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Non-receipt of Subscription Money under Companies Act, 2013

Ashish M. Shaji

| Updated: May 21, 2020 | Category: Compliances

Non-receipt of subscription money

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:

  • If it is a Private Company, a minimum number of members required are two;
  • If it is a Public Company, the minimum number of members required are seven;
  • If it is a One Person Company, the minimum number of members required is one.

Meaning of Members and Subscribers

According to section 2(55) of the Companies Act, 2013 the definition of “member” is defined as-

  • The subscriber to the Memorandum of a company who shall have deemed to agree to become a member of the company and on its registration shall be entered as a member in the register of members;
  • Every other person who in writing agrees to become a member of the company and the one whose name is entered in the register of members of the company;
  • Every person who holds shares of the company and whose name is entered as the beneficial owner in the records of a depository.

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.

Who can be a Subscriber, and who can’t?

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.

Liability of Subscribers

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.

Time limit for bringing the subscription money under the Companies Act, 2013

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, will there be any impact on the reduction of the paid-up capital?

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.

If the company doesn’t receive the subscription money from the subscribers, will such subscriber be considered as a member?

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.

If the subscription money is not received from the subscribers, will such subscribers get the right to vote in the meeting of shareholders?

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.

Can a company issue share certificates to subscribers in case of non-receipt of subscription money?

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.

  • In the case of subscribers to the memorandum, every company shall deliver the certificate of all securities allotted within a period of two months from its date of incorporation.
  • The company shall neither make any allotment nor file PAS-3 to issue shares to the subscriber of the Memorandum of Association. They become members from the date of the company’s registration, as stated above.

Consequences of non-receipt of subscription money

  1. When the shares are issued by the company, the company has the right to call the amount from the shareholders as per requirement that means either to pay in full or in installments. The board resolution should be passed in the board meetings for making calls on shares. Therefore, the company provides 14 days notice to all the shareholders for the payment of money, and in case such amount is not paid within the prescribed time limit or in case the shareholders are not willing to pay the money then the company has the authority to forfeit the shares and reissue them.
  2. According to section 10 A (3) and 248 (1) (d) of the Companies Act, 2013, in case the company fails to file Form INC 20A within 180 days from the date of incorporation, the registrar can initiate action for removal of the name of such company from the Registrar of Companies.
  3. In case a company fails to comply with the provisions of section 56 of the Companies Act, 2013 (regarding transfer and transmission of securities) then it shall be punished with fine which shall not be less than twenty-five thousand rupees and may extend up to five lakh rupees. Apart from it, every officer of the company who is in default shall be punished with fine, which will not be less than ten thousand rupees and may extend up to one lakh rupees.
  4. In case of non-receipt of subscription money or if the subscriber doesn’t pay for the shares subscribed to the company, then debts due from such a subscriber should be displayed in the balance sheet, however, there shall be no effect on the reduction of the paid-up capital.
  5. Subscription of the Memorandum of Association by the subscriber is a contract between the subscriber and the company in which the company shall issue a share certificate to the subscriber, and the subscriber in consideration of the same shall make payment to the company. In case of non-receipt of subscription money due from the subscriber, then it shall be a breach of contract from the subscriber and will attract civil dispute for such breach.

Can a subscriber transfer the shares and authorize a new person to make payment to the company in case of non-receipt of subscription money by the subscriber?

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.

Conclusion

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.

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Ashish M. Shaji

Ashish M. Shaji has done his graduation in law (BA. LLB) from CCS University. He has keen interests in doing extensive research and writing on legal subjects especially on criminal and corporate law. He is a creative thinker and has a great interest in exploring legal subjects.

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