Dormant company under the Companies Act, 2013

The Companies Act, 2013 introduces a concept of a dormant company within its ambit. It is the first time that such a concept is thought of, i.e. company which is not active. There is no definition of what constitutes a dormant company under the definition clause. A definition appears in section 455 of the Act and here also the concept is defined in a very roundabout manner.

Section 455 states

(1) Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction, such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant company.

So dormant company can be a company formed for a future project or to hold an asset or intellectual property without there being any significant accounting transaction OR an inactive company. Now inactive company has been defined in section 455 as under:

(i) “inactive company” means a 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 returns during the last two financial years;

So we get the definition of an inactive company from this definition which means that any company which has not been doing any business for the last two years OR (and here's the doosra!!) they have not filed any financial statements and annual returns for the last two years. So it means any active company doing regular business and regular accounting transactions, but has failed to file its mandatory annual documents, then it can also be construed to become a dormant company!!

Significant accounting transaction is also defined in order to clear out any ambiguity, it means

(ii) “significant accounting transaction” means any transaction other than—
(a) payment of fees by a company to the Registrar;
(b) payments made by it to fulfil the requirements of this Act or any other law;
(c) allotment of shares to fulfil the requirements of this Act; and
(d) payments for maintenance of its office and records.

So a company can apply for a "dormant company" to itself by making the necessary application in this behalf. And the Registrar shall maintain a Register of Dormant companies in its Records or Portal.

In case a company has not filed its annual mandatory documents for the last two years, then the Registrar can take it to the Dormant company status. It is not clear what happens when the company is taken to the dormant company status in such a scenario.

However a dormant company is still required to have minimum directors, hold minimum two Board meetings and file minimum one annual financial document with the Registrar.

A dormant company can apply to revert back to Active status company.

Now we come to the procedures for which we turn to the Companies (Miscellaneous) Rules, 2014

1) Application for obtaining status of dormant company is required to be made in form MSC-1 along with the fees. The fees ranges from Rs.2000/- for a company with a share capital upto Rs.25 lakhs to Rs.20,000/- for a company which has share capital more than Rs.10 crores;
2) Application for obtaining status of dormant company can be made only after obtaining special resolution approval of the shareholders or issuing notice to all the shareholders and obtaining consent of at least 3/4th of the shareholders in value terms;
3) Conditions : No inspection, inquiry, or investigation has been ordered or taken up against the company OR no prosecution has been initiated against the company and pending under any court
4) The company does not have any public deposits or interest thereon outstanding for payment
5) There is no outstanding loan, secured or unsecured. If there are unsecured loans then consent of the lender should be obtained and enclosed along with the form;
6) There should be no dispute or difference amongst the management or promoters of the company and a certificate to that effect is enclosed;
7) The company does not have any outstanding tax dues either to central or state government or local authorities;
8) The company has not defaulted in payment of its workmen's dues;
9) It is not a listed company;

The Registrar shall after considering the application issue a "Dormant company" status to the company and enter its name in the Register maintained for the purpose.

The company shall continue to have minimum number of directors (i.e. 3 in case of a public company and 2 in case of a private company);

Rotation of auditors shall not apply to a dormant company.

A dormant company shall file an annual "Return of Dormant Company" in form MSC-3 which indicates the financial position of the company and which shall be duly audited by a chartered accountant in practice. This should be filed within 30 days from the end of each financial year. i.e. on or before 30th April every year.

However, there is a proviso to Rule 7 of Companies (Miscellaneous) Rules, 2014 which says that a dormant company shall continue to file its return of allotment or change in directorships if such events occur. Really, if such events are going to occur in a dormant company, then should the company be called a dormant company or an active status company. It is not clear and there is ambiguity in this matter. Change in directorships could occur upon the death or incapacity of a director so that is understood in that context.

Section 173(5) stipulates that a dormant company should hold two Board meetings in a financial year i.e one each in each half of the financial year and the gap between two Board meetings should not be less than 90 days. This stipulation is not clear because once a company is a dormant company then where is the need to hold a Board meeting, except perhaps to approve the annual financial statements. I guess two Board meetings in a financial year has been stipulated as a matter of abundant caution.

The dormant company can revert to an active status company by making another application under section 455(5) of the Act in form MSC-4 along with the requisite fees. This application should be accompanied by the return in form MSC-3.

Proviso to Rule 8 of the Companies (Miscellaneous) Rules, 2014 says that a dormant company cannot remain as a dormant company for more than 5 consecutive financial years. If it remains so, then the Registrar shall commence the process of striking off the name of the company from the Records, i.e. the company will be removed. So maximum tenure for a dormant company is 5 consecutive financial years.

Rule 8(4) ibid provides that where the Registrar has a doubt that a dormant company has been indulging in business activities and in fact it is not dormant then he can take necessary action to revert its status to an active company.

So the entire concept of dormant company while it is not clearly defined in the Act or Rules, means that any company which is not doing business for two financial years and is not intending to do any business in the near future for upto 5 years can make an application to place its status as a dormant company under the Records. What this will ensure that the legal status of the company is intact and the name is available to the company for any future business programs. However as mentioned above, it cannot remain as a dormant company in perpetuity. It should make a decision to revert to an active status within 5 years or the Registrar will be empowered to strike off the name of the company from its records.

Many a times, promoters incorporate companies but either there is dispute between the promoters or a major project fails through or it is formed for holding an intellectual property title or an asset, then this concept of dormant company comes into use. All the company has to do is to file one annual financial document duly certified by a CA and keep the Directors in tact in the company.

Unfinished Potrait by Agatha Christhie

When you normally pick up an Agatha Christhie novel you usually expect a rural England mystery with liberal doses of suspense and crime in it. But this one writing under the pseudonym Mary Westmacott is a kind of semi autobiographical novel which almost mirrors her personal life. The writing is absolutely brilliant and it kind of touches a chord in your heart when you go through the travails that she endured. It is not exactly a kind of a sympathetic novel and it could have ended as a tear jerker but her powerful writing is what kept it alive. Pure genius. 

Independent Directors' Repository

Vide PIB release dated 12th August, 2014, a portal exclusively devoted to independent directors has been created at http://independentdirector.in

Vide section 149(4) of the Companies act, 2013, every listed company shall have at least one third of its Board of Directors as independent director.

Other categories of companies which are required to have at least two independent directors on its Board are

(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees:

Now persons who are interested in becoming independent directors can register themselves at the above site. But they will be required to have a Director Identification Number before applying themselves.

Salient features of the concept of independent director (ID) under the Act are as follows:

(1) An ID has to give his consent for being appointed as a director of the company.
(2) At least one ID will be on the Corporate Social Responsibility Committee wherever such a Committee is required to be appointed;
(3) An ID cannot be the Managing Director, Whole-time Director or Nominee Director of the company.
(4) An ID is required to give a declaration of independence at the first meeting of the Board where he is appointed as also at the first meeting of the Board in every financial year;
(5) The ID is required to abide by the Code of Conduct specified in Schedule IV of the Companies act, 2013;
(6) The ID is not entitled to receive any stock options from the company;
(7) The ID may be remunerated by way of sitting fees, reimbursement of expenses involved in participation in Board and other meetings and profit related commission, if the members approve of it;
(8) The ID shall be eligible for appointment for two terms of 5 years each in succession, but can be considered for appointment after a grace period of three years. Term shall mean any term less than but not more than 5 years at a stretch;
(9) During the grace period of three years, he should not be associated with the company in any capacity;
(10) An ID shall be held liable, only in respect of such acts of omission or commission by a company which has occurred with his knowledge, attributable through Board process and with his consent or connivance or where he has not acted diligently;
(11) An ID shall not retire by rotation;
(12) No person shall be appointed as an alternate director for an independent director unless he fulfils the criteria and condition for appointment as independent director;

QUALIFICATIONS FOR BEING AN INDEPENDENT DIRECTOR ARE AS FOLLOWS:

An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—
(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;
(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;
(e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;
(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate
company or that holds two per cent. or more of the total voting power of the company; or
(f) who possesses such other qualifications as may be prescribed.















 


 

Insider Trading order by SEBI

SEBI has passed an insider trading order in the matter of Mr. X of Wipro Ltd.

As per Regulation 13(4) of the Prohibition of Insider Trading Regulations 1992

(4) Any person who is a director or officer of a listed company, shall disclose to the company and the stock exchange where the securities are listed in Form D, the total number of shares or voting rights held and change in shareholding or voting rights, if there has been a change in such holdings of such person and his dependents (as defined by the company) from the last disclosure made under sub-regulation (2) or under this sub regulation, and the change exceeds Rs. 5 lakh in value or 25,000 shares or 1% of total shareholding or voting rights, whichever is lower.

It was concluded that Mr. X was an Officer within the purview of the Regulations and therefore having traded shares exceeding Rs.5 lakhs during November - December 2012 and not having given the necessary intimation in Form D he was held guilty under the PIT Regulations 1992 and fined Rs.5 lakh.

A copy of the order can be found here

Definition of Officer in the relevant regulations can be found here:

Regulation 2 (g) of PIT Regulations, 1992 - "Officer of a company' means any person as defined in Clause (30) of Section 2 of the Companies Act, 1956 (1 of 1956) including an auditor of the company".
Section 2 (30), Companies Act, 1956- Definition of ‘Officer’ – “Officer includes any director, manager or secretary or any person in accordance with whose directions or instructions the Board of directors or any one or more of the directors is or are accustomed to act”.

Interesting to note that the person is the geographical head of a particular territory and he in turn reports to the CEO of the organisation. Therefore SEBI holds him as an Officer since he is holding an important position in the organisation .

 

Death is now my neighbour by Colin Dexter

Just finished reading "Death is Now my Neighbour" by Colin Dexter, a Inspector Morse murder mystery. Morse and his assistant Lewis are on the trail of a murder of a woman and their prime suspect is her next door neighbour. Investigation progresses when another murder takes place in the same neighbourhood. Also suspects are two individuals who are contesting for the position of a Master at a Local college, which is supposedly a prestigious post for both of them. The plot unravels slowly and in between Morse has had to be confined to hospital for his usual health problem. Colin Dexter is a fascinating writer and i particularly liked the way in he introduced each chapter with a quotation from the classics or mundane which might or might not have been relevant to the case.  

Free ATM transactions in banks.

Free ATM transactions from other bank ATMs are down to 3 per month, from 5 per month earlier. However individual banks may if they want keep it at 5 free transactions per month. Any transaction above 3 in a month would attract a levy of Rs.20/- plus service tax. This is contained in a RBI circular dated 14th August, 2014 which can be found here

But this limit of 3 free transactions per month will apply only in the 6 metro cities of Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad. In all other cities and towns, the limit of 5 free ATM transactions still apply.

Reduction will not apply to small/ no frills/ basic savings account which continues to get free services as before.

Own bank ATM transactions will continue to be free for five transactions per month.

In order to beat this levy, makes sense to use own bank ATM transactions for upto 5 times a month and other bank ATMs for upto 3 times in a month. I am sure no body would withdraw more than 8 times a month!!

 

Company Law Settlement Scheme 2014

The Ministry of Corporate Affairs has announced a new Company Law Settlement Scheme 2014 to enable companies which have defaulted in filing their mandatory annual documents to file the same at reduced additional fees of 25% of the normal additional fees. The salient features of the Scheme are as follows:

1) The Scheme is open from 15th August, 2014 to 15th October, 2014
2) Applicable for filing of annual statutory documents like compliance certificate, audited financial statements, annual return and auditors appointment only.
3) Not applicable for other event based documents.
4) Companies can file the documents under respective forms 66, 23ac, 23aca, 20b, 21a and 23b by filing the same within the period. They have to pay the filing plus 25% of the additional filing fees payable.
5) The companies will have to file an immunity application in respect of these documents which were filed under the CLSS 2014. The e-immunity application will be required to be filed after the annual documents are taken on record or approved by the ROC. The e-immunity application counter will be open  for a period of three months after the closure of the Scheme.
6) The designated authority will consider the e-immunity applications and pass the necessary orders;
7) Companies which have already been issued with show cause notices from MCA in respect of non filing of the documents, and which has filed an appeal in a competent court, will have to first withdraw the appeal before it will be allowed to file the documents under the CLSS 2014.
8) The disqualification of directors under section 164 of the Companies Act, 2013 will apply only to prospective defaults if the company files the necessary documents under the CLSS 2014.
9) CLSS 2014 will not apply to vanishing companies, striking off action companies under section 560 of the Companies Act, 1956 and companies which have filed for dormant status under section 455 of the Companies Act, 2013;


DEFAULTING INACTIVE COMPANIES:

1) Where the company is inactive, i.e. there is no business in it, they can also take advantage under the Scheme by either

(a) applying to get themselves declared as dormant companies by filing the necessary form at 25% of the normal fees applicable on the said form. OR
(b) apply for striking off their names from the Register of the MCA by filing the necessary form at 25% of the normal fees applicable on the said form.

The MCA circular is available at this link