Read the following paragraph and answer the five questions that follow: Section 455 of Indian Companies Act, 2013 talks about a New Provision Calls "DORMANT COMPANY. This concept was not there in Companies Act, 1956. A Dormant Company offers excellent advantage to the promoters who want to hold an asset or intellectual property under the corporate shield for its usage at a later stage. For instance: if a promoter wants to buy lands now for its future project at a comparatively lesser price, he may do the same through dormant company so that he can use the land for its future project. Thus, dormant company status is a new phenomenon in the Companies Act 2013 and is an excellent tool for keeping assets in the company for its future usage. A dormant company may be either a public company or a private company or a one person company. Certain companies, due to the nature of their business, may not be able to start any business, for a long time from the date of incorporation as for instance any business for creation of intellectual property or for a future project and has no significant accounting transaction. Such a company may be an "Inactive company". Construction Companies/Real Estate Companies/Incorporate New Companies to hold land/properties for future projects. This concept is beneficial for them. By this concept, they can Incorporate Company and purchase property/land in that company and get status of Dormant Company. If a company gets status of dormant company, there are less compliance in dormant company in comparison of active company. It will help to save cost of compliances for inactive companies.
Given below are two statements: One is labelled as Assertion A and the other is labelled as Reason R. Assertion (A): Provision is made to obtain the status of a ‘dormant company for a inactive company that doesn't trade. Reasons (R): Dormant company doesn't trade but has significant accounting transaction. In the light of the above statements, choose the most appropriate answer from the options given below -
(A) is correct but (R) is not correct:
Understanding Dormant Company Status under Companies Act 2013
The question asks us to evaluate two statements, Assertion (A) and Reason (R), regarding the concept of a 'dormant company' based on the provided paragraph about Section 455 of the Indian Companies Act, 2013.
What is a Dormant Company?
According to the paragraph, Section 455 of the Indian Companies Act, 2013, introduces the concept of a "Dormant Company". This status is beneficial for promoters who wish to hold assets or intellectual property under a corporate structure for future use. It's described as an excellent tool for keeping assets in a company for its future usage. A dormant company can be a public company, a private company, or a one person company.
What is an Inactive Company?
The paragraph defines an "Inactive company" as one that, due to the nature of its business, may not be able to start any business for a long time from its incorporation date (e.g., for creating intellectual property or a future project) and has no significant accounting transaction.
Analyzing Assertion (A): Provision for Dormant Status for Inactive Company
Assertion (A) states: "Provision is made to obtain the status of a ‘dormant company for a inactive company that doesn't trade."
- The paragraph explicitly links the "Inactive company" status to the "Dormant Company" status.
- It states, "Such a company [an inactive company as defined] may be an 'Inactive company'."
- It further mentions, "If a company gets status of dormant company... It will help to save cost of compliances for inactive companies."
- This indicates that an inactive company can obtain dormant status.
- An inactive company is defined as one that may not be able to start business for a long time and has no significant accounting transaction, strongly implying it "doesn't trade".
Based on the paragraph, Assertion (A) is consistent with the description of how an inactive company that is not trading can apply for or obtain dormant status to reduce compliance burden.
Conclusion for Assertion (A): (A) is correct.
Analyzing Reason (R): Dormant Company Transactions
Reason (R) states: "Dormant company doesn't trade but has significant accounting transaction."
- The first part, "Dormant company doesn't trade," aligns with the nature of an inactive company which is eligible for dormant status and hasn't started business or isn't trading.
- However, the second part, "but has significant accounting transaction," directly contradicts the definition of an "Inactive company" provided in the paragraph.
- The paragraph clearly states that an "Inactive company" (which can become dormant) "has no significant accounting transaction".
Therefore, Reason (R) presents a characteristic (having significant accounting transactions) that is the opposite of what the paragraph states about an inactive company eligible for dormant status.
Conclusion for Reason (R): (R) is not correct.
Comparing Assertion (A) and Reason (R)
- Assertion (A) is correct: An inactive, non-trading company can seek dormant status.
- Reason (R) is incorrect: A dormant company (stemming from an inactive company) does not have significant accounting transactions.
- Reason (R) cannot be the correct explanation for Assertion (A) because Reason (R) itself is incorrect.
Selecting the Most Appropriate Answer
Based on our analysis:
- (A) is correct.
- (R) is not correct.
Let's look at the provided options:
- Option 1: Both (A) and (R) are correct... (Incorrect, as R is not correct)
- Option 2: Both (A) and (R) are correct... (Incorrect, as R is not correct)
- Option 3: (A) is correct but (R) is not correct: (This matches our findings)
- Option 4: (A) is not correct but (R) is correct (Incorrect, as A is correct and R is not)
The analysis confirms that Option 3 is the correct choice.
| Statement | Evaluation based on Paragraph | Conclusion |
|---|---|---|
| Assertion (A): Provision is made to obtain the status of a ‘dormant company for a inactive company that doesn't trade. | The paragraph links inactive companies (which haven't started business/don't trade and have no significant transactions) to obtaining dormant status for reduced compliance. | Correct |
| Reason (R): Dormant company doesn't trade but has significant accounting transaction. | The paragraph states an inactive company (eligible for dormant status) has "no significant accounting transaction". Reason (R) contradicts this. | Not Correct |
Revision Table: Key Concepts
| Concept | Description as per Paragraph (Companies Act, 2013) |
|---|---|
| Dormant Company | Introduced by Section 455. Allows holding assets/IP for future use under corporate shield. Less compliance than active companies. |
| Inactive Company | A company that hasn't started business for a long time (e.g., for future projects) and has NO significant accounting transaction. Such a company MAY obtain dormant status. |
| Significant Accounting Transaction | An inactive company (eligible for dormant status) is characterized by having NO significant accounting transactions. Reason (R) incorrectly states dormant companies DO have significant accounting transactions. |
Additional Information: Advantages of Dormant Status
The paragraph highlights a major advantage of obtaining dormant company status:
- Reduced Compliance: Compared to an active company, a dormant company has fewer compliance requirements.
- Cost Saving: This reduction in compliance leads to savings in compliance costs, which is particularly beneficial for companies holding assets for future projects without current business operations.
- Asset Holding: It provides a legal structure to hold assets or intellectual property safely until needed for a future venture.
This status is designed to allow companies to remain incorporated and hold assets without the full regulatory burden of an active trading company, provided they meet the criteria of being inactive and having no significant accounting transactions.
Important Questions from The Companies Act, 2013
Match List I with List II:
List- I
List – II
A.
Appointment of auditors by CAG (I)
Section 139 (5) B.
Qualifications and disqualifications of auditors (II)
Section 141 C.
Powers-and duties of auditors (III)
Section 142 D.
Remuneration of auditors (IV)
Section 143
Choose the correct answer from the options given below -Which one of the following nature of business is suitable to a Dormant company?
Which of the following companies do not fall under a purview of Dormant company?
(A) Private company
(B) One person company
(C) Limited and unlimited liability companies
(D) Public company
(E) Government company
Choose the most appropriate answer from the options given below:
Dormant company offers excellent advantage to which one of the following?
Given below are two statements : One is labelled as Assertion A and the other is labelled as Reason R.
Assertion (A): If a company gets status of a dormant company, then it is subject to less compliance in comparison to active company.
Reasons (R) : It will help to save of compliances for Inactive companies when they become dormant company under section 455 of the Companies Act, 2013 as compared to the Companies Act. 1956.
In the light of the above statements, choose the most appropriate answer from the options given below :
