What is a Dormant Company?

The financial year marks a dormant company when the organization maintains a legal presence yet avoids all business activities. Under Section 455,  Companies Act 2013 the Dormant Company remains inactive from commercial transactions or operations but is kept majorly for the following purposes: 

• Holding asset or intellectual property

• For future business plans but has temporarily halted trading.

• A business that has ceased its operations but wants to keep its legal status intact.

• Shelving an idea until the time is right

Characteristics of a Dormant Company

• A dormant company does not execute business operations for trading activities and service provision as well as earning income revenues.

• Most dormant companies hold minimal financial activities so they commonly refrain from creating detailed financial statements during a year.

• Most dormant business entities qualify for tax exemptions but must file either annual reports or necessary declarations before the tax authorities.

• The company needs to meet legal filing requirements for annual returns to remain a registered entity during its dormant state.

Why is Filing an Annual Return for Dormant Companies Important?

Even though dormant companies do not carry out business activities, they still have to meet certain legal obligations, which include filing an annual return with the relevant regulatory authorities. In India, this obligation is governed by the Companies Act, 2013. The annual return serves several purposes:

• Compliance with the Law: The annual return ensures that the company complies with the legal requirements of the Registrar of Companies (ROC) or the relevant regulatory body. A company must file annual reports to avoid penalties while also preventing the registration cancellation process known as being struck off from the register.

• Maintenance of Company’s Legal Standing: Filing the annual return ensures that the company’s name remains on the official register, thus preserving its legal existence. If annual returns are not filed, the company could be considered defunct and removed from the records.

• Keeps Stakeholders Informed: Even if the company is dormant, filing the annual return keeps shareholders, directors, and other stakeholders informed about the company’s status. It gives transparency and confirms that the company is not inactive for a long period without due notice.

• Avoiding Striking Off or Closure: If a dormant company does not file its returns for several years, the authorities may initiate proceedings to strike off the company’s name from the register. Filing an annual return helps avoid this risk.

• Future Business Plans: Filing the annual return correctly ensures that, in the future, the company can easily resume business activities if needed without facing any legal hurdles. The dormant status remains intact, and the company can continue operations after complying with the filing requirements.

What is an Annual Return?

An annual return publishes extensive information about company governance status together with all necessary financial filings from the selected fiscal year. A dormant company must file a return which contains essential information that may have fewer requirements than active companies.

• Company Details:

1. Company name, date of incorporation, and registration number (CIN).
2. Registered office address and contact information.
3. Names of directors and key personnel.

• Statement of Financial Position:

1. Even though the company is dormant and has no active business, it may still need to provide a basic financial statement. This could include a statement of assets and liabilities, even if the amounts are minimal.

• Directors’ Report:

1. A statement by the directors confirming that the company is dormant and not conducting any business. This report will also contain a declaration that the company has not had any significant financial transactions during the year.

• Shareholding Information:

1. Details of shareholders (if applicable), including share capital and any changes in shareholding during the year.

• Compliance Statements:

1. A statement regarding compliance with other legal requirements (e.g., filing with the Income Tax Department, if applicable).

• Auditor’s Report (if required):

1. In some cases, the company may be required to file an auditor’s report, even though the company has not conducted any business.

• Certification of Dormancy:

1. Some jurisdictions may require a specific certification that the company qualifies as dormant under the relevant provisions of the law.

Process for Filing the Annual Return for a Dormant Company

The process for filing the annual return for a dormant company can vary depending on the jurisdiction. Below is a general guide for filing in India:

• Determine Eligibility as a Dormant Company: The first requirement is to verify if your company complies with dormant company criteria defined by law. A dormant company in India needs to meet the Companies Act requirements of 2013 to gain dormant status and it may need to petition the Registrar of Companies (ROC) for this status.

• Prepare Financial and Other Statements: Prepare the necessary documents, even if they are basic, such as the statement of financial position (which may show zero or minimal activity) and the directors’ report.

• File Form AOC-3: Dormant companies in India must file Form AOC-3 (Financial Statements) with the Registrar of Companies.

• File Form MGT-7: Businesses must submit the annual report to the Registrar of Companies through Form MGT-7. The shareholder information alongside directorial data and compliance details can be found in this form.

• Compliance Certificate (if required): Depending on the size and nature of the company, you may need to attach a compliance certificate or an auditor’s report along with the forms.

• Timely Filing: File all documents before expiration of the established deadlines. For example, the annual return for a dormant company in India must be filed within 60 days from the end of the financial year (usually by 30th September).

• Payment of Fees: Pay any applicable government fees for the filing of the forms. Company fees are determined by their size together with their organizational class.

Penalties for Non-Compliance

If a dormant company fails to file its annual return or does not comply with other statutory requirements, it can face several penalties, including:

• Fines: The company may be liable to pay fines for not filing the annual return within the prescribed deadline.

• Late Fees: There could be late fees for submitting the return after the due date.

• Striking Off the Company: If the company consistently fails to comply, the regulatory authority (e.g., the Registrar of Companies in India) may initiate proceedings to strike off the company from the register.

• Disqualification of Directors: Non-compliance may lead to disqualification of directors.

Conclusion

Any dormant company must fulfill the mandatory requirement of filing their annual returns regardless of being out of active business operations. Filing the annual return enables a dormant company to stay compliant with regulations and maintain its legal existence while avoiding official penalties and disbandment.

The simplified nature of dormant company filing still requires proper timing and accuracy to keep the company operational and functional in case needed for future business activities.

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