Dormant Company or Strike-Off? Choosing Between Sections 455 and 248

A pre-launch startup holding IP, a vehicle for a project that has not begun, a company between pivots: keeping it fully active costs time and money, but closing it destroys the wrapper you may still need. The Companies Act 2013 gives two ways out of active life. Dormant status (s.455) keeps the company alive but quiet and lets it return to active status. Strike-off (s.248) ends the company: once the Registrar's notice is published in the Official Gazette, the company stands dissolved. The Registrar is the Registrar of Companies, and the Tribunal is the company law tribunal. This article is for founders deciding which to use.

Dormant: a company that is alive but asleep

Section 455(1) says that where a company is formed and registered "for a future project or to hold an asset or intellectual property and has no significant accounting transaction", that company, or an "inactive company", may apply to the Registrar for the status of a dormant company (s.455(1), Companies Act 2013). There are two doors in:

• The purpose-built shell. It was formed for a future project, or to hold an asset or intellectual property, and has no significant accounting transaction.
• The inactive company. The Explanation defines it as a company that "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" (Explanation (i) to s.455(1)). The three tests are joined by "or", so any one of them qualifies.

What counts as a "significant accounting transaction"

The Act defines it by exclusion: any transaction other than (a) payment of fees by a company to the Registrar; (b) payments made to fulfil the requirements of the Act or any other law; (c) allotment of shares to fulfil the requirements of the Act; and (d) payments for maintenance of its office and records (Explanation (ii) to s.455(1)).

So registry fees, statutory compliance payments, a compliance-driven allotment and office upkeep do not count against you. Everything else does. A customer receipt, a supplier payment or a loan to or from another company is a significant accounting transaction. If dormancy is the plan, look at what actually went through the company's bank account before you apply.

What the Registrar does

• On considering the application, the Registrar "shall allow the status of a dormant company to the applicant and issue a certificate" in the prescribed form (s.455(2)).
• The Registrar maintains a register of dormant companies (s.455(3)). Dormant status is a recorded, public status, not an internal decision to go quiet.
• A company that has not filed financial statements or annual returns for two financial years consecutively gets a notice, and the Registrar enters its name in the dormant register (s.455(4)). Silence alone can move you onto that register.

What keeping dormant status requires

A dormant company must have "such minimum number of directors, file such documents and pay such annual fee as may be prescribed" to retain its status in the register (s.455(5)). The Act leaves the numbers, the documents and the fee to the prescribed rules. Check the current rules and forms before relying on any figure you find in a blog post, including this one.

Revival is built in. The same sub-section lets the company "become an active company on an application made in this behalf accompanied by such documents and fee as may be prescribed" (s.455(5)).

Dormancy is not a hiding place from the Act. The Registrar "shall strike off the name of a dormant company from the register of dormant companies, which has failed to comply with the requirements of this section" (s.455(6)). That sub-section speaks of removal from the dormant register. Do not treat a dormant company as being on autopilot: if the directors, filings and annual fee are not kept up, the status can be lost.

Strike-off: the company ends

Strike-off has two routes: the Registrar can start it, or the company can.

Registrar-initiated: four live grounds

Under s.248(1), where the Registrar has reasonable cause to believe any one of the following, he sends a notice to the company and all its directors of his intention to remove the company's name from the register of companies:

• (a) the company has failed to commence its business within one year of its incorporation;
• (c) the company is not carrying on any business or operation for a period of two immediately preceding financial years and has not made any application within that period for the status of a dormant company under section 455;
• (d) the subscribers to the memorandum have not paid the subscription they undertook to pay at incorporation, and a declaration to that effect has not been filed within one hundred and eighty days of incorporation under s.10A(1); or
• (e) the company is not carrying on any business or operations, as revealed after the physical verification carried out under s.12(9).

Clause (b) was omitted with effect from 29 May 2015, so the lettering runs (a), (c), (d), (e): four grounds in force, not five.

Ground (c) matters most for this decision. A company that has done nothing for two financial years and has not applied for dormant status is exposed to strike-off. Applying under s.455 is the statutory answer to that ground.

The notice asks the company and directors to send representations, with copies of relevant documents, "within a period of thirty days from the date of the notice" (s.248(1)).

Company-initiated: voluntary closure

Separately, "a company may, after extinguishing all its liabilities, by a special resolution or consent of seventy-five per cent. members in terms of paid-up share capital, file an application in the prescribed manner to the Registrar for removing the name of the company from the register of companies on all or any of the grounds specified in sub-section (1)" (s.248(2)). The Registrar then issues a public notice in the prescribed manner.

Points to note:

• Liabilities must be extinguished first, and the approval is a special resolution or consent of members holding 75 per cent in terms of paid-up share capital.
• A company regulated under a special Act must also obtain and enclose the approval of its regulatory body (proviso to s.248(2)).
• A section 8 company cannot use this route (s.248(3)).
• Notices under s.248(1) or (2) are published in the prescribed manner and also in the Official Gazette (s.248(4)).

Restrictions on applying

An application under s.248(2) must not be made if, in the previous three months, the company has done any of these:

• changed its name or shifted its registered office from one State to another;
• made a disposal for value of property or rights held by it, immediately before ceasing trade or otherwise carrying on business, for the purpose of disposal for gain in the normal course of trading or carrying on business;
• engaged in any activity other than what is necessary or expedient for making the application, deciding whether to do so, concluding its affairs or complying with a statutory requirement; or
• applied to the Tribunal for sanction of a compromise or arrangement that has not been finally concluded.

It also cannot be made if the company is being wound up under Chapter XX of the Act or under the Insolvency and Bankruptcy Code, 2016 (s.249(1)(a) to (e)). Filing in violation attracts a fine that may extend to one lakh rupees (₹1,00,000) (s.249(2)), and the Registrar rejects the application, or the company withdraws it, once the condition is brought to his notice (s.249(3)).

What the Registrar checks, and when the company dies

Before passing a strike-off order the Registrar must satisfy himself that sufficient provision has been made to realise amounts due to the company and to pay or discharge its liabilities within a reasonable time, and may obtain undertakings from the managing director, director or others in charge of management (s.248(6)). Even then, the company's assets remain available to pay its liabilities after the order (proviso to s.248(6)).

At the expiry of the time in the notice, the Registrar "may, unless cause to the contrary is shown by the company, strike off its name" and publish notice in the Official Gazette. On that publication "the company shall stand dissolved" (s.248(5)). From the date mentioned in the notice, the company ceases to operate as a company and its Certificate of Incorporation is deemed cancelled, except to realise amounts due and discharge liabilities (s.250).

Closing does not close your exposure

• The liability of every director, manager or other officer who was exercising any power of management, and of every member, continues and may be enforced as if the company had not been dissolved (s.248(7)).
• The Tribunal retains power to wind up a company whose name has been struck off (s.248(8)).
• If an application under s.248(2) was made to evade liabilities or deceive creditors, those in charge of management are jointly and severally liable to anyone who suffered loss, and are punishable for fraud under section 447, even though the company has been dissolved (s.251(1)). The Registrar may also recommend prosecution (s.251(2)).

If a company is struck off: getting it back

• Appeal by any aggrieved person. Any person aggrieved by the Registrar's order notifying a company as dissolved under s.248 may appeal to the Tribunal within three years of the order. If the Tribunal finds the removal "is not justified in view of the absence of any of the grounds on which the order was passed", it may order restoration. The Registrar, the company and all persons concerned must be heard (s.252(1)).
• Registrar's application. If the Registrar is satisfied that the name was struck off inadvertently or on incorrect information from the company or its directors, he may himself apply to the Tribunal for restoration within three years of the dissolution order (second proviso to s.252(1)).
• Company, member, creditor or workman. Any of them may apply to the Tribunal before twenty years from Gazette publication of the notice under s.248(5). The Tribunal may restore if satisfied that the company was carrying on business or in operation when struck off, or that it is otherwise just to do so. It may give directions to place everyone in the position as nearly as may be as if the name had not been struck off (s.252(3)).
• After the order. The company files a copy of the Tribunal's order with the Registrar within thirty days. On receipt the Registrar restores the name and issues a fresh certificate of incorporation (s.252(2)).

Dormant or strike-off: how to decide

Dormancy is cheaper than full compliance, but it is not free: directors, filings and an annual fee continue as prescribed. Strike-off is cleaner but final in effect; getting back means a Tribunal application.

What to do now

• If you want to pause the company: apply to the Registrar for dormant status before two financial years of inactivity pass without an application (s.455(1); s.248(1)(c)).
• If you want to close it: extinguish liabilities, pass a special resolution or obtain 75 per cent paid-up-capital consent, then file the s.248(2) application (s.248(2)).
• If you receive a Registrar's notice of intention to strike off: respond with representations and documents within thirty days of the date of the notice (s.248(1)). If you do nothing, the Registrar may strike off the name and the company stands dissolved on Gazette publication (s.248(5)).
• If the company has already been struck off: the three-year appeal window under s.252(1) runs from the date of the Registrar's order.

Have a CA review your facts before you act or file.

FAQ

What makes a company "inactive" for dormant status?
A company that 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 (Explanation (i) to s.455(1)).

What keeps a dormant company dormant?
The prescribed minimum number of directors, the prescribed documents and the prescribed annual fee (s.455(5)). A dormant company that fails to comply can be struck off the register of dormant companies (s.455(6)).

What triggers a Registrar-initiated strike-off?
Any of four grounds: no commencement of business in one year; no business or operation for two preceding financial years without a dormant application; unpaid subscriber capital without the s.10A declaration within 180 days; or no business or operations revealed by physical verification under s.12(9). The Registrar must first send a thirty-day notice (s.248(1)).

Can members close the company voluntarily?
Yes, after extinguishing all liabilities, by special resolution or consent of 75 per cent of members by paid-up share capital. Section 8 companies cannot use this route (s.248(2), (3)).

Can directors escape liability once a company is dissolved?
No. The liability of directors, managers, officers and members continues as if the company had not been dissolved (s.248(7)).

How long do I have to get a struck-off company restored?
Three years from the Registrar's order for an appeal by an aggrieved person (s.252(1)). A company, member, creditor or workman may apply within twenty years of the Gazette publication under s.252(3), on the conditions in that sub-section.

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See Also

• Allotting Shares After a Public Offer? Minimum Subscription, Listing Permission and Refunds Under Sections 39–40
• Debentures Under Section 71: Conversion, DRR, Trustees and Holder Remedies
• Buying back your own shares (s.68): the 25% ceiling, the board-vs-members route, and the solvency paper trail