What do you think is the definition of a dormant is? By the dictionary definition it basically means, unused, untouched, haven’t moved for a long time, or hibernating. The same goes for the definition of a dormant company. However, a company is a legal business entity, and as per the Companies act 2013, it deserves a legal definition. Therefore, through the course of this article, we are going to look into this form of company and present the conditions on which you can apply for a dormant status as well.
Dormant Company: The definition
A dormant company is the one which hasn’t engaged with any meaningful accounting transaction over a specific period of time. It can also be called an inactive company. Now, according to Section 455 of the companies act, there are provisions that have been laid down by the MCA. These provisions enable companies to attain a status of being inactive or dormant.
However, by all the accounts that we have explained, why would one want to attain an inactive status for the companies. Well, we are going to discuss this in further section.
Why dormant status for a company?
Well, with attaining the dormant status for the company, you are ensuring that its assets are protected to be able for future use. Other reasons for a company to be dormant are as follows:
- Dormant status can be declared in order reserve the name of the company until official business is launched.
- In order to restructure the business that has been active currently
- There also might be a case in which the owner of the company might be on a long leave due to special circumstances of illness. Unless and until that person has delegated the company responsibilities to another, declaring the company dormant is the best choice.
When owners choose to attain the dormant status for the private limited company or any other type of company for that matter, they are protecting the legal identity of the company. It is a more viable option compared to winding up the company. With dormant status, when the passes, the company reactivates without need of re-registration. However, that is not the case with winding up the company.
Dormant status suitable for whom
For companies that might have to be inactive for a long time, the dormant status is the best one to get. The ones who can benefit most by the dormancy are:
- Construction Companies
- Real Estate Companies
The above sorts of companies are focused towards providing future projects. Therefore, there is an incessant need to ensure that the assets of such company are preserved properly.
Definition of an inactive company
An inactive company is the one:
- That has not carried out any business operation
- Has not made any meaningful accounting transaction
- Has not filed any financial statement or returns over the last 2 financial years.
What are the conditions for a company to be dormant?
Dormant status is only allowed under following circumstances:
- No inquiry, no inspection or investigation has been carried out or taken up against the company.
- There are no public deposits outstanding of the company
- There are no defaults in payments
- There are no prosecution cases against the company
- The company has not committed a default in paying the workmen.
- The purpose of the application for dormancy is not to deceive the creditors.
- The securities of the company should not be listed in any stock exchange in or outside India.
- There are no outstanding loans of the company.
- There is no dispute in the management or ownership of the company.
A dormant company or an inactive company is a state sought out by many who seek to preserve their assets for some future project. However there are certain conditions that one needs to heed to in order to get this status.