Dormant Company – Setting Up of Business Entities and Closure Important Questions

Dormant Company – Setting Up of Business Entities and Closure Important Questions

Question 1.
A group of persons wants to form a company for a future project and acquire the status of a ‘dormant company’. The group seeks your advice about the procedure and the conditions to be complied with under the provisions of the Companies Act, 2013. [Dec. 2015 (2 Marks)]
Answer:
Dormant Company means any of the following types of company:
(a) A company that has been formed and registered for a future proj¬ect or to hold an asset or intellectual property and has no significant accounting transaction.
(b) Inactive company.

A Company can obtain status as a Dormant Company by Suo Motu or ROC can declare a company as Dormant Company.

Procedure to be adopted by the company for obtaining the status of dormant company Suo Motu:
A company may make an application in Form No. MSC-1 along with a prescribed fee to the Registrar for obtaining the status of a Dormant Company after passing a special resolution to this effect in the general meeting of the company or after issuing a notice to all the shareholders of the company for this purpose and obtaining the consent of at least 3/ 4th shareholders in value.

Application for obtaining the status of dormant company [Section 455(2)]: The Registrar on consideration of the application shall allow the status of a dormant company to the applicant and issue a certificate. As per Rule 4, the Registrar shall, after considering the application filed in Form No. MSC-1, issue a certificate in Form No. MSC-2 allowing the status of a Dormant Company to the applicant.

Question 2.
State the privileges and exemptions available to the dormant companies under the provisions of the Companies Act, 2013. [Dec. 2015 (2 Marks)]
Answer:
The privileges and exemptions enjoyed by a dormant company or its advantages over other companies are as follows:

  • Board Meeting: Dormant Company is required to hold only one meeting of the Board of Directors in each half of a calendar year. However, the gap between the two meetings should not be less than 90 days.
  • Cash Flow Status: Dormant Company is not required to include the statement of Cash Flow in its financial statement.
  • Rotation of Auditor: The provision of rotation of auditors is not applicable in the case of the dormant company.
  • Lower Statutory Fees: Dormant companies enjoy the advantages of lower statutory compliance cost as less statutory compliance are applicable to the dormant company as compared to an active company.
  • Hold Asset: Dormant status is an advantage to promoters who want to hold intellectual property or an asset under the corporate shield for its usage at a later stage.
  • Term of Dormant: Companies can enjoy the status of the dormant company for a period of 5 consecutive years.

Question 3.
Distinguish between: Small Company and Inactive Company. [June 2016 (4 Marks)]
Answer:
Small Company [Section 2(85)]: Small company means a private company,

  1. Paid-up share capital of which does not exceed ₹ 50 lakh or such higher amount as may be prescribed which shall not be more than ₹ 10 Crore and
  2. Turnover of which as per its last profit and loss account does not exceed ₹ 2 Crore or such higher amount as may be prescribed which shall not be more than ₹ 100 Crore.

Nothing in this definition shall apply to (This means following companies cannot be small companies)
(a) Holding or a subsidiary company
(b) Company registered u/s 8 or
(c) Company or body corporate governed by any Special Act.

Inactive Company (Section 455): Inactive company means a company:
(a) Which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years or
(b) Has not filed financial statements and annual returns during the last 2 financial years.

Question 4.
Anshul Gold Farm Ltd. has obtained the status of the dormant company on 15th December 2018. Enumerate the various exemptions to which the company shall be entitled under the Companies Act, 2013. [Dec. 2018 (3 Marks)]
Answer:
The privileges and exemptions enjoyed by a dormant company or its advantages over other companies are as follows:

  • Board Meeting: Dormant Company is required to hold only one meeting of the Board of Directors in each half of a calendar year. However, the gap between the two meetings should not be less than 90 days.
  • Cash Flow Status: Dormant Company is not required to include the statement of Cash Flow in its financial statement.
  • Rotation of Auditor: The provision of rotation of auditors is not applicable in the case of the dormant company.
  • Lower Statutory Fees: Dormant companies enjoy the advantages of lower statutory compliance cost as less statutory compliance are applicable to the dormant company as compared to the active company.
  • Hold Asset: Dormant status is an advantage to promoters who want to hold intellectual property or an asset under the corporate shield for its usage at a later stage.
  • Term of Dormant: Companies can enjoy the status of the dormant company for a period of 5 consecutive years.

Question 5.
Explain the term ‘Significant Accounting Transaction’ while determining the status of a company as a dormant company under the Companies Act, 2013. [JDec. 2018 (3 Marks)]
Answer:
Significant Accounting Transaction: It means any transaction other than –
(a) Payment of fees to the ROC.
(b) Payments made by it to fulfill the requirements of the Companies Act or any other law.
(c) Allotment of shares.
(d) Payments for maintenance of its office and records.
Eg:

  1. Payment of auditor fees for audit under Companies Act, 2013
  2. ROC fees for filing resolution (MGT 14)

Question 6.
Cute Garments Ltd. has recently obtained the status of a dormant company. The Board of Directors seeks your advice about the required compliances in respect of the following:
(i) Minimum number of directors
Answer:
Minimum Number of Directors: A dormant company shall have a minimum number of 3 directors in the case of a public company, 2 directors in the case of a private company, and a director in the case of OPC.

(ii) Requirement of Return filing
Answer:
Return Filing:
(a) Statutory Fees: Dormant companies enjoy the advantages of lower statutory compliance cost as less statutory compliance are applicable to the dormant company as compared to active company,
(b) Return of Dormant Company: A dormant company shall file a “Return of Dormant Company” position duly audited by a chartered accountant in practice in Form MSC-3 within a period of 30 days from the end of each financial year.

(iii) Meetings of Board of Directors. [June 2019 (3 Marks)]
Answer:
Meeting of Board:
(a) Minimum Board Meeting: Dormant Company is required to hold only one meeting of the Board of Directors in each half of a calendar year,
(b) Gap between 2 meetings: The gap between the two meetings should not be less than 90 days.

Question 7.
Preetha has recently become Director of a Company. She wants to know about the ‘active’ and ‘inactive’ status shown on the MCA website. Explain the concept of ‘Inactive Company to her referring to the relevant provisions of the Company Law mid also brief her under what circumstances a company can make an application for obtaining ‘dormant’ status. (Dec.2019(3 Marks)
Answer:
Inactive Company: Inactive Company means a company:
(a) Which has not been carrying on any business or operation, or has not made any significant accounting transaction during the last 2 financial years or

(b) Has not filed financial statements and annual returns during the last 2 financial years.

Dormant Company [Section 455(1)]: Dormant Company means any of the following types of company:
(a) A company that has been formed and registered for a future project or to hold an asset or intellectual property and has no significant accounting transaction.

(b) Inactive company.
A Company can obtain status as a Dormant Company by Suo Motu or ROC can declare a company as Dormant Company.

Setting Up of Business Entities and Closure Questions and Answers

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