This article is written by Yash Bagra, a student of the Institute of Law, Nirma University.
A very important concept or say update under the Companies Act of 2013 is of dormant companies. There are around 1.5 lakh dormant companies present in Indian corporate sector according to recent government data which are either incorporated for future project or to hold only IPRs or assets. Some are yet to carry out the operations or are in operational stage for a fair period of time. It is not always that by dormant companies it is meant that they are defunct. They were just not in operation because of the nature of business they perform.
Section 455 of Companies Act, 2013 deals with companies which are dormant in nature. It provides certain conditions to be fulfilled before getting a tag of Dormant Company. Company should not have any significant accounting transaction like allotment of shares or payments for maintenance of its office and records. An application has to be made to the registrar of companies to get a Dormant Company tag.
Companies may apply for a dormant status if the company is incorporated for a future project, incorporated for holding an asset or intellectual property, company which has not filed financial statement and annual returns during the last two financial years and a company which is carrying out any business or say an inactive company.
Important conditions to be fulfilled for acquiring Dormant Company status:
i) The company is neither having any public deposits which are outstanding nor is the company in default in payment thereof or interest thereon;
ii) No inspection, inquiry or investigation has been ordered or taken up or carried out against the company;
iii) No prosecution has been initiated or pending against the company under any law;
iv) The company is not having any outstanding loan or if there is any, the concurrence of the lender has been obtained and is enclosed with the application;
v) The company has not defaulted in the payment of workmen’s dues;
vi) 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.;
vii) There is no dispute in the management or ownership of the company;
viii) The application has not been made with an objective to deceive the creditors or to defraud any other person;
ix) The securities of the company are not listed on any stock exchange within or outside India.
Exemptions or privileges of dormant companies:
A Dormant Company provides an excellent advantage to promoters who want to hold an intellectual property or an asset under the corporate shield for its usage at a later stage. For instance, if a promoter wants to buy a property now for the purpose of some future project at a comparatively affordable price, he can purchase the property through a Dormant Company so that he use the property for the project later on.A Dormant Company is exempted from enclosing cash flow statements in its annual accounts.
Section 173(5) of the Act states that a Dormant Company shall be deemed to have complied with all the provisions of this section if at least one meeting of board of directors has been conducted in each half of a calendar year and the gap between the two meetings should not be less than ninety days.
Rule 29.8 provides that a Dormant Company need to have minimum number of three directors in case of a public company, two in case of private company and one in case of one Person Company. Even the provisions of rotation of directors do not apply on dormant companies.
A Dormant Company formation can prove useful when an individual wishes to stop trading for a specific period of time. For example, if an individual has been running a successful company but wishes to move abroad, he can choose to preserve his company so that he can restart it at a later date by just doing some negligible formalities like registering his company as a Dormant Company with the registrar. Since a Dormant Company remains in the books of registrar for a considerable time it provides the company with a sense of maturity and might help to boost its credit worthiness.
Procedural Aspects:
Rule 29.5 provides guidelines for the application through which a company get a status of Dormant Company inclusive of a special resolution to be passed in a general meeting. If the registrar finds that application by the company fulfills all the conditions, it can give company a certificate of Dormant Company.
A Dormant company can also file an application to obtain status of an active company under Rule 29.10. (1) With required fee. It is important to note that the registrar has the power to strike off the name of the company from the register if the Company remains dormant for five consecutive years.
Dormant Company status is a new phenomenon in the Companies Act 2013 and is an excellent tool for keeping assets in the company for its future usage, it is beneficial for all kind of corporations especially real estate companies, chit funds, venture capital companies.