A Project On Dormant Company

Name : Reshmi Dutta

Branch : BA.LLB

Section : A

Roll No : 1683065

Semester : 5th

Subject : Company Law-I

Subject Code : LW-3011

 SCHOOL OF LAW , KIIT UNIVERSITY

INTRODUCTION

A dormant company is one that has been registered with Companies House but is not
carrying on any kind of business activity or receiving any form of income. Therefore,
HMRC considers it dormant (or inactive) for corporation tax purposes. It can be
dormant from the date of its incorporation, or it can become dormant after a period of
activity.
There are many reasons why a company may be dormant – to reserve a company
name whilst preparing to launch the business; restructuring a previously active
business; or an owner requires an extended period of time off due to illness, maternity
leave, travel, a sabbatical, or any other reason.
It can remain dormant for any length of time, but you must inform your local
corporation tax office as soon as possible and maintain a number of statutory
obligations for Companies House, including filing annual returns and dormant
accounts, reporting changes to registered company details, and keeping records
up-to-date and available for public inspection.

1. Section 455 of Companies Act , 2013 - Dormant

Company

(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.
Explanation:

(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;

(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 ofiice and records

(2) The registrar on consideration of the application allow the status of a dormant
company to the applicant and issue a certificate in such form as may be prescribed to
that effect.
(3) The registrar shall maintain a register of the dormant companies in such form as
may be prescribed.
(4) In case of a company which has not filed financial statements or annual returns
for two financial years consecutively, the registrar shall issue a notice to that company
and enter the name of such company in the register maintained for dormant
companies.
(5) A dormant company shall have such minimum number of directors, file such
documents and pay such annual fee as may be prescribed to the registrar to retain its
dormant status in the register and may become an active company on an application
made in this behalf accompanied by such documents and fee as may be prescribed.
(6) The registrar shall strike off the name of a company from the register of dormant
companies, which has failed to comply with the requirements of this section .

2. How to make a company dormant ?

To register a new company as dormant or change the trading status from active to
dormant, you must contact your local corporation tax office in writing, stating the date
from which it has been or will be dormant. You can find these contact details on any
official letter from HMRC that has been delivered to your registered office address.
Alternatively, you can locate your nearest tax office. Within approximately 15 days,
you should receive notification at the registered office address that states acceptance
of this dormant status.

If your company was previously trading, HMRC will send a ‘Notice to deliver a
Company Tax Return’ after you have contacted your local corporation tax office. This
must be completed for the corporation tax accounting period prior to it becoming
dormant. It must be delivered to HMRC online. You will have to pay any corporation
tax that it owes if it made a profit during that time. You should also close down your
payroll and cancel your VAT registration, if applicable.

Before declaring your company as dormant, you should ensure all outstanding bills
have been paid, including directors’ salaries, employees’ wages, shareholders’
dividends, direct debits for service providers, and all accounts with suppliers. If it is
owed any money from clients, you should arrange to have these accounts settled.
Upon satisfying all the above, you should not have to contact HMRC again until it
begins trading.

3. Can a dormant company trade ?

It cannot carry on any kind of trading activity or receive any form of income, which
includes:
 Buying and selling goods and services
 Leasing or buying property
 Employing staff
 Paying directors’ salaries
 Managing investments and receiving dividend payments
 Issuing dividends to shareholders
 Earning interest or paying bank charges
 Paying legal or accountancy fees from the business bank account
A dormant company that carries on any such activities will forfeit its dormant trading
status and be required to prepare full statutory accounts.

4. Dormant company reporting and filing

requirements

 Requirements for Companies Houses

Dormant companies are required to prepare dormant accounts and a confirmation

statements for Companies House every year.
The accounts consist of a balance sheet and any relevant notes. You can deliver this
information to Companies House by post or online using form AA02. The deadline
for filing accounts is 9 months after the end of the financial year, which is known as
the ‘accounting reference date’.
However, if you are filing your company’s first accounts and they cover a period of
more than 12 months, the deadline will be 21 months of the date of incorporation.
Companies House will notify you of these filing dates in plenty of time.
The annual confirmation statements, which was previously known as the ‘annual
return’ is a document that outlines key company details at a certain date, including:
 Company name.
 Registered office address.
 SAIL address (if applicable).
 Directors’ details.
 Secretary details (if one is appointed).
 Shareholders’ details.
 Location of statutory company records.
 Information about issued shares.
 Nature of business activities (SIC codes)
 Information about people with significant control (PSCs)
A company’s first confirmation statement must be delivered 12 months after the date
of incorporation. Subsequent statements are due 12 months after the date of the
previous statement. There is no limit to the number or frequency of statements filed
each year. The purpose is simply to confirm important details to ensure the public
register remains accurate and up-to-date.
Dormant companies must also ensure statutory records are kept up-to-date and made
available for public inspection at the registered office or SAIL address. Any changes
to the registered details of a company must be reported to Companies House as soon
as possible. The public record will be updated accordingly.
 Requirements for HMRC

Dormant companies are required to file a Company Tax Return with HMRC if they
were previously trading before becoming dormant. Companies that are dormant from
the date of incorporation do not have to file any tax returns until they become active.
After informing your local corporation tax office that it has ceased trading, you should
receive a ‘Notice to deliver a Company Tax Return’. This must be completed to cover
the period of activity before your company became dormant and to work out the
amount of corporation tax your company owes, if any.
Other than this tax return, a dormant company should have no further obligation to
contact HMRC until it begins trading or the company is dissolved.

5. Does a dormant company have to pay any tax?

No, dormant companies do not have to pay any tax until they become active. However,
if a dormant company was previously trading, it must pay any outstanding tax
liabilities to HMRC from that period of activity.

6. Can a dormant company be a guarantor of another

limited company?

A dormant company can be set up as limited by shares or limited by guarantee for the
sole purpose of acting as a guarantor of another company and agreeing to contribute a
sum of money towards its debts in the event of insolvency. However, to maintain its
dormant status, a corporate guarantor must not have any ‘significant accounting
transactions’ going through its accounts at any time.
If you set up a dormant company to simply act as a guarantor of another company,
there shouldn’t be any need for you to put any transactions through the accounts, for
example:
 If you register a dormant company limited by shares, the value of the shares can
be set to match the amount you have guaranteed to contribute toward the other
company’s debts.
 If you register a dormant company limited by guarantee, the pre-determined sum
of the guarantee can be set to match the amount you guarantee to contribute toward
the other company’s debts.
The payment of shares and guarantees will not be classed as a significant accounting
transaction, because these fixed sums of capital are in place when your dormant
company is incorporated. However, if it receives any kind of payment for its role as a
guarantor, or if the directors or members (shareholders or guarantors) of the dormant
company receive any income, the company will no longer be considered dormant.
 CONCLUSION

Legal and tax commentators have criticized the lack of adequate regulation of
dormant companies in Nigeria. In addition to their existence being a loss of revenue to
the government, it is argued that they deprive other entrepreneurs the opportunity to
utilize the business names of such dormant companies particularly where the
shareholders of the dormant company have abandoned any intention of continuing to
carry on business under such a name in the future.
The minimum legal and tax requirements for all corporations in Nigeria, whether
dormant or not, are higher when compared to jurisdiction like the United Kingdom
where the reporting requirements for a dormant company are enumerated in the UK
Companies Act, and are minimal. Present attempts to amend the provisions of CAMA
will do well to recognize the short-term benefits on the one hand or disadvantages on
the other that a dormant company may have to the Nigerian economy, and regulate its
practice accordingly.

Until CAMA and CITA legislation are amended, dormant companies in Nigerian will
be advised to comply with the existing statutory requirements.

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