Non-receipt of Subscription Money and Filing of INC-20 A

A company including a Private Limited company or any category is recognized as a separate legal entity that requires capital to function and run and to meet day to day expenses. At the time of incorporation, a minimum number of members must be present to act on behalf of the company and enter into contracts by subscribing to MOA of the company. These members, known as 1st subscribers, are the first shareholders of the company. This article will take you through the implications of non-receipt of subscription money and non filing of INC-20A (Commencement of business) compliance post company registration, the time limit for issuing share certificates along with payment of stamp duty on share certificate state wise rules applicable, and the consequences of non-compliance under the Companies Act, 2013 including RD MCA Adjudications, Penalty provisions, closure of the company by ROC etc.

Applicability of Section 10A of the Companies Act, 2013

Section 10A of the Companies Act, 2013, introduced through the Companies (Amendment) Act, 2019, mandates that every company having share capital must file a declaration in Form INC-20A within 180 days of incorporation, confirming receipt of the subscription money from all subscribers to the memorandum.

In the case of a foreign subsidiary, wholly-owned subsidiary (WOS), or any company receiving Foreign Direct Investment (FDI), it is advisable from a FEMA compliance perspective to complete the allotment of shares and file Form INC-20A within 60 days of incorporation, since FDI reporting is contingent upon the issuance of share certificates. As per RBI norms, share certificates must only be issued once the subscription amount is received, and reporting of FDI under FEMA must follow within the stipulated timeline.

Non-compliance of INC-20A Filing with this requirement results in penalties:

• The company may face a penalty of Rs. 50,000.

• Officers in default may be fined Rs. 1,000 per day, with a maximum cap of Rs.1,00,000.

This Provision mandates that companies incorporated after its commencement cannot begin business operations or avail borrowing facilities unless they meet specific conditions:

1. A director must submit a declaration in form INC-20A within 180 days of incorporation, affirming that all subscribers to the memorandum have fully paid for their agreed share value.

2. The company must complete and file the verification of its registered office in INC-22 with the Registrar of Companies (ROC)/MCA.

Failure to comply with these requirements attracts penalties for both the company and its responsible officers.

Minimum Number of Members for Company Incorporation

The minimum number of members required for company formation depends on the type of company:

• Private Company: Minimum of two members

• Public Company: Minimum of seven members

• One Person Company (OPC): Minimum of one member

Definition of Members and Subscribers

As per Section 2(55) of the Companies Act, 2013, a "member" is:

1. A subscriber to the Memorandum of Association (MOA) who is deemed to have agreed to become a member upon registration.

2. Any individual who, in writing, agrees to become a member and whose name is entered in the company’s register of members.

3. A person holding shares recorded as the beneficial owner in the depository.

Subscribers, by signing the MOA, commit to purchasing shares at face value and depositing the corresponding amount in the company's bank account.

Eligibility of Subscribers

Any individual or legal entity competent to contract can be a subscriber. A company can subscribe through an authorized person, but a partnership firm cannot—only an individual partner may subscribe.

Liability of Subscribers

Subscribers are obligated to pay the full value of the shares they subscribe to. However, payment is required only when called upon by the company. Until full payment is made, subscribers cannot transfer shares or make any allotments.

Time Limit for Bringing Subscription Money

Previously, no time limit was prescribed for depositing subscription money. However, under Section 56 of the Companies Act, 2013, companies must issue share certificates within two months from the date of incorporation, even if the subscription money has not been deposited or paid in Cash may be.

As per the MCA amendment effective from November 2, 2018, newly incorporated companies must, within 180 days, file a declaration (Form INC-20A) with the Registrar of Companies (ROC) stating that every subscriber has paid for their shares.

For companies issuing shares under Section 42(6), shares must be allotted within 60 days from the receipt of the application money. Failure to allot shares within this period requires repayment within 15 days, failing which the company must pay 12% interest per annum.

Key Case Laws

• Sant Chemicals Pvt. Ltd. Case: Held that subscribers become members upon incorporation, irrespective of whether their names are entered in the register.

• Official Liquidator of U.P. Oil Mills Ltd. Case: Affirmed that subscribers are deemed members by virtue of subscription.

Non-Receipt of Subscription Money and Its Impact

1. Effect on Paid-up Capital: If subscription money is unpaid, it is recorded as debt in the balance sheet but does not reduce the paid-up capital.

2. Membership Status: As per Section 2(55), a subscriber remains a member even if subscription money is not received.

3. Voting Rights: Section 106 allows companies to restrict voting rights for members who have not paid dues if stated in the Articles of Association (AOA). If no such clause exists, the member retains voting rights.

4. Issuance of Share Certificates: Companies must issue share certificates within two months of incorporation, regardless of whether subscription money is received.

Consequences of Non-Receipt of Subscription Money

1. Forfeiture of Shares: If a subscriber fails to pay when called upon, the company may forfeit and reissue the shares.

2. Action by ROC: Failure to file Form INC-20A within 180 days may lead to the removal of the company's name from the register.

3. Penalties: Non-compliance with Section 56 attracts fines between Rs. 25,000 and Rs. 5,00,000 for the company and Rs. 10,000 to Rs. 1,00,000 for officers in default.

4. Breach of Contract: Subscription to the MOA is a contractual obligation, and failure to pay may lead to civil disputes.

Transfer of Shares Without Payment

Under Section 56(3), a transferor can transfer shares even if they are shown as fully paid in the share certificate but recorded as debt in company books. The company cannot restrict such a transfer unless objected to by the transferee.

Therefore, Subscribers must deposit the committed share capital upon incorporation to maintain their status as members. Failure to comply can lead to penalties, forfeiture, and even removal of the company from the ROC. Proper adherence to regulatory requirements ensures smooth operations and avoids legal complications.

FAQs

Q1. What is Form INC-20A, and why is it required?

Ans. Form INC-20A is a declaration that newly incorporated companies with share capital must file within 180 days of incorporation. It confirms that all subscribers have paid for their shares, allowing the company to commence business and borrow funds legally.

Q2. What happens if a company does not receive subscription money from its subscribers?

Ans. If the subscription money is not received, the company cannot file Form INC-20A, which may lead to penalties, restrictions on business operations, and even the removal of the company's name from the Registrar of Companies (ROC). Read here one MCA adjudication where penalty imposed for Non-receipt of Subscription Money and delay in filing of INC-20 A form.

Q3. Can a company issue share certificates without receiving subscription money?

Ans. Yes, under Section 56 of the Companies Act, 2013, companies must issue share certificates in form SH-1 post company registration within two months, even if the subscription money is pending. However, unpaid shares may be treated as debt in the B/s or books. 

Furthermore:

• The amount receivable from the third shareholder shall be shown as 'Calls in Arrears' or 'Amount Receivable from Subscribers' in the books.

• The company's MCA Master Data may reflect full paid-up capital based on the e-MOA unless corrected.

• If the third subscriber remains unresponsive or unwilling to pay, the company may consider removing the unpaid shares through legal means, such as share capital reduction under Section 66, or rectification of register, though these require careful compliance and possibly NCLT approval.

Q4. What are the penalties for non-compliance with Section 10A?

Ans. The penalties for non-compliance with Section 10A are:

• Company: Liable to a penalty of Rs. 50,000.

• Officers in default: Subject to a penalty of Rs. 1,000 per day, up to a maximum of Rs. 1,00,000.

Q5. Can a subscriber transfer shares without paying for them?

Ans. Under Section 56(3), shares may be transferred even if they are marked as fully paid in share certificates but recorded as unpaid in company books. However, the transferee may object if the unpaid status is discovered.

Q6. What are the consequences of failing to file Form INC-20A?

Ans. The consequences of failing to file Form INC-20A are:

• Business operations and borrowing powers including directors loan remain restricted.

• The ROC may strike off the company’s name (Closure of the Company)

• The company and its officers may face MCA penalties by MCA adjudication order.