In India, companies can raise funds through issue of Equity shares, Preference shares, and Debe...
The company is a separate legal entity that requires capital in order to carry out its business and minimum number of members at the time of formation who can act and enter into contracts on behalf of the company. The term used for such members is called subscribers. They are also considered as the first shareholder of the company. In this article, we shall have a clear understanding of non-receipt of subscription money by the subscribers, time limit of issuing share certificate, and the consequences in case of non-compliance under the Companies Act.
As per the provisions of the Companies Act, 2013, there shall be a minimum number of members required at the time of the formation of the company. It depends upon the type of the company. For instance:
According to section 2(55) of the Companies Act, 2013 the definition of “member” is defined as-
Subscribers are those persons whose names are entered in the Memorandum of Association (MOA), and by signing the MOA, they are providing their consent to take some amount of shares of the company by contributing capital to the entity.
Subscription money refers to the amount where the subscriber complies to subscribe to the shares of the company at face value and requires depositing that amount in the company’s bank. Non-receipt of subscription money from the subscriber shall have serious implications.
Any person who is competent to contract may be a subscriber. A company (i.e., a legal person) can subscribe. It can subscribe through its authorized person; however, a partnership not being a legal person cannot subscribe; an individual partner must subscribe.
The subscribers of the Memorandum of any company (public or private) doesn’t need to pay anything to the company on subscription, their undertaking to pay when called upon is enough. Every subscriber is liable to pay the company the full amount of shares for which he has subscribed. The liability of every subscriber is equal to the total amount due on the shares subscribed by him. Until the amount of shares is not fully paid up, the subscriber cannot transfer the shares, nor can any allotment of shares be made.
Earlier there used to be no time limit prescribed in the Companies Act for depositing the subscription money by the subscribes to the company however as per Section 56 of the Companies Act, 2013 it is specified that the company must issue the share certificate within a time period of two months from the date of incorporation of the company in case of subscribers to the Memorandum of Association.
Regardless of whether the amount has been deposited or not, a share certificate is to be given.
As per the recent amendment in the Companies Act 2013, a new company that has been incorporated on or after November 2, 2018, shall within 180 days of its incorporation is required to file the declaration by the director with the Registrar of Companies (ROC) in Form 20 A, stating that every subscriber to the memorandum has paid the value of shares taken by them.
As per Section 42(6) of the Companies Act, 2013 an existing company issuing shares shall allot within 60 days from the date of receipt of the application money, and if the company is not able to allot within the prescribed period, it is required to repay the application money to the subscribers within 15 days from the date of completion of sixty days. In case the company fails to repay the application money within the aforementioned period, then it shall be required to repay the money with interest at the rate of twelve percent per annum.
Relevant case laws-
In the case of Sant chemicals private limited Vs. Sant chemicals private limited with Aviat chemicals private limited and Jagmohan Singh Arora and others it was held that the subscribers to the Memorandum of Association (MOA) become members of the company on registration or the incorporation of the company. Entry in the register of members is a matter of procedure, and that is to be performed by the authorized director or the secretary after the incorporation of the company. The entry made in the member’s register is for the purpose of maintenance of records of the company, and mere omission of the entry cannot revoke his membership once the company is incorporated.
In the case of official liquidator of the U.P oil mills company limited Vs. Jamna Prasad and others it was held that the words “shall be deemed to have agreed to become the members of the company” means that subscribers of the memorandum of a company shall be treated as having become the members of the company by the fact of subscription.
In case of non-receipt of subscription money or if the subscriber did not make any payment of the shares subscribed by it to the company, then debts due from the subscriber must be shown in the balance sheet, but there shall be no effect on the reduction of the paid-up capital.
Under section 2(55) of the Companies Act, 2013, “Member” means the subscriber to the Memorandum of the company who shall deem to have agreed to become the member of the company and on its registration, shall be entered as a member in its member’s register.
Thus, it is quite clear from the definition that a subscriber shall become a member on registration of the company regardless of non-receipt of subscription money.
As provided in section 106, the article of a company may provide that no member will exercise any voting right with respect to any shares registered in his name upon which any calls or other sums payable by him which have not been paid or in regard to which the company has exercised any right.
According to section 106, in case there is any clause in the Article of Association of the company that provides that a member shall not exercise any voting right if there is any non-receipt of subscription money. In such a situation, such a member shall not get the right to vote in the meeting. However, it may be noted that if there is no provision regarding such a situation in the Article of Association, then such member shall get the right to vote in the meeting.
A company is required to issue share certificates to subscribers regardless of whether the subscription money is received or not. The points mentioned below clears that the company shall issue a share certificate to the subscribers post-incorporation of the company regardless of the fact whether or not subscription money is received.
According to section 56(3) of the Companies Act, if shares are partly paid up, and application has been made by the transferor alone then the transfer shall not be registered unless the company provides the notice of the application in a manner as may be prescribed to the transferee and the transferee has no objection to such transfer within two weeks from the receipt of notice.
Therefore if the transferor makes an application to the company for the transfer of his shares that are shown as fully paid up at the share certificates and as debts in the books of the company, the company cannot restrict the transfer of such shares because the transferor is the registered owner of those shares.
Every subscriber must fulfill the obligation to deposit the number of shares in the bank at the time of incorporation and thereafter so that the person continues as a member of the company till the time there is a transfer, transmission, surrender of the shares of the company and it is reflected in the company’s registers.