutive 5 years.. Hence a company cannot be dormant for more than 5 years as
stipulated under the Rules.

It must be noted that as per the provisions of s. 455 of the 2013 Act a company formed for the
purpose of protecting or holding intellectual property which may comprise of trademarks,
designs, copyrights, patents, etc.

Notice by Registrar [Section 455(4) of Companies Act, 2013]

The Registrar, according to s. 455(4) of the 2013 Act, shall issue a notice to a company which
has not filed its financial statements or annual returns for two years consecutively and enter the
name of such company in the register of dormant companies maintained by him. This essentially
means that it is not only the company that can apply for dormant status but the Registrar is also
empowered to take suo moto cognizance and convert a company into a dormant company.
However, such conversion can take place only as per the provisions of the 2013 Act and after
duly serving a notice on the company to that effect. As per s. 455(6) of the 2013 Act, the
Registrar shall strike off the name of a dormant from the register of dormant companies
maintained by it if a company fails to comply with the requirements of s. 455 of the 2013 Act.

However, a dormant company is not exempt from conducting audit of its books of accounts or
from holding meetings of the board or members or other compliances under the 2013 Act.

Procedure to be followed by Registrar [Section 455(2), (3), (5) and (6)]

On receipt of an application from a company to be declared the 2013 Act, the Registrar will
consider the application and after due consideration allowed the status of a dormant company as
per s. 455(2) of' the 2013 Act. A certificate shall be issued in this regard. The Registrar shall
maintain, as laid down in S. 455(3) of the 2013 Act, a register of dormant companies.
As mentioned earlier under a notice, as per S. 455(4) of the Act, shall be issued by the Registrar
if the financial statements and annual returns are not filed by the company for the last two years
consecutively. Section 455(5) of the 2013 Act makes it obligatory on part of the company which
has been given dormant status to have such minimum number of directors, file such documents
and pay such fees as may be prescribed. Section 455(5) of the 2013 Act also gives an option to a
dormant company to become an active company by making an application to this effect along
with necessary documents and fees to the Registrar.

Relevant Rules issued under Companies Act, 2013

Companies (Miscellaneous) Rules, 2014 deal with procedures relating to dormant companies
and Rules 3, 4, 5, 6, 7, and 8, as reproduced below, are relevant in this regard.
3. Application for obtaining status of dormant company. For the purposes of section
455(3), a company may make an application in Form MSC-I along with such fee as provided
in the Companies (Registration Offices and Fees) Rules, 2014 to the Registrar for obtaining
the status of a Dormant Company in accordance with the provisions of section 455 after
passing a special resolution to this effect in the general meeting of the company or after
issuing a notice to all the shareholders of the company for this purpose and obtaining
consent of at least 3/4th shareholders (in value):

It is provided that a company shall be eligible to apply under this rule only, if-

1. no inspection, inquiry or investigation has been ordered or taken up or carried out

against the company;
2. no prosecution has been initiated and pending against the company under any law;
3. the company is neither having any public deposits which are outstanding nor the
company is in default in payment thereof or interest thereon;
4. the company is not having any outstanding loan, whether secured or unsecured:
Provided that if there is any outstanding unsecured loan, the company may apply under
this rule after obtaining concurrence of the lender and enclosing the same with Form
MSC-I,
5. there is no dispute in the management or ownership of the company and a certificate
in this regard is enclosed with Form MSC-I;
6. the company does not have any outstanding statutory taxes, dues, duties etc. payable
to the Central Government or any State Government or local authorities etc.;
7. the company has not defaulted in the payment of workmen's dues;
8. the securities of the company are not listed on any stock exchange within
or outside India.

4. Certificate of status of dormant company. The Registrar shall after considering

the application filed in Form MSC-I, issue a certificate in Form MSC-2 allowing the status of
a Dormant Company to the applicant.

5. Register of dormant companies: The Register maintained under the portal maintained by
the Ministry of Corporate Affairs on its web-site www.mca.gov.in or any other website
notified by Central Government, shall be the register for dormant companies.
6. Minimum number of directors for dormant company: A dormant company shall have a
minimum number of three directors in case of a public company, two directors in case of a
private company and one director in case of a One Person Company:

Provided that the provisions of the Act in relation to the rotation of auditors shall not apply on
dormant companies.
7. Return of dormant companies. A dormant company shall file a "Return of Dormant
Company" annually, inter-alia, indicating financial position duly audited by a Chartered
Accountant in practice in Form MSC-3 along with such annual fee as provided in the
Companies (Registration Offices and Fees) Rules, 2014 within a period of thirty days from the
end of each financial year.

Provided that the company shall continue to file the return or returns of allotment and
change in directors in the manner and within the time specified in the Act, the company
allots any security to any person or there is any change in the directors of the company.

8. Application for seeking status of an active company.

1. An application, under sub-section (5) of section 455, for obtaining the status of an
active company shall be made in Form MSC-4 along with fees as provided in the
Companies (Registration Offices and Fees) Rules, 2014 and shall be accompanied by a
return in Fom MSC-3 in respect of the financial year in which the application for
obtaining the status of an active company is being filed:

Provided that the Registrar shall initiate the process of striking off the name of the
company if the company remains as a dormant company for a period of consecutive five
years.

2. The Registrar shall, after considering the application tiled under sub-rule (l), issue a
certificate in Form MSC-5 allowing the status of an active company to the applicant.

3. Where a dormant company does or omits to do any act mentioned in the Grounds of
application in Form MSC-I submitted to Registrar for obtaining the status of dormant
company, affecting its status of dormant company, the directors shall within seven days from
such event, file an application, under sub-rule (l) of this rule, for obtaining the status of an
active company.

4. Where the Registrar has reasonable cause to believe that any company registered as
'dormant company' under his jurisdiction has been functioning in any manner, directly or
indirectly, he may initiate the proceedings for enquiry under section 206 of the Act and if,
after giving a reasonable opportunity of being heard to the company in this regard, it is found
that the company has actually been functioning, the Registrar may remove the name of such
company from register of dormant companies and treat it as an active company.

CONCLUSION

A dormant company provides an excellent advantage to promoters who want to hold an

intellectual property or an asset under the corporate shield for its usage at a later stage. For
instance, if a promoter wants to buy a property now for the purpose of some future project at a
comparatively affordable price, he can purchase the property through a dormant company so
that he use the property for the project later on. A dormant company formation can also prove
useful when an individual wishes to stop trading for a specific period of time. For example, if
an individual has been running a successful company but wishes to move abroad for a short
time, he can choose to preserve his company so that he can restart it at a later date. Since a
dormant company remains in the books of registrar for a considerable time it provides the
company with a sense of maturity and might help to boost its credit worthiness. Dormant
companies or asset holding companies also helps in limiting the liabilities of the holding
company and protect the assets of the group company from the operation of other subsidiary
company. In case one of the subsidiaries goes bankrupt, unless the holding company has co-
signed the debt, the holding company will not be liable for the loss.