The primary objective of the revisions made to the Companies Act 1956 was to have a simplified law that will be able to address the changes taking place in the national and international scenario, enable the adoption of internationally accepted best practices and also provide flexibility in response to the ever-changing business models. One such aspect which was introduced in the Companies Act 2013 was the concept of Dormant Companies in section 455 of this act.
In common parlance, the word “Dormant” means inactive or inoperative. A dormant company is an excellent opportunity to start a company for a future project or hold an asset/intellectual property without having significant accounting transactions. On the other hand if a company has not filed its annual returns for two consecutive years then such a company will also be called as a dormant company.
Significant accounting transactions would mean transactions other than the basic procedural transactions i.e the payment of fees by a company to the Registrar and also payments to fulfil the requirements of this Act or any other law, allotment of shares to fulfil the requirements of this Act and payments for maintenance of its office and records.
1. Dormant company is a new concept introduced in the Companies Act 2013 which was not there in the earlier Act of 1956. However, the concept is there in the United Kingdom under English Law. Section 455 of the Companies Act 2013 spells out about the dormant company. According to this section, the Dormant Company means inactive or inoperative company.
1.1 Explanation provided to this section says that for the purpose of this section “inactive company: means 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 has not filed financial statement and annual returns during the last two financial years.
1.2 Meaning of significant accounting transaction
In the explanation provided by the Act, it says not made any “significant accounting transaction”. Let us understand as to what is the meaning of significant accounting transactions.
Significant accounting transaction simply means that the company has not been doing any other transactions than (i) making payment or fees to the Registrar of Companies; (ii) making payment in order to fulfill the regulatory requirements; (iii) making allotment of shares and (iv) effecting payments for the purpose of maintenance of office and records.
2. The question that arises in the minds of the reads is to – why would anyone create a company and register it to declare it dormant? The main purpose of acquiring or maintaining a company’s outstanding position is to enable the company to maintain its corporate status even if it does not do any business. We can look at the benefits derived from the status of a dormant company as summarized below, to answer the above question.