Dormant Status: Need of the Hour By Jaya Sharma and Sunita Choudhary


BACKGROUND:
 
In this write up, we have tried capturing the very essence of the concept of "Dormant Company" and how a Company can practically implement the same in the current pandemic which would be befitting to the Company from the perspective of the compliance cost and at the same time retain and preserve the company for the very reason it had been formed. The COVID-19 pandemic has adversely affected the business situations all over the country. It is an unforeseen challenges for many companies big and small, especially the start-ups. Companies which wish to remain compliant can avail this status with minimum compliance cost. Companies can avail this status with the idea of commencing the business at a later date.
 
DORMANT COMPANY?
 
Section 455 of the Companies Act, 2013 governs the provisions related to Dormant Company.
 
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 in such manner as may be prescribed for obtaining the status of a Dormant Company.
 
WHO IS ELIGIBLE TO APPLY FOR DORMANT STATUS:
 
  • The Company shall not undergo any inspection, inquiry, or investigation or shall not initiate any prosecution against the Company and pending under any court;

  • The Company shall neither have any public deposits which are outstanding nor shall the Company default in payment thereof or interest thereon;

  • There shouldn’t be any outstanding loan on the Company, secured or unsecured. In case there is an unsecured loan, the lender’s consent should be enclosed with the form;

  • There shall be no dispute in the management or ownership of the Company and a certificate in this regard shall be enclosed with the form;

  • The Company shall not have any outstanding statutory taxes, dues, duties etc. payable to the Central Government or any State Government or local authorities etc;

  • There shall be no default in the payment of workmen’s dues;

  • The Company should not be a listed company within or outside India.

DIFFERENCE BETWEEN DORMANT COMPANY AND DEFUNCT COMPANY:
 

DORMANT COMPANY

DEFUNCT COMPANY

A dormant  company is a company which 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

A defunct company means a company which has:

·       Nil asset and nil liability, and

·       Not commenced any business or activity since incorporation or

·       Not been carrying any business operation since last one year before making an application under Fast Track Exit Scheme.

 
PROCEDURE TO APPLY FOR DORMANT STATUS:


VALIDITY OF DORMANT STATUS:
 
A Company can remain dormant only for a period of five consecutive years. On completion of five years, Registrar shall initiate the process of striking off the name of Company.
 
COMPLIANCES BY DORMANT COMPANY:               
 

Annual Return

A dormant company shall file a “Return of Dormant Company” annually, inter-alia, indicating financial position duly audited by a chartered accountant in practice

Form MSC-3 within a period of thirty days from the end of each financial year.

Return of Allotment and change in directors

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, whenever the Company allots any security to any person, or there is any change in the directors of the Company.

Returns of allotment- PAS 3

Change in directors- DIR 12

Meeting of Board of Directors

A Dormant company shall hold at least one meeting of the Board of Directors in every half year. The gap between two meetings shall not be more than 90 days

N.A

 
Thus, as compared to a Company which would be filing its normal annual compliance despite of not much significant transactions, obtaining a dormant status would bring down the compliance cost to the Company to a certain extent in the current scenario whereby survival and retaining the identity of the Company is crucial along with balancing the cost to the Company.
 
PROCEDURE FOR APPLICATION FOR STATUS OF ACTIVE COMPANY:

Where a dormant company does or omits to do any act mentioned in the Grounds of application in Form MSC-1 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, apply, for obtaining the status of an active company.
 
APPLICABLE FORMS/CERTIFICATES:
 

MSC-1

Form for application for obtaining Dormant Status of Company.

MSC-2

Certificate for allowing the Dormant status to the Company.

MSC-3

Annual return to be filed by the dormant Company within 30 days from the end of each financial year.

MSC-4

Form for application of Active status by the dormant Company.

MSC-5

Certificate for allowing the Active status to the dormant Company.

 
SCHEME FOR INACTIVE COMPANIES UNDER COMPANIES FRESH START SCHEME (CFSS) 2020:
 
CFSS-2020 has opened a new avenue for many inactive companies. The defaulting Inactive companies can file its belated documents under the CFSS-2020 and can simultaneously, either:

  • Apply for seeking dormant status under section 455 of the Companies Act, 2013 by filing e-form MSC-1 OR

  • Apply for removal of the name of Company from ROC by filing e-form STK-2.

CONCLUSION:
 
"You have to see failure as the beginning and the middle, but never entertain it as an end"-Jessica Herrin, founder and CEO of Stella & Dot

The management has to weigh the options and not act instantly, as during this COVID-19 crisis, it is not easy to make such a decision. The pandemic has adversely affected business situations all over the country.

It is an unforeseen challenge for many companies, big and small, especially the start-ups. Companies which wish to remain compliant can avail this status with minimum compliance cost. Companies can avail this status with an idea of commencing the business at a later date.

HOW DO WE HELP?
 
The lessons from the COVID crisis will provide enough reasons to stand the test of time. As Elon Musk, CEO of Tesla Motors and SpaceX quoted "If something is important enough, or you believe something is important enough, even if you are scared, you will keep going."

Bibliography
 

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