Modes of closing a business - Series III: How a company can obtain dormant status

The COVID-19 pandemic has dealt a severe blow to many businesses, big and small. It certainly has been an unforeseen challenge for many companies, specially startups.

This is the third part of the blog series on closing a business. In Series I of the blog, we covered steps involved in summary procedure of liquidation and in Series II, we covered the merits and demerits of Fast Track Exit (striking off the name of the company).

This third 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. Dormant status could be an option available to companies which do not have any significant accounting transactions 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.

Advantages

• No. of board meetings: The minimum number of board meetings mandatorily required to be held by a dormant company is one meeting every half of a calendar year with a gap of not less than 90 days between two meetings. This is in comparison to a minimum of four board meetings in a year applicable to active companies.
• Annual compliance: A dormant company is required to file on an annual basis, only 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 30 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 does 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, 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.

Eligibility criteria

The following companies shall be eligible to apply for dormant status by making an application to the Registrar of Companies -

1. 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.
• A company which has no significant accounting transaction.

2. In case of inactive companies:

• 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.
• A company which has not filed financial statements and annual returns during the last two financial years.

3. Other general conditions in addition to 1 and 2 above:

• 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 3/4^th of the members in favour of obtaining dormant status for the company.
• Filing of form: Subject to fulfillment 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 the 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.

Conclusion

The 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.

ALSO READ

Modes of closing a business - Series II: Striking off the name of a company by Registrar of Companies

Please Note: 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 the specific requirements of your company have to be considered.

The series was written with the help and research of the team at NovoJuris Legal.