The Covid situation has struck an adverse blow on many businesses big and small. It certainly is an unforeseen challenge for many companies, specially startups.
This is a third part of the blog series on closing a business. Our Series I of the blog we covered steps involved in summary procedure of liquidation and the Series II covered the merits and demerits of Fast Track Exit (striking off the name of the company).
This 3rd part of the blog provides an option, where businesses intend to shut down operations but not the company. Such businesses remain alive for a specific period with minimum costs and compliance.
The word “Dormant” means inactive or inoperative. This option is useful for companies who have gone back to the drawing board on their business or business model or pivoting.. Dormant Company could be an option available to companies which do not have any significant accounting transactions presently and are not carrying on any business.
It may be noted, that companies will have to be compliant whether they are conducting business or not. However, the “dormant status” provides for relief from certain compliances.
- No. of Board Meetings: The minimum number of Board Meetings mandatorily required to be held by a Dormant Company is 1 (One) meeting every half of a calendar year with a gap of not less than 90 days between 2 meetings. This is in comparison to a minimum of 4 Board Meetings in a year applicable to active companies.
- Annual Compliance: A dormant company is required to file on an annual basis, only 1 (One) form - “Return of Dormant Company” indicating its financial position, duly audited by a chartered accountant in practice in Form MSC-3 within a period of thirty days from the end of each financial year.
- Continued Existence: A person may form a company for a future project or to hold an asset or intellectual property, or an inactive company which do not have any significant accounting transaction may continue to exist with reduced costs by obtaining “Dormant” status
- Safeguarding Intellectual Property (IP): The Dormant status helps companies which have Intellectual Properties such as copyright, patents and trademarks etc. and whose management wish to retain such IPs for future business use without having to sell them during the process of winding up.
However, a company may allot securities and also effect change in directorship during this period.
The following companies shall be eligible to apply for dormant status by making an application to the Registrar of Companies -
- In case of active companies:
- A company which has been formed and registered under the Companies Act for a future project or to hold an asset or intellectual property; and
- A company which has no significant accounting transaction.
- A company which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last two financial years; or
- A company which has not filed financial statements and annual returns during the last two financial years.
- No prosecution, inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
- No Deposits or Loan: The company is neither having any public deposits which are outstanding nor the company is in default in payment thereof or interest thereon or outstanding loan, whether secured or unsecured (in case of outstanding loan, concurrence of the lender should be obtained);
- There is no dispute in the management or ownership of the company;
- 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.;
- The company has not defaulted in the payment of workmen’s dues;
- The securities of the company are not listed on any stock exchange within or outside India
Procedure to apply for dormant status:
- Board Meeting: The board of directors of the company shall in a Board Meeting recommend obtaining the dormant status.
- Shareholders Meeting: The shareholders of the company, in a General Meeting pass special resolution with consent of at least 3/4th of the majority in value to obtain Dormant status for the company;
- Filing of Form: Subject to fulfilment of the eligibility criteria, an application shall be filed to the Registrar with Board and shareholder consents, certified statement of accounts and other financial statements.
- On approval of the application, the Registrar shall issue a Certificate allowing the status of a dormant company to the applicant and the same shall be entered in the register of dormant companies maintained by Registrar.
Validity of Dormant status:
A Company can remain dormant ONLY for a period of five consecutive years. A company may at any time during the said five years apply to the Registrar in Form MSC-4 together with Form MSC-3 to obtain the status of active company. If the company remains dormant even after the period of consecutive five years, then the Registrar shall initiate the process of striking off the name of the company.
If a dormant company does or omits to do any act mentioned in the eligibility criteria to apply for Dormant company, which affects its status as dormant company, the directors shall within seven days from such event, file an application in Form MSC-4 to obtain the status of an active company.
This option of ‘Dormant’ status may be used by companies considering shutting down business due to lack of ideas, adverse market conditions etc., but with an idea to commence business at a later date.
Disclaimer: In the process of simplifying the reading of this blog, we have excluded many technical aspects/ document description, filings, timelines etc. to be followed. Please obtain legal advice, since your specific company’s requirements have to be considered.