COMMENCEMENT OF BUSINESS


The Government of India promulgated a temporary law called the Companies (Amendment) ordinance 2018 on 2nd November 2018 to by parachute landing of few more reform measure. Constitution of India mandate that Government needs to get it approved by Parliament within 6 months.

Readers may read this post as a law applicable with effect from 2nd November 2018 till passing a law by the Parliament, a bill for which was introduced before Loksabha on 20th December 2018. These provisions may continue in force after parliamentary approval. In this post, we will discuss, the reintroduction of Commencement of Business.

The law stated herein is with effect from effect from 2nd November 2018 (for the Act/ordinance) and 18th December 2018 (for the Rules) for earlier law please refer posts given in footnotes here[1].

Brief history

The provision of commencement of business has old logic and origin. However, this provision was a sacrificial goat for ease of doing business and deleted by the Companies Amendment Act, 2015 with effect from 29th May 20188. Immediately thereafter demand for its re-introduction was made by the industry itself. We discussed the deletion of Section 11 earlier here.

Section 149 of the Companies Act, 1956 had similar but a detailed exhaustive provision for commencement of business. This was later captured in now deleted Section 11 of the Companies Act, 2013. A new avatar is introduced with new number 10A by present ordinance.

Restriction on Commencement of Business

A Company having share capital may not commence its business or exercise any borrowing power without complying Section 10A. Be careful, a company having share capital may or may not be a —company limited by share. {Section 10A(1)}

Twin preconditions

The company must satisfy two conditions before the commencement of business:

  1. Every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of the making of such declaration; and
  2. The company has its registered office. {Section 10A(1)}

Twin compliance

A company may commencement its business on:

  1. Filing a declaration by its director with the registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of the making of such declaration; and
  2. Filing a verification of its registered office under section 12. {Section 10A(1)}

Prescribed Forms

For above two there are two forms.

Declaration

The Form for filing a declaration is notified by the Ministry on 18th December 2018 with the introduction of the Companies (Incorporation) Fourth Amendment Rules, 2018 amending the Companies (Incorporation) Rules, 2014.

The Ministry inserted Rule 23A for the purpose. The declaration mentioned under Section 10A shall be Form INC – 20A. This Form shall be filed by a director of the company. The contents of this form shall be verified by a professional – Company Secretary or a Chartered Accountant or Cost Accountant. As Form related to legal compliances, it is advisable to get it verified by a competent company secretary.

This is important to note as discussed hereinabove, the intent of this law is to capture registration or approval from sectoral regulators. Such approval or registration is required form Securities and Exchange Board of India, Reserve Bank of India, and any other regulator which require any registration or approval before commencement of business. A company outside the jurisdiction of any sectoral regulator may file such form without any such registration or approval. There is a long and growing list of regulators for different sectors. Therefore, it requires careful certification from a competent professional.

A copy of such registration or approval shall also be attached with the Form.

Verification

The From INC – 22 is already there for verification of registered office under Section 12 and discussed elsewhere under post related to registered office.

Twin Time limits

A company has two-time limits for complete compliance of Section 10A. Firstly the form for filing verification of its registered office shall be filed within the time prescribed under section 12. Secondly, the declaration that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him should be filed within 180 days from the date of incorporation of the company. {Section 10A(1)}

Applicability

Section 10A shall be applicable to the companies incorporated after the commencement of the Companies (Amendment) Ordinance 2018 which is 2nd November 2018. {Section 10A(1)}

Consequences for non-compliance

This is interesting to note there are two different consequences for default in compliance of Section 10A: monetary penalty and removal of name from the register of companies. {Section 10A(2) and (3)}

Monetary Penalty

The company shall be liable to a penalty of fifty thousand rupees. Every officer of the company shall be liable to a penalty of one thousand rupees for each day during which default continues but not exceeding an amount of one lakh rupee. {Section 10A(2)}

Any default either of Section 10A(1)(a) and Section 10A(1)(b) shall attract monetary penalty under section 10A(2).

Removal of Name for THE declaration

The registrar may initiate action for the removal of the name of the company from the register of companies:

  1. Where no declaration is filed within 180 days as mentioned above; and
  2. The registrar has reasonable cause to believe that the company is not carrying any business or operation. {Section 10A(3)}

The default under section 10A(1)(a) shall attract action under 10A(3). The default under Section 10A(1)(b) shall attract the same action but not under Section 10A(3) but under newly inserted Section 12(9).

According to related and insertion of sub-section (9) to Section 12, if the registrar has reasonable cause to believe that the company is not carrying any business or operation, he may cause physical verification of the registered office of the company. If any default is found to be made in complying the requirement of section 12(1), the registrar may initiate action for the removal of the name of the company from the register of companies.

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[1] Please refer to following earlier posts:

https://aishmghrana.me/2013/08/23/registered-office/ dated 23rd August 2013

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