As a professional, it is important to understand the intricacies of company law. One query that often arises is whether dormant companies are authorized to enter into contracts. In this article, we will discuss what dormant companies are, their legal status, and the conditions under which they can enter into contracts.
What is a Dormant Company?
A Dormant Company is a term used to describe a company that is registered with Companies House but is currently inactive. This means that the company is not carrying out any business or trade activities, nor is it generating any income. In most cases, the company was formed for future business purposes, and the owners or shareholders have not yet initiated any operations.
Dormant companies are required to file annual accounts and a confirmation statement with Companies House, even though they have not reported any trading activities.
Legal Status of Dormant Companies
Although dormant companies are not actively involved in any business-related activities, they still have a legal status. The company remains a legal entity, and the owners or shareholders still hold legal ownership. In other words, a dormant company can own assets and property and can also be sued or sue in court.
Can Dormant Companies Enter into Contracts?
Yes, dormant companies can enter into contracts, but there are limitations. A dormant company cannot enter into a contract for a purpose other than the purpose of the company`s formation. For instance, a company formed for the future purpose of establishing a restaurant cannot enter into a contract to purchase a telecommunications company.
Moreover, the director(s) of the dormant company must ensure that the contracts they enter into do not activate the company`s status. If the company activates, then it would be required to file accounts with Companies House, and the shareholders will be held accountable for taxes and penalties.
Another limitation is that the director(s) of a dormant company cannot enter into contracts when there is no foreseeable business purpose. For example, a dormant company cannot enter into a contract to make a charitable donation or purchase a gift for the director. Such contracts will be considered ultra vires, i.e., beyond the powers of the company.
In conclusion, dormant companies can enter into valid contracts when the directors ensure that the contract is in line with the purpose of the company`s formation and the shareholders are not exposed to any additional liabilities. It is, therefore, essential to seek legal advice before signing any contract.