What is Dormant Company and Annual Report?

When it comes to understanding the corporate regulatory framework in India, the concept of a dormant company plays a significant role. This article aims to provide a detailed overview of what constitutes a dormant company, its importance, the regulatory provisions under the Companies Act, 2013, and the compliance requirements, including the role of annual reports in maintaining transparency and accountability.

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What Do You Mean by Dormant Company?

As per Section 455 of the Companies Act, 2013 and Companies (Miscellaneous) Rules, 2014, a dormant company refers to a company that has been registered for a future project or to hold an asset or intellectual property and has not undertaken any significant accounting transaction. Such companies can apply to the Registrar of Companies (ROC) to obtain the status of a dormant company.

A dormant company may be a public company, private company, or even a one-person company (OPC). These companies are typically created with long-term business intentions, where operations are yet to begin, or are deliberately halted.

What is an Inactive Company?

An inactive company is a company that:

• Has not carried out any business activity or operation,
• Has not made any significant accounting transactions in the last two financial years,
• Has not filed financial statements and annual returns during the last two financial years.

Significant Accounting Transactions exclude:

• Registrar fee payments,
• Payments under legal obligations,
• Share allotment to fulfill statutory requirements,
• Office and record maintenance expenses.

If only these excluded transactions are made in the last two financial years, the company may be considered inactive and qualify for dormant status.

Advantages of Being a Dormant Company

Before understanding the advantages, it is important to note that dormant companies are created with long-term business intentions. These entities remain legally registered but are inactive, either awaiting the right time to begin operations or deliberately holding intellectual property or assets.

1. Minimum Directorship: Requires a minimum of three directors (public company), two directors (private company), and one director (OPC).

2. Intellectual Property Holding: Useful for holding patents or other assets under a corporate structure.

3. Simplified Filings: Dormant companies use a simplified compliance form (Form MSC-3).

4. Tax Relief: No taxes are applicable until the company becomes active.

5. No Cash Flow Statement: Exemption from cash flow disclosures.

6. Auditor Rotation Not Required: Provisions related to auditor rotation do not apply.

7. Lower Compliance Costs: Fewer filings and legal obligations reduce operational costs.

8. Easy Reacquisition: Easier to revert to active status without new incorporation.

Compliances for Dormant Company

To retain dormant status, a company must:

• Maintain the minimum required number of directors.
• File returns for share allotments and changes in directors.
• Conduct at least one board meeting every six months (with a gap not exceeding 90 days).
• File Form MSC-3 annually, showing audited financial position.
• Avoid including cash flow statements in annual accounts.
• Abide by non-rotation of auditors provision.
• Not exceed five consecutive financial years in dormant status, or the ROC may strike it off.

Procedure to Obtain Dormant Company Status

A company can be classified as dormant through:

Suo-Moto Application:

• File Form MSC-1 with requisite fees.
• Comply with Rule 3 of Companies (Miscellaneous) Rules, 2014.

By ROC:

• If a company fails to file financial statements or annual returns for two consecutive financial years, ROC may classify it as dormant and enter its name in the dormant company register.

Prerequisites for Dormant Status

A company cannot be granted dormant status if:

• Investigations, inquiries, or prosecutions are ongoing.
• There are unresolved public deposits.
• Loans (secured/unsecured) are outstanding without lender approval.
• There is a management dispute.
• Statutory dues or workmen's dues are pending.
• The company is listed.

Reverting to Active Status

To become active again:

Apply via Form MSC-4 before five years lapse.

Prepare MSC-3 Return for the financial year concerned.

Conduct Board Meeting:

• Issue meeting notice.
• Pass board resolutions for status change.

Submit Form MSC-4 with prescribed fees and MSC-3 return.

Receive Certificate: ROC issues Form MSC-5, officially restoring the active status.

If dormant status conditions are violated, directors must file MSC-4 within 7 days of the event.

What is an Annual Report?

An Annual Report provides a comprehensive summary of a company’s operations over a financial year. It serves as a critical document for shareholders, stakeholders, and regulatory authorities. Key components include:

1. Financial Statements: Balance sheet, profit & loss account, and notes to accounts.
2. Management Discussion and Analysis (MD&A): Highlights risks, opportunities, and operational performance.
3. Corporate Governance Report: Disclosures about board structure, committees, and governance policies.
4. Director’s Report: Overview of business performance, future plans, and key activities.
5. Auditor’s Report: Comments on the fairness of financial disclosures.
6. Regulatory Disclosures: Includes any changes in accounting policies, capital structure, and financial transparency.

As per Regulation 34 of the SEBI (LODR) Regulations, listed companies must submit annual reports to shareholders and stock exchanges. The aim is to ensure informed decision-making and foster accountability.

Dormant companies offer flexibility to business owners who wish to maintain a corporate entity without immediate operational obligations. By adhering to the outlined compliance measures, these companies can preserve their legal existence with minimal costs. On the other hand, annual reports continue to serve as a cornerstone for corporate transparency, reflecting the financial and strategic health of a company. Maintaining both compliance as a dormant entity and a robust annual reporting framework is crucial for long-term corporate sustainability.