In the world of business and corporations, there’s a prevailing notion that every newly incorporated company is eager to hit the ground running, commencing its business operations as soon as it secures the coveted certificate of incorporation. While this eagerness is indeed the norm, there exists a lesser-known category of companies known as dormant companies. These entities even after the acquisition of their certificate of incorporation defy the conventional path. They opt to remain on the records of the Registrar of Companies (ROC) without venturing into active business or production activities.
According to the Companies Act, 2013, a dormant company is a company that has not commenced any business activity since its incorporation and has no significant accounting transaction during the last two financial years.
To be considered dormant, a company must meet the following criteria:
- Limited Accounting Transactions: A dormant company should not have engaged in significant accounting transactions during the last two financial years.
- Non-Filing of Annual Returns: It should not have filed its annual returns with the Registrar of Companies (ROC) for the last two financial years.
- Non-Commencement of Business Activity: A dormant company is one that has not initiated any business activity since its incorporation.
But the question is: Why would a company go through the process of incorporation, yet choose to remain dormant?
Dormant status serves various purposes for companies, one of which is to hold intellectual property rights (IPRs) in a number of ways. For example:
- To protect IPRs before they are commercialized: Companies often develop new technologies and products that they are not yet ready to commercialize. By holding these IPRs in a dormant company, the company can protect them from being infringed upon by others.
- To license IPRs to other companies: Companies may choose to license their IPRs to other companies in exchange for royalties. By holding their IPRs in a dormant company, the company can simplify the licensing process and make it easier to track royalties.
- To sell IPRs to other companies: Companies may also choose to sell their IPRs to other companies. By holding their IPRs in a dormant company, the company can make it easier to sell the IPRs as a standalone asset.
Examples of how dormant companies can be used to hold IPRs:
- A technology company may develop a new software application that it is not yet ready to launch. The company can hold the copyright for the software application in a dormant company until it is ready to launch the product.
- A pharmaceutical company may develop a new drug that is still in the early stages of development. The company can hold the patent for the drug in a dormant company until it has completed clinical trials and is ready to bring the drug to market.
- A consumer goods company may develop a new brand name for a new product that it is not yet ready to launch. The company can hold the trademark for the brand name in a dormant company until it is ready to launch the product.
Benefits of using a dormant company to hold IPRs
- Simplicity: Dormant companies are relatively simple to set up and maintain.
- Flexibility: Dormant companies can be used to hold a variety of types of IPRs, including patents, trademarks, copyrights, and trade secrets.
- Confidentiality: Dormant companies can be used to keep IPRs confidential until the company is ready to commercialize them.
- Asset protection: Dormant companies can be used to protect IPRs from being infringed upon by others.
While the status of a dormant company can be maintained for up to 5 years, it’s important to note that if the company doesn’t initiate business activities within this period, the name of the company will be removed from the ROC register.