Subscriber’s Unpaid Share Subscription: Can Company Recover Dues or Forfeit Shares Under AOA?

Subscriber Has Not Paid Subscription Money: Can the Company Recover the Money or Forfeit the Shares?

Summary: Once a person subscribes to the Memorandum of Association (“MOA”), he becomes a member of the company upon incorporation, even if the subscription money has not yet been paid. Section 2(55) of the Companies Act, 2013 recognises the subscriber as a member, while Section 10(2) treats amounts payable by a member under the memorandum or articles as a debt due to the company. The recovery mechanism for unpaid subscription money is primarily governed by the company’s Articles of Association (“AOA”), including the calls and forfeiture provisions of Table F where adopted. The company may issue a formal call and, if the amount remains unpaid, proceed with forfeiture in accordance with the applicable AOA provisions. Forfeiture does not automatically extinguish the amount already due. Separately, Section 10A requires every subscriber to have paid the value of the shares agreed to be taken before the company can make the declaration for commencement of business in Form INC-20A within 180 days of incorporation. Failure to satisfy this requirement may result in penalties and, in specified circumstances, action by the Registrar under Section 248. The article therefore distinguishes membership, recovery of unpaid subscription money, forfeiture of shares and the separate Section 10A commencement-of-business requirement.

Short Answer

Yes , the individual subscriber became a member of the company on the date of incorporation itself, under Section 2(55) read with Section 10(2) of the Act, and his membership is not conditional on payment. That is correct as far as it goes, but it should not be read as “the matter ends there”; he remains liable to pay for those shares, and that liability, and the company’s Section 10A position, are two separate things that need separate handling. On recovery: the Act does not prescribe a statutory procedure for unpaid subscription money; that is governed by the company’s AOA. If the AOA contains calls-and-forfeiture provisions (Table F of Schedule I to the Act, or a custom equivalent), the Board should first issue a formal call, and if that remains unpaid, proceed to forfeiture , an internal, board-driven process that needs no court, though it does not by itself extinguish the debt. A civil suit for the money becomes necessary only if the AOA has no forfeiture mechanism, or if forfeiture does not fully recover what is owed, or if the company , given this is a joint venture , would rather sue for the money than remove a JV partner’s shareholding. On Section 10A, running in parallel and more urgent than either recovery route: the company should not, and cannot truthfully, file its commencement-of-business declaration (Form INC-20A) until the subscription position is genuinely correct , and forfeiting the defaulting subscriber’s shares and reissuing them to someone else who pays does not, by itself, make that declaration true in respect of the original subscriber. This has to be resolved within 180 days of incorporation.

Applicable Legal Provisions

• Section 2(55), Companies Act, 2013 , defines “member” and expressly includes every subscriber to the memorandum, who is deemed to have agreed to become a member and, on registration of the company, is to be entered as a member in its register of members , without any further act of application or allotment on his part.
• Section 10(2), Companies Act, 2013 , the memorandum and articles, once registered, bind the company and its members to the same extent as if each member had signed them and had covenanted to observe all their provisions, including the covenant to pay for the shares he has agreed to take.
• Section 10A, Companies Act, 2013 , bars a company having share capital from commencing business or exercising borrowing powers until a director files a declaration, within 180 days of incorporation, that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him, verified in Form INC-20A. The TaxGuru material on Form INC-20A and commencement of business addresses the corresponding compliance requirements.
• Section 10A(2) , default in complying with Section 10A attracts a penalty of fifty thousand rupees on the company, and one thousand rupees per day of continuing default on every officer in default, subject to an overall cap of one lakh rupees on the officer.
• Section 10A(3) , where no declaration is filed within 180 days and the RoC has reasonable cause to believe the company is not carrying on any business or operations, the RoC may initiate action to remove the company’s name from the register, independently of the penalty under Section 10A(2).
• Section 248(1)(d), Companies Act, 2013 , lists, as a distinct, standalone ground for the RoC to strike a company’s name off the register, the fact that subscribers to the memorandum have not paid the subscription money they undertook to pay at incorporation and no Section 10A declaration has been filed within 180 days of incorporation.
• Regulations 13 to 18, Table F, Schedule I to the Act , the model provisions on “calls on shares”: how a call is made, the minimum notice for payment, and interest chargeable on calls in arrears , apply by default unless the company’s own AOA displaces or modifies them. The TaxGuru discussion on non-receipt of subscription money and Table F also sets out the call mechanism.
• Regulations 28 to 34, Table F, Schedule I to the Act , the model provisions on forfeiture of shares for non-payment of a call: the notice required before forfeiture, the effect of forfeiture, and the survival of the defaulting member’s liability for amounts due at the time of forfeiture , again, applicable only if the company’s AOA adopts or mirrors them.
• Order XXXVII, Code of Civil Procedure, 1908, read with the Commercial Courts Act, 2015 (where the pecuniary threshold is met) , the summary suit procedure available for recovery of an ascertained sum due under a written contract, which the deemed statutory contract under Section 10(2) is capable of supporting; mentioned here only because it changes how the recovery suit, if needed at all, should be filed , not as an independent right of recovery.

Relevant Extracts

Section 2(55)(a) (simplified): every subscriber of the memorandum is deemed to have agreed to become a member of the company and, on its registration, shall be entered as a member in its register of members.

Section 10(2) (simplified): the memorandum and articles bind the company and every member to the same extent as if each had signed them and covenanted to pay the amount due on his shares.

Section 10A(1)(a) (simplified): a company having share capital shall not commence business or exercise borrowing powers unless a director files, within 180 days of incorporation, a declaration that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him.

Section 248(1)(d) (simplified): the Registrar may initiate removal of a company’s name from the register where subscribers to the memorandum have not paid the subscription they undertook to pay and no Section 10A declaration has been filed within 180 days of incorporation.

Legal Position

At least three separate questions are in play here, and the most common drafting error in advice on this point is answering them as if they were one.

Membership of Subscriber Without Payment

First , does the subscriber become a member without paying? Yes, without doubt. Section 2(55) does not make membership conditional on payment , the act of subscribing to the memorandum itself creates the membership, by operation of law, the moment the company is registered. Unlike a further issue of shares (where an application, a Board resolution of allotment, and a return of allotment in Form PAS-3 are all required), the original subscribers need none of that; they become members automatically and are to be entered directly in the register of members. So the premise that “once a person subscribes to the MOA, he is the owner of the share, whether he has paid the money or not” is directionally correct, though “owner” is worth qualifying: the more precise description is that he is a member in respect of the shares subscribed for, holding that status subject to his outstanding liability to pay for them , membership and full ownership free of any claim are not quite the same thing where money is still owed.

Recovery of Unpaid Subscription and Forfeiture

Second , does the subscriber remain liable to pay, and how does the company enforce that? Yes, he remains liable, and the enforcement route needs care. The unpaid amount is not a free-floating dispute , it is, in substance, a “call in arrears”, a sum due on shares under the deemed statutory contract created by Section 10(2). How a company enforces payment of that sum is not laid down in the Act at all; it is a matter the Act deliberately leaves to each company’s own AOA. Where the AOA has adopted Table F (or a custom clause modelled on it), the Board has two internal tools available before any question of suing arises: first, a formal call demanding payment by a fixed date, with interest running on the arrears at the rate the AOA specifies; and second, if the call remains unpaid, forfeiture of the shares after due notice. Forfeiture is a unilateral, board-driven act , it needs no court order , but it is not automatic and is not available at all unless the AOA (or Table F, if adopted) actually authorises it, and the notice procedure must be followed exactly as prescribed, not on an assumed or generic timeline. If forfeiture is carried out, it extinguishes the defaulting subscriber’s membership in those specific shares and the shares revert to the company for reissue or cancellation , but, importantly, forfeiture by itself does not wipe out the debt. Under the standard Table F formulation, a member whose shares are forfeited remains liable to pay everything that was due and payable at the time of forfeiture, together with interest, and the Board may still enforce that payment if it chooses to. So a civil suit is not the company’s only route, and in most cases should not be the first one , it becomes necessary only where the AOA has no forfeiture mechanism, where forfeiture does not recover the full amount, or where the company (for commercial reasons particular to a joint venture) does not want to forfeit a JV partner’s shareholding and instead wants to keep the shares in place while suing for the money.

Where a suit does become necessary, it is worth being precise about forum and procedure as well. Recovery of a fixed sum of money is not a matter the National Company Law Tribunal (“NCLT”) has jurisdiction over , there is no oppression, mismanagement, or scheme involved, only a plain debt, and that character does not change merely because the parties happen to be shareholders of the same company , so the correct forum is the ordinary civil court, or the relevant Commercial Court if the claim value crosses the pecuniary threshold under the Commercial Courts Act, 2015. Because the claim arises from a written contract (the memorandum, operating as a deemed contract under Section 10(2)) for an ascertained sum, it may be capable of being filed as a summary suit under Order XXXVII of the Code of Civil Procedure, 1908, rather than a regular, full-trial civil suit , materially faster, since the defendant must first obtain leave to defend rather than triggering an automatic trial. This should not be assumed automatically, though: whether a particular claim actually qualifies depends on the pleadings and the documentary trail (the call notice, demand notice and acknowledgment, if any) satisfying Order XXXVII’s own requirements, and that should be checked on the specific facts before the suit is drafted.

Section 10A and the Original Subscriber

Third , and this is the point most likely to be got wrong in practice , does forfeiting the shares and reissuing them to someone else cure the Section 10A position? No, and this deserves to be stated as a firm proposition rather than a passing caveat. Section 10A(1)(a) does not ask whether the company’s paid-up capital is, in the aggregate, now backed by money in the bank; it asks the director to declare that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him. That is a statement about a specific named person, not about the company’s capital account. If the individual subscriber forfeits his shares and the company reissues them to a new investor who does pay, the new investor’s payment discharges the new investor’s own obligation on the reissued shares , it does not, and cannot, retrospectively make it true that the original subscriber paid for what he originally took. This reading is not merely a cautious textual one; it matches how the declaration is actually verified in practice, since the standard supporting proof for Form INC-20A is a bank statement (or equivalent payment evidence) showing credit entries traceable to each individual subscriber’s own account, precisely so that one subscriber’s default cannot be papered over by another party’s money. Treating forfeiture-and-reissue as having “fixed” the Section 10A position for the original subscriber is therefore not a safe assumption , it is, at best, an unsettled and aggressive reading that this firm would not recommend relying on without specific, fact-checked professional advice, and the conservative position is to treat the company’s Section 10A declaration as still outstanding, and the underlying default as still live, for as long as the original subscriber personally has not paid.

Exemptions/Relaxations

Section 10A draws no distinction between private and public companies, and none of the standing MCA private-company exemption notifications (5 June 2015, as amended on 13 June 2017, or any consolidation since) carve out Section 10A or Section 248(1)(d) for private companies, small companies, Section 8 companies, or OPCs. The commencement-of-business declaration requirement, and the strike-off exposure for not meeting it, apply to this joint venture company exactly as they would to any other company having a share capital.

Case Laws / Judicial View / Professional Interpretation

In Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd., AIR 1971 SC 422, the Supreme Court, examining the equivalent of the Table F forfeiture regulation, held that shares can be forfeited only for non-payment of a call or an instalment of a call unless the company’s own articles lawfully provide additional grounds, and that once forfeiture takes place, the company’s only right is to dispose of the forfeited share and apply the proceeds towards the liability for which the forfeiture was made , any surplus belongs to the defaulting member and cannot be appropriated by the company. This is directly relevant here: it confirms both that forfeiture must strictly follow whatever the AOA actually authorises (it cannot be improvised), and that forfeiture is a recovery mechanism, not a punitive windfall for the company.

Practical Interpretation

A suggested sequence for this company, run in parallel rather than one after another given the 180-day Section 10A clock is already running:

• Pull the AOA and, if this is a joint venture, the shareholders’ agreement (“SHA”), before anything else. Confirm whether the AOA has adopted Table F or contains its own calls-and-forfeiture clauses, and at what rate of interest. Separately, many JV SHAs carry their own default clauses for a partner who fails to pay agreed subscription money (e.g., dilution, deemed transfer, or a defined penalty) , these operate on contract, independently of the Companies Act machinery, and can sometimes be faster and less adversarial than forfeiture.
• Do not file Form INC-20A on the current facts. If it has already been filed showing the subscription as fully received when it was not, that needs urgent, separate professional attention , a declaration that misstates the payment position exposes the signing director, and the certifying professional, to scrutiny under Section 448 (punishment for false statement) read with Section 447, which is a materially more serious exposure than a delayed filing. If it has not yet been filed, hold it until the position is genuinely accurate.
• Calendar the 180-day deadline precisely from the date of incorporation, and work backwards: a call notice (minimum 14 days under standard Table F timelines) followed, if unpaid, by a forfeiture notice (a further minimum 14 days) takes roughly a month at the least. Build that into the timeline now rather than after the fact.
• If the AOA permits it, have the Board issue a formal written call on the individual subscriber for the unpaid amount, specifying the due date and the interest that will run on arrears, referencing the specific AOA clause (or Table F Regulations 13–18 if adopted).
• If the call remains unpaid, proceed to a forfeiture notice and, if still unpaid, a Board resolution forfeiting the shares, strictly following the notice periods and procedure the AOA prescribes , not an assumed or generic timeline.
• In parallel, send a formal demand/legal notice for the outstanding amount , this preserves the option of a suit, creates a documented paper trail of the company’s diligence (useful if the RoC later raises a Section 10A query), and often prompts payment on its own, particularly from a body-corporate-backed JV partner who does not want a public default on record.
• If forfeiture is not available or does not fully satisfy the amount, recover the balance through a money suit , filed as a summary suit under Order XXXVII CPC in the appropriate civil or commercial court, supported by the MOA, the call notice, and the demand notice as the documentary record of the debt.
• Do not treat forfeiture-and-reissue as a fix for Section 10A. If the individual subscriber never personally pays, the safer position is that the company’s Section 10A declaration cannot truthfully be made in respect of that subscriber, whatever happens to the shares afterwards. Filing INC-20A should wait until either the original subscriber has actually paid, or the company has taken specific, fact-checked professional advice , including, if genuinely necessary, advice on the company’s exposure for the period it remains unable to make the declaration , rather than assuming reissue proceeds have closed the point.

Example

XYZ Ventures Private Limited was incorporated three months ago with three subscribers to the memorandum: Body Corporate A (60% – fully paid), Body Corporate B (30% – fully paid) and an individual, C (10%, comprising 10,000 equity shares of ₹10 each, i.e., ₹1,00,000), who has paid nothing. The AOA has adopted Table F without modification. The Board issues a call notice on C on Day 1, demanding payment of ₹1,00,000 within 14 days with interest at the AOA-specified rate; C does not pay. The Board issues a forfeiture notice on Day 15, giving a further 14 days; C still does not pay. On Day 30, the Board passes a resolution forfeiting C’s 10,000 shares , C ceases to be a member in respect of those shares, and the shares become available for reissue to Body Corporate A, Body Corporate B, or a new investor, D, who does pay ₹1,00,000 for them on reissue. C nonetheless remains liable for the original ₹1,00,000 plus accrued interest, which the company may still recover from C by a summary suit if C does not settle. D’s payment on reissue is D’s own payment for D’s own shares , it is not treated as payment by C, and it does not, by itself, allow the company to declare under Section 10A that C, the original subscriber, has paid the value of the shares C agreed to take. Unless C actually pays, the company’s Section 10A position in respect of C remains unresolved, and the company should take specific professional advice on how to handle the INC-20A declaration and its 180-day deadline in these circumstances, rather than filing on the assumption that D’s money has cured the point.

Conclusion

The starting premise is correct: a subscriber to the memorandum is a member of the company from the date of incorporation itself, and that status does not depend on payment. But the recovery route is not, as a first step, a civil suit. It runs through the company’s own Articles of Association , a call, and, if the AOA authorises it, forfeiture , with a civil (and, where the facts fit, summary) suit as the route for whatever the internal process does not recover, or as the only route if the AOA has no forfeiture machinery at all. Sitting above both of these, and genuinely time-critical for a three-month-old company, is Section 10A: the commencement-of-business declaration cannot be truthfully made until the subscription position is actually correct, and non-payment left unresolved for 180 days from incorporation is, on its own, a specific ground under Section 248(1)(d) for the Registrar to strike the company off. That is the item on this file that should not wait for the recovery process to run its full course , it needs its own, parallel timeline.

FAQs

Can the Board simply cancel the individual subscriber’s shares without any notice?

No. Forfeiture is only valid if the AOA authorises it and the company strictly follows the notice procedure the AOA (or Table F, if adopted) prescribes , a call notice and, separately, a forfeiture notice, each with the minimum notice period specified. Skipping the notice makes the forfeiture void.

Does forfeiting the shares close out the individual’s liability to pay?

Not automatically. Under the standard Table F position, the amount due and payable at the time of forfeiture, together with interest, continues to be recoverable from the former member unless the Board specifically waives it , forfeiture is a recovery tool aimed at the shares, not a release of the underlying debt.

Will resolving this through forfeiture, rather than getting the individual to actually pay, satisfy the Section 10A declaration?

Only once the paid-up capital position genuinely reflects money actually received , either because the individual pays, or because the forfeited shares are reissued to someone who does. This is a practical reconciliation point the certifying professional should verify carefully against the company’s books before Form INC-20A is filed, rather than treating forfeiture alone as automatically curing the declaration.

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Author – CS Divesh Goyal, GOYAL DIVESH & ASSOCIATES Company Secretary in Practice from Delhi and can be contacted at [email protected]).