When a company is formed for a future project or hold an asset or intellectual property and has no any significant accounting transactions or an inactive company will be called as dormant company.
If a company want to convert it as a dormant company, such company need to make an application through MCA website in e-form MSC-1. For filing such form there is a necessity of passing a special resolution in a duly convened general meeting or with the consent of 3/4th value of share holders by sending proper notice.
This is not an open option for any company to apply for the status of a dormant company. If a company want to apply to become a dormant company, following conditions should be fulfilled.
- There should not be any inspection, inquiry or investigation has been ordered or taken up or carried against the company.
- There should not be any prosecution proceeding has been initiated or pending against the company under any law.
- If the company ever accepted deposits, there should not be any outstanding public deposits nor the company made any default in payment or interest there on.
- The company should not have any outstanding loan whether secured or unsecured. In the case of loan there is an exception, If the company have any outstanding loan company can file an apply after obtaining lender’s approval and enclosing the same with form MSC-1.
- If there is any dispute in management or ownership of the company, the application can not be made. A certificate in this regard should be filed along with the form.
- The company should not have made any outstanding statutory dues, taxes, duties etc, payable to Central Government, any State Government or any local authorities etc.
- There should not be any default in payment of workmen dues.
- The securities of the company should not be listed in India or outside. So a listed company cannot become a dormant company.
If the application is in order, the Registrar will allow the status of dormant company in MSC -2. Then the name of the company name will be entered in the register of dormant companies maintained at MCA website.
Such dormant companies should maintain minimum directors as per the Companies Act.
Dormant companies should file Return of Dormant Company annually indicating financial position which should be certified by a chartered accountant in practice in e-form MSC 3 within 30 days from the end of each financial year.
Provisions relating return of allotment and change in directors will apply as normal. (e-form PAS-3 and DIR-12)
While calculating ceiling of the total number of 20 companies audit limit to an auditor, dormant companies will not be included as well the process of rotation of auditors will not apply to dormant companies.
Dormant companies also need to conduct meetings of the board, but in reduced numbers. There should be a minimum of one board meeting in each half of calendar year and the gap between two board meetings should not be less than 90 days.
A company company may retain the status of Dormant Company for five years once it has been dormant company status, after it Registrar may strike off the name of the company from the Register of Companies.
The companies act also provides for automatic conversion to dormant companies. If a company fails to file Financial Statements or annual returns for two consecutive financial years and enter the name of such company in the register maintained for dormant companies.
Following are the benefits of dormant status
The company can be revived and operation can be started in the future.
Even if in the dormant status the company can protect its reputation or interest.
To hold fixed assets.
Invest money when the cost is less and use it later. This is useful in trademarks.
Conversion of dormant company to active.
The application for conversion should be filed in e-for MSC-4 along with proper return in e-form MSC 3 in respect of the financial year in respect of financial year in which application for obtaining the status of active company is being files.
On satisfaction of the application the Registrar shall issue the certificate in form MSC -5 and the company will become active.
If a dormant company by action or omission become an active company, the company or director should file an application for obtaining the status of active company within 7 days of such even in form MSC-1.
If the Registrar of companies have reasonable grounds to believe that even when the company is a dormant company, the company functions like an active company, the Registrar can initiate enquiry under section 206 of the Act. If the company found functioning the registrar may remove the name of such company from the register and treat the company as an active company. Before passing such a decision the registrar should provide a reasonable opportunity of being heard to the concerned company.