Dormant Company vs Inactive Company: What's the Difference?

There are many companies that are incorporated in India but don’t conduct any business operations from the day one. There are some companies that suspend their business operations for certain period and there are others who register themselves with Registrar of Companies (ROC) without conducting any substantial business operations.

In such cases, the phrases “Dormant Company” and “Inactive Company” are often used. However, though the phrases look quite similar, yet there is a difference in their meanings under the Companies Act, 2013.

It is essential to know the difference between the two as it enables directors, shareholders and business people to decide what action they should take – whether to proceed with ROC compliances or get themselves into dormant position.

In this blog, we will discuss about the meanings, legal provisions, compliances and benefits of the two and their differences in simple words.

Table of Contents

What is an Inactive Company?

Under Section 455 of the Companies Act, 2013, an inactive company means a company that falls under any of the following conditions:

It has not been carrying on any business or operation during the last two financial years.
It has not made any significant accounting transaction during the last two financial years.

It has not filed its financial statements and annual returns during the last two financial years.

An important point is that an inactive company is not automatically a dormant company.

For example, ABC Private Limited was incorporated in 2022 but has not started any business activities since incorporation. It has also not undertaken any significant accounting transactions for the last two financial years.

Such a company may qualify as an inactive company under Section 455. However, it will not be considered a dormant company unless it obtains dormant status from the ROC.

What is a Dormant Company?

A dormant company is a company that has obtained dormant status from the Registrar of Companies under Section 455 of the Companies Act, 2013.

A company may apply for dormant status when:

It is incorporated for a future project.
It is formed to hold an asset or intellectual property.
It is not carrying on significant business activities.
It qualifies as an inactive company under Section 455.

The main purpose of dormant status is to allow companies to remain registered with the ROC without undertaking regular business operations, while maintaining certain prescribed compliances.

Example:

XYZ Private Limited was established for commencing the manufacture project after two years. The company currently does not engage in any business activity but still wishes to keep its entity and property for future use.

In this case, the company can apply to the ROC for becoming a dormant company by filling up Form MSC-1.

After receiving the approval from the ROC, the company becomes a dormant company.

Legal Provisions under the Companies Act, 2013

The provisions relating to dormant companies are covered under:

Section 455 of the Companies Act, 2013: Deals with dormant companies and inactive companies.
Companies (Miscellaneous) Rules, 2014: Prescribes the procedure and conditions for obtaining and maintaining dormant status.

Section 455 also explains the meaning of significant accounting transactions.

The following transactions are not treated as significant accounting transactions:

Payment of fees to the Registrar of Companies.
Payments made to fulfil requirements under the Companies Act or any other law.
Allotment of shares to fulfil the requirements of the Act.
Payments for maintenance of the company’s office and records.

Therefore, a company may undertake these permitted transactions and still qualify as inactive, subject to the other conditions.

Difference Between Dormant Company and Inactive Company

The following table explains the major differences:

Basis	Inactive Company	Dormant Company
Meaning	A company meeting the conditions of inactivity under Section 455	A company granted dormant status by ROC
Legal provision	Explanation to Section 455(1)	Section 455
ROC approval	Not required for being inactive	Required
Form	No separate application to become inactive	Form MSC-1
Business activity	No business or operations, as per the statutory definition	Generally no significant business activity
Legal status	Remains an ordinary registered company	Remains registered with dormant status
Compliance	Regular applicable ROC compliances	Special dormant company compliances apply
Annual filing	Applicable regular filings	Annual Form MSC-3
Future business	Can resume business activities	Can apply for active status through Form MSC-4
Purpose	Describes the company’s inactivity	Provides a formal status for a company not currently operating

Eligibility Criteria for Dormant Status

Not every inactive company can automatically obtain dormant status. It must satisfy the conditions prescribed under Rule 3 of the Companies (Miscellaneous) Rules, 2014.

The major conditions include:

No inspection, inquiry or investigation should have been ordered, taken up or carried out against the company.
No prosecution should have been initiated and pending against the company.
The company should not have any outstanding public deposits or default in their repayment or payment of interest.
The company should not have any outstanding loan, whether secured or unsecured. However, an outstanding unsecured loan may be permitted with the lender’s concurrence.
There should be no outstanding statutory taxes, duties or other dues payable to the Central Government, State Government or local authorities.
The company should not have defaulted in payment of workmen’s dues.
The company’s securities should not be listed on any stock exchange in India or outside India.

The company must also obtain the required approval of its shareholders.

Procedure to Obtain Dormant Company Status

A company that wants to obtain dormant status must follow the procedure prescribed under the Companies (Miscellaneous) Rules, 2014.

Step 1: Hold a Board Meeting

The company should convene a Board Meeting to consider and approve the proposal for obtaining dormant status.

Step 2: Obtain Shareholders’ Approval

The company must either:

Pass a special resolution in a general meeting; or
Issue notice to all shareholders and obtain consent of at least 75% of shareholders in value.

Step 3: File Form MGT-14

Where a special resolution is passed, the company must file Form MGT-14 with the ROC within the prescribed time.

Step 4: File Form MSC-1

The company must file Form MSC-1 with the ROC along with the prescribed fees and required attachments.

Step 5: Approval by ROC

The ROC examines the application and, if satisfied, grants dormant status by issuing a certificate in Form MSC-2.

The company will be treated as a dormant company after receiving the approval from the ROC.

ROC Compliance Requirements for a Dormant Company

Obtaining dormant status does not mean that the company is completely free from statutory compliances.

A dormant company must fulfil the following requirements:

Form MSC-3: The company must file an annual return of dormant company within 30 days from the end of each financial year.
Minimum Directors: A dormant public company must have at least three directors, a dormant private company must have at least two directors, and a dormant OPC must have at least one director.
Statutory Records: The company must maintain its statutory registers and records as applicable.
Changes in Directors and Share Capital: Relevant forms must be filed whenever there is a change in directors or an allotment of securities.
Other Applicable Compliances: The company must continue to comply with applicable statutory requirements.

Form MSC-3 must contain details of the company’s financial position and be certified by a practising Chartered Accountant.

A dormant company should also monitor its compliance obligations to avoid cancellation of its dormant status.

Benefits of Dormant Company Status

Obtaining dormant status can be useful for companies that are not planning to undertake business activities in the immediate future.

Some major benefits include:

Reduced Compliance Burden: Dormant companies have a separate annual filing requirement under Form MSC-3.
Retention of Company Name: The company can retain its legal identity and registration with the ROC.

Future Business Plans: Companies incorporated for future projects can remain registered until business activities begin.
Asset Protection and Holding: A company can retain assets or intellectual property for future use.
Easy Conversion to Active Status: A dormant company can apply to become active when it plans to resume business operations.

However, dormant status should be obtained only after carefully reviewing the company’s financial position and statutory compliance requirements.

How to Convert a Dormant Company into an Active Company?

If a company wants to restart its business operations, it can apply to the ROC for conversion from dormant status to active status.

The procedure is as follows:

Hold a Board Meeting and approve the proposal to obtain active status.
File Form MSC-4 with the ROC along with the prescribed fees.
File the pending Form MSC-3, wherever applicable.
The ROC will examine the application.
Once satisfied, the ROC will issue a certificate in Form MSC-5, granting active status.

A company can therefore resume its business activities after completing the prescribed procedure.

Frequently Asked Questions (FAQs)

Q1. Is an inactive company automatically treated as a dormant company?

No. An inactive company is not automatically a dormant company. It must apply to the ROC through Form MSC-1 and obtain approval for dormant status.

Q2. Can a newly incorporated company apply for dormant status?

Yes. A company incorporated for a future project or to hold an asset or intellectual property may apply for dormant status, subject to the prescribed conditions.

Q3. Which form is required to obtain dormant company status?

Form MSC-1 is required to apply for dormant status. After approval, the ROC issues a certificate in Form MSC-2.

Q4. Is annual ROC filing mandatory for a dormant company?

Yes. A dormant company must file Form MSC-3 annually within 30 days from the end of the financial year, along with the prescribed fee.

Q5. What is the minimum number of directors required for a dormant company?

Public Company: 3 Directors
Private Company: 2 Directors
One Person Company: 1 Director

Q6. Can a dormant company start business activities again?

Yes. A dormant company can apply for active status by filing Form MSC-4 with the ROC. The ROC issues Form MSC-5 after approval.

Q7. Can a dormant company continue to be dormant forever?

Not necessarily. If a company has been dormant for five continuous years, the ROC will start the procedure of getting its name removed from the register as per the guidelines.

Q8. What would happen if the annual return is not filed by the company for two financial years continuously?

Non-filing of financial statements and annual return for two continuous years is one of the criteria of being labeled as an inactive company as per Section 455. The ROC may also take action against the company under the relevant provisions of the Companies Act.

Conclusion

It is very important for each entrepreneur and director to understand the difference between a dormant company and an inactive company.

An inactive company is classified on the basis of its business operations and accounting transactions; a dormant company is a company that has been officially approved by the ROC under Section 455 of the Companies Act, 2013.

In case a company does not plan to do any business activity soon but wishes to keep its registration alive for future work, then it might be a good idea to get its dormant status.

Before filling up the application for the same, one should take care of the pending ROC filings and liability matters of the company.

Dissatisfied with your current ROC compliance process? Consult a professional to know about the requirements and filing processes.