Businesses do close. Though none of the businesses are started with intent of closure but various factors both internal and external to the business force such closures. There is general feeling of negativity around the closures since something has to ‘not work’ for a Company to choose closing down and hence the discussions around the topic are limited.
In my experience in leading the regulatory division, it is easy to start a business (in whichever form and structure) than closing it down and I am only speaking of the legal and regulatory requirements around the same. The major challenges forcing a Company to seek closure come for reasons like management deadlock; unfavorable business atmosphere; unfavorable customer response; legislative changes; global management decision and the list can go on.
Even then the challenge remains to decide whether to shut down formally or wait for signs of revival and have a relook after a few years. Till introduction of the Companies Act, 2013, there was no option available for Companies but to stop functioning and stop complying, as there were no relaxed requirements for the inactive or dormant Companies. The concept of Dormant Company, which has now been recognized in the Companies Act, 2013 has given Companies a much-desired option to stay put while they wait for things to turn around without closure. Dormancy also helps Companies minimize their compliance requirements under the Companies Act.
Let us look at the provisions around dormancy contained in Section 455 read with Companies (Miscellaneous) Rules, 2014 of the Companies Act, 2013 (the Act)
Who would typically look at dormancy option?
- Inactive Company: The 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 statements and annual return during the last two financial years
- Where a Company is formed and registered under the Act for a future project and has no significant accounting transaction. e.g Companies, which are not able to commence their business till the sanction of the project however to become eligible for the project, they have to have legal presence
- Where a Company is formed to hold intellectual property and has no significant accounting transaction.
What is the meaning of significant accounting transaction?
Significant accounting transactions means any transactions other than
- payment of fees to Registrar of Companies
- payment to fulfill statutory requirements
- allotment of shares to fulfill requirement of the Act
- payment for maintenance of office and records
Any transaction other than the above shall be termed as significant and may render the claim for dormancy invalid leading to conversion of the status of Company from Dormant to Active.
How is a dormant Company different from a regular Company?
- Instead of regular annual compliances under the Act, a dormant Company has to file ‘Return of Dormant Company’ annually indicating financial position duly audited by a Chartered accountant within 30 days from the end of financial year.
- It can hold meeting of board of directors in in each half of a calendar year and gap between two meetings should not be less than ninety days.
- A dormant company must have minimum 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.
- It should not engage in any business transactions and not have significant accounting transactions.
Rotation of auditors and directors do not apply to a dormant Company
The Company has been noted as Dormant, What next?
The Registrar shall initiate the process of striking off for the Company which has stayed dormant for a period of consecutive five years.
A Dormant Company, which has defaulted in complying with conditions specified, should file an application for obtaining status of an active Company. Even Registrar may, upon such knowledge strike off Company’s name from the register of Dormant Companies.
What are the Drawbacks?
Only the Act recognizes the concept of Dormant Company. No other statute allows for any exemptions in compliance hence all the other compliances have to be made.
Inclusion of this concept in the Act is a welcome step in recognizing genuine business requirements as well as difficulties and if used well and wisely, can provide respite to many Companies, which go dormant and face action from Registrar of Companies.