Dormant Company Concept, Definition, Features, Formation

According to Section 455 of the Companies Act, 2013, a Dormant Company is defined as a company that has no significant accounting transactions during a financial year or has not undertaken any business operations for two consecutive financial years. Dormant companies can exist for various reasons, including strategic planning for future business activities, tax benefits, or the desire to maintain a company name for future use without incurring significant operational costs.

Features of a Dormant Company:

1. Lack of Business Activity

The primary feature of a dormant company is its lack of significant business activity. This means that it has not engaged in any commercial operations, transactions, or activities that generate income or expenses during the specified periods.

2. Minimal Compliance Requirements

Dormant companies are subject to fewer compliance requirements compared to active companies. They are exempt from certain annual filings and disclosures, which reduces administrative burdens. However, they must still comply with some regulatory obligations to maintain their dormant status.

3. Preservation of Corporate Identity

Dormant companies can retain their corporate identity and name, which can be beneficial for businesses planning to reactivate the company in the future. This preservation allows the original owners to keep their brand and market presence without the need to create a new company.

4. Potential for Reactivation

A dormant company can be reactivated at any time by resuming business operations. Upon reactivation, it must comply with the standard regulatory requirements and filings applicable to active companies.

5. Tax Benefits

Dormant companies may benefit from certain tax advantages, as they are not subject to tax liabilities associated with active business operations. This feature makes dormant companies an attractive option for entrepreneurs looking to hold a corporate structure without incurring significant costs.

6. Registered Status

Despite being inactive, a dormant company retains its registered status with the Registrar of Companies (ROC). This means it is still recognized as a legal entity and can engage in certain activities, such as entering into agreements or holding assets.

7. No Business Transactions

Dormant company typically has no significant transactions that affect its financial statements. This feature distinguishes it from companies that may be inactive but still engage in minimal transactions, such as maintaining bank accounts or paying fees.

Formation of a Dormant Company:

The formation of a dormant company follows the standard company incorporation process but includes specific provisions to maintain its dormant status. Here are the key steps involved in forming a dormant company:

1. Incorporation of the Company

The first step in forming a dormant company is to incorporate it under the Companies Act, 2013. This involves:

• Choosing a unique name for the company.
• Preparing the Memorandum of Association (MOA) and Articles of Association (AOA).
• Submitting the registration application to the Registrar of Companies (ROC) along with the required documents.

2. Declaration of Dormancy

To establish a company as dormant, the applicants must declare their intention to keep the company inactive. This declaration should be included in the incorporation documents, indicating that the company will not engage in any significant business operations.

3. Filing with the Registrar of Companies

Once the company is incorporated, it must file specific forms with the ROC to formally declare its dormant status. This includes submitting Form MGT-14 for the declaration of dormancy and ensuring compliance with the requirements set by the ROC.

4. Annual Compliance Requirements

Dormant companies must still adhere to certain annual compliance requirements, including:

• Filing annual returns and financial statements with the ROC, although the requirements are less rigorous than for active companies.
• Providing a statement indicating that the company has no significant transactions during the financial year.

5. Maintenance of Records

Although dormant companies are not actively engaged in business, they must maintain proper records and documentation to support their dormant status. This includes keeping track of financial statements, bank statements, and any other relevant documents.

6. Renewal of Dormant Status

Dormant companies must periodically renew their dormant status by filing the necessary documents with the ROC. This renewal ensures that the company continues to meet the criteria for dormancy and remains compliant with regulatory requirements.

Advantages

• Cost Savings:

Dormant companies incur lower operational costs compared to active companies, as they do not engage in significant business activities.

• Brand Preservation:

Dormant companies can retain their brand identity and name, allowing them to resume operations in the future without starting from scratch.

• Flexibility for Future Business:

The dormant status provides flexibility for business owners to plan future operations without the immediate pressures of running an active business.

Challenges

• Limited Growth Opportunities:

Dormant companies cannot engage in active business operations, limiting their growth and revenue potential.

• Compliance Obligations:

Although the compliance requirements are minimal, dormant companies still need to fulfill certain obligations, which may be perceived as a burden by some entrepreneurs.

• Potential for Striking Off:

If a dormant company fails to comply with the annual filing requirements for an extended period, it may be subject to being struck off the register by the ROC, leading to the loss of its corporate identity.