When Paid-Up Capital Was Never Paid: Accounting and Legal Treatment of Unpaid Subscription Money at Incorporation

When Paid-Up Capital Was Never Paid: Accounting and Legal Treatment of Unpaid Subscription Money at Incorporation

Summary: A private company incorporated in FY 2025-26 has subscribed equity share capital of ₹20 lakh comprising 2,00,000 equity shares of ₹10 each, but the original subscribers have not paid the subscription money. The analysis considers Sections 2(55)(i), 2(64) and 10(2) of the Companies Act, 2013 and the ICAI Guidance Note on Division I, Non-Ind AS Schedule III. It explains the treatment of the subscriber’s unpaid amount as a debt due to the company and the Guidance Note position that unpaid amounts towards shares subscribed by Memorandum subscribers are considered as subscribed and paid-up capital while the debt due is disclosed as an asset. It distinguishes this situation from calls in arrears and from loans or advances to promoters or shareholders. For the ₹20 lakh example, the proposed accounting entry debits an amount due from subscribers to the Memorandum of Association and credits Equity Share Capital, with the receivable separately disclosed and classified according to the applicable current/non-current test. The article also considers Section 10A, Form INC-20A, the 180-day requirement and stated penalties; Section 248(1)(d) and Section 252 in relation to strike-off and restoration; the 5B Industries India Private Limited adjudication; an ICAI disciplinary order concerning certification of unpaid share capital; audit verification, recoverability, going concern and reporting considerations; and a practitioner checklist covering incorporation documents, subscribers, bank evidence, MCA records, INC-20A, accounting, disclosure, recoverability and recovery or forfeiture considerations.

When Paid-Up Capital Was Never Paid: Accounting and Legal Treatment of Unpaid Subscription Money at Incorporation

A private company is incorporated in FY 2025-26 with subscribed equity share capital of ₹20 lakh, divided into 2,00,000 equity shares of ₹10 each. The subscription clause of the Memorandum of Association records that the original subscribers have undertaken to take up all 2,00,000 shares. In preparing the company’s financial statements for FY 2025-26, the practitioner finds that the subscription money was never actually received.

The company’s records show the capital as subscribed. The bank statement shows no corresponding receipt. This raises a question that is narrower than it first appears, and worth working through carefully: if the shares have been subscribed to at incorporation but the subscription money has not been received, how should the amount be accounted for and presented in the company’s FY 2025-26 financial statements?

The statutory starting point

Section 2(64) of the Companies Act, 2013 (the “Act”) defines paid-up share capital as such aggregate amount of money credited as paid-up as is equivalent to the amount received as paid-up in respect of shares issued and also includes any amount credited as paid-up in respect of shares of the company, but does not include any other amount received in respect of such shares, by whatever name called. Read in isolation, this looks decisive: no receipt, no paid-up capital.

But the subscribers to the Memorandum occupy a special statutory position. Under Section 2(55)(i), which defines “member,” every subscriber to the Memorandum is deemed to have agreed to become a member of the company and is entered in the register of members on registration itself. Section 10(1) reinforces this by making the Memorandum and Articles bind the company and each member as if separately signed by them. Section 10(2) then does something equally important: it converts the subscription obligation into a debt. All monies payable by a member to the company under the Memorandum or Articles, it says, shall be a debt due from him to the company. Upon registration, the subscriber becomes a member of the company, while the subscription obligation becomes a debt due to the company under Section 10(2), whether or not the subscription money has actually been received.

This dual character is the root of the entire accounting puzzle, and it is why the original subscriber’s position cannot be read off Section 2(64) alone.

The apparent contradiction, and why it is not really one

Here is the tension the practitioner runs into. Section 2(64) ties “paid-up” to actual receipt. Yet the ICAI’s Guidance Note on Division I, Non-Ind AS Schedule III to the Companies Act, 2013 (Revised January 2022 Edition) states, in the course of explaining the disclosures required under Note 6A of Schedule III, that the unpaid amount towards shares subscribed by the subscribers of the Memorandum of Association should be considered as ‘subscribed and paid-up capital’ in the Balance Sheet and the debts due from the subscriber should be appropriately disclosed as an asset in the balance sheet. On its face, ICAI appears to be telling members to caption unreceived money as “paid-up.”

The resolution lies in seeing that Section 2(64) and the Guidance Note are answering different questions. Section 2(64) is a general definition, and in practice it is most naturally read against the ordinary way paid-up capital is built up: application money, allotment money, and staged calls, where “paid-up” genuinely tracks cash received in tranches over time. The original subscriber’s position is structurally different. There is no application, no separate allotment resolution, and no staged call schedule; the Memorandum itself operates as the instrument of subscription, and under Section 2(55)(i), which deems a subscriber to have agreed to become a member on registration, it operates as the instrument of membership as well. The share is constituted as fully paid from the moment of incorporation because the Act does not contemplate a partly-subscribed Memorandum share sitting in limbo. What survives non-receipt is not an unconstituted share; it is a debt under Section 10(2), owed by a member who is already on the register, in respect of a share that already exists.

Once that is accepted, the Guidance Note’s instruction stops looking like a contradiction and starts looking like a considered choice between two imperfect labels. The alternative to “subscribed and paid-up capital plus a receivable” would be to show the capital as merely “subscribed but not called,” which is not accurate either, since nothing remains to be called: the full amount was due on subscription itself, immediately, by operation of Section 10(2). It is more accurate to say the debt exists and is presented as an asset than to say the share capital itself was never constituted. Whether the label “paid-up” is the ideal word for this is a fair question, and reasonable practitioners can and do find it uncomfortable that the balance sheet caption does not visibly flag the shortfall to a reader who has not opened the notes. But it is not, on close reading, inconsistent with Section 2(64), because the two provisions are governing different fact patterns: one governs the general definition of what counts as received, the other governs the specific, deemed-member position of a Memorandum subscriber under Section 2(55)(i) read with Section 10(2).

This also explains why “calls in arrears” is the wrong label for this situation, even though it is the label many reach for instinctively. Calls in arrears, disclosed under Schedule III of the Act, presuppose a called-up structure: application money, allotment money, and one or more calls, with a shortfall on a specific call. An original subscriber’s obligation was never staged in that way; the whole amount became a debt on incorporation. Captioning it as calls unpaid borrows a mechanism that does not exist on the facts and, worse, invites the wrong balance sheet treatment, since calls unpaid are shown as a deduction from called-up capital to arrive at paid-up capital, which is precisely what the Guidance Note says not to do here.

Equally, “loan or advance to promote” is the wrong label unless the underlying facts actually support a loan. A loan requires an act of lending, terms of repayment, and typically a rate of interest; what exists here is a statutory debt arising automatically from the subscription clause of the Memorandum, not a voluntary extension of credit by the company. Recharacterising it as a loan also drags in Section 185 restrictions on loans to directors where the subscriber happens to be a director, which is a separate and more serious compliance problem the practitioner should not manufacture by mislabelling an asset. The correct description is a receivable, in the nature of a statutory debt under Section 10(2), due from a subscriber to the Memorandum, and it should be captioned and disclosed as exactly that: not folded into trade receivables, not called a loan, and not called calls in arrears.

Three situations that look alike but are not

Practitioners routinely collapse three distinct fact patterns into one, and the mislabelling above is usually the result.

Situation A: original subscribers to the Memorandum never pay

Situation A: original subscribers to the Memorandum never pay. This is governed by Section 2(55)(i) read with Section 10(2), as discussed above. The share is constituted; the obligation is a debt; the Guidance Note treatment applies.

Situation B: existing shareholders receive a subsequent allotment and fail to pay a call

Situation B: existing shareholders receive a subsequent allotment and fail to pay a call. Here the ordinary Schedule III mechanism of calls unpaid genuinely applies. The shares were validly called up in stages under Section 49 and the articles, a shortfall exists on a specific call, and the amount is properly shown as a deduction from called-up capital, with separate disclosure of calls unpaid by directors and officers under Clause (k) of Note 6(A) of Schedule III of the Act.

Situation C: the company has actually advanced money to a promoter or shareholder

Situation C: the company has actually advanced money to a promoter or shareholder. This has nothing to do with unpaid subscription at all; it is a loan or advance, governed by Section 185 and Section 186, and must be shown as a loan or advance receivable, not netted against or confused with share capital.

Treating A as if it were B produces an understated paid-up capital figure that misstates the company’s constitutional position. Treating A as if it were C manufactures a related-party loan compliance problem that does not exist on the facts. Getting the classification right at the outset avoids both errors.

Working the ₹20 lakh example

Take the facts as given: 2,00,000 equity shares of ₹10 each, ₹20 lakh subscribed by the original subscribers, ₹0 received. At incorporation, the entry that reflects the Guidance Note position is:

Amount due from subscribers to the Memorandum of Association A/c – Dr. – ₹20,00,000
To Equity Share Capital A/c – ₹20,00,000

This is not a self-evidently “correct” entry that can simply be assumed; it needs to be tested against what it is trying to represent. The credit to Equity Share Capital is fully justified by Section 2(55)(i) and Section 2(64) read together with the Guidance Note, since the share is constituted and the ICAI position is that the amount continues to be shown as subscribed and paid-up. The debit, however, deserves a more specific caption than a generic “receivable” or “sundry debtors,” both because Schedule III of the Act insists on relevance in presentation and because a generic caption obscures precisely the fact a reader most needs to know. A caption such as “Amount recoverable from subscribers to the Memorandum of Association,” disclosed as a separate line item and not clubbed with trade receivables, is the more defensible practitioner interpretation, since trade receivables under Schedule III of the Act are specifically amounts due in respect of goods or services supplied in the ordinary course of business, which this is not.

On classification as current or non-current, the test under the Schedule III of the Act general instructions is whether realisation is expected within twelve months of the reporting date. A subscription receivable that has been outstanding since incorporation with no recovery plan, no demand notice issued, and no repayment schedule would ordinarily be non-current, unless the company can point to a genuine, near-term expectation of receipt.

Note disclosures should, at minimum, state: the amount and nature of the receivable; the identity of the subscriber(s), together with consideration of whether the applicable related-party disclosure requirements are attracted; the age of the balance; whether any recovery steps (demand, forfeiture proceedings) have been initiated; and the auditor’s basis for concluding on recoverability, addressed separately below.

When the promoters eventually pay, the entry is straightforward:

Bank A/c – Dr. – ₹20,00,000
To Amount due from subscribers to the Memorandum of Association A/c – ₹20,00,000

No further adjustment to share capital is needed, because the capital account was never adjusted downward for the non-receipt in the first place; only the debtor balance clears.

Section 10A: what it does and does not reach

Section 10A applies to companies having a share capital that were incorporated on or after November 02, 2018. It requires a director’s declaration, filed as Form INC-20A within 180 days of incorporation and certified by a practicing CS, CA or CMA, confirming that every subscriber to the Memorandum has paid the value of the shares agreed to be taken. The declaration must also confirm compliance with Section 12(2) regarding verification of the registered office. Failure attracts a penalty of ₹50,000 on the company and ₹1,000 per day on every officer in default, capped at ₹1 lakh.

Two points are frequently got wrong in practice. First, Section 10A is not retrospective: a company incorporated before November 02, 2018 is simply outside its scope, and non-receipt of subscription money in such a company is not, by itself, a Section 10A violation, though it remains a Section 10(2) debt and, separately, one of the grounds for the Registrar of Companies to strike the company off under Sec 248(1)(d). Second, non-filing of INC-20A alone does not automatically trigger strike-off. Section 248(1)(d) requires two things together: non-payment of subscription money and failure to file the declaration in INC-20A within 180 days.

Where a company is struck off on this ground and the promoters later wish to revive it, whether to bring in the money, complete a transaction, or preserve an asset, the route is an appeal to the NCLT under Section 252 within three years of the strike-off order, on a showing that restoration is just and equitable.

Real cases: what the record actually shows

The Ministry of Corporate Affairs has adjudicated genuine Section 10A defaults involving cross-border delay. In the matter of 5B Industries India Private Limited, incorporated on 26 May 2023 with two Australian corporate subscribers committed to shares valued at roughly ₹8.19 crore, the funds were not actually received until February 26, 2024, after the 180-day window had closed; the Registrar of Companies for NCT of Delhi and Haryana adjudicated a penalty under Section 454. This is a useful illustration precisely because it shows the provision biting on a commercial delay rather than deliberate default.

On the audit side, an ICAI Disciplinary Committee order records a finding against a chartered accountant who served as statutory auditor of a private limited company from FY 2015-16 to FY 2019-20. The Committee found that in the audited financial statements and the e-Form AOC-4 for FY 2017-18, the auditor incorrectly certified the share capital as “subscribed and paid up” despite the fact that the subscribers had not actually paid it, a misstatement that continued in subsequent years. The Committee held the member guilty under Items (6) and (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, for gross negligence and failure to report a material fact known to him, and ordered removal of his name from the Register of Members for one month together with a monetary penalty of ₹10,000.

The auditor’s perspective

Discovering unpaid original subscription during a first audit is not a paperwork issue; it goes to the truth and fairness of the opening balance sheet. A defensible audit response works through several steps in sequence, not as a checklist recited but as an actual chain of evidence.

Verification starts with the bank statements from the date of incorporation, since the receipt (or its absence) occurred at inception. This is cross-checked against the subscription clause of the Memorandum and the register of members to confirm the amount each subscriber agreed to bring in. Where INC-20A has been filed, the auditor should reconcile the declaration against the actual bank evidence; a filed INC-20A confirming receipt, when the bank statements show none, is itself a serious red flag going beyond the accounting question into the territory of a false statutory declaration. Independent confirmation from the subscribers of the outstanding balance, rather than relying on management representation alone, is appropriate given the near-universal related-party status of Memorandum subscribers.

Recoverability then has to be assessed on its own facts: is the subscriber traceable, solvent, and willing to pay, or has the balance sat unrecovered for years with no demand issued? Materiality in a first-audit context is rarely in doubt when the amount represents the entirety, or a substantial part, of the company’s stated equity base; a ₹20 lakh unpaid subscription in a company with ₹20 lakh of stated capital is not an immaterial rounding item, it is the balance sheet.

Where the amount has been outstanding for a long period without recovery action, the auditor should consider whether this affects the going concern assessment, particularly for an early-stage company that has been relying on the fiction of a funded equity base to transact with vendors, lenders or regulators. On reporting, CARO 2020 does not contain a clause addressed to this fact pattern specifically, but the general requirement under Section 143 to report observations that have an adverse effect on the functioning of the company, and the requirement to state whether the financial statements give a true and fair view, are both squarely engaged. The ICAI disciplinary order discussed above illustrates that where such an amount is material, its classification, disclosure and the auditor’s reporting on the matter require careful consideration.

What should a practitioner do when this is discovered: a checklist

1. Examine the MOA and incorporation documents to establish the exact subscription commitment of each subscriber.

2. Identify every original subscriber by name and confirm their status as related parties.

3. Verify actual receipt through bank statements from the date of incorporation onward, not merely the current year.

4. Reconcile the books, the MCA master data, and any filed INC-20A against the bank evidence.

5. Determine the legal nature of the shortfall: a Section 10(2) debt from an original subscriber, not calls in arrears and not a loan, unless the facts genuinely support one of those alternative characterisations.

6. Apply the ICAI Guidance Note treatment: retain the amount within subscribed and paid-up capital, and disclose the debt as a specifically captioned asset.

7. Determine current or non-current classification based on a genuine expectation of recovery.

8. Draft note disclosures covering the amount, the subscriber’s identity, ageing, and any recovery steps taken.

9. Check whether Section 10A applies at all, based on the date of incorporation, and whether INC-20A was correctly filed and, if filed, whether it was accurate.

10. Assess recoverability and, where doubtful, consider the impact on the auditor’s report and on the going concern assessment.

11. Consider whether recovery or forfeiture proceedings are legally and commercially warranted, and document the conclusion either way.

12. Record the accounting position taken, and the reasoning for it, in the audit file and the notes to accounts, so the position survives scrutiny in a later year or a later audit.

Conclusion

The apparent conflict between Section 2(64) and the ICAI’s Schedule III guidance dissolves once the original subscriber’s peculiar statutory position under Sections 2(55)(i) and 10(2) is taken seriously: the share exists from incorporation, the shortfall is a debt, not an uncalled instalment, and the correct presentation is subscribed and paid-up capital carried alongside a specifically disclosed receivable, not a deduction from capital and not a loan to a promoter. Getting the label right protects the practitioner from precisely the finding that ICAI’s Disciplinary Committee has already made against at least one member: that certifying “subscribed and paid up” without disclosing the underlying, unrecovered debt is not a technicality, it is a misstatement.

Note: Unless otherwise stated, all section references in this article are to the Companies Act, 2013.

Disclaimer: This article is a practitioner analysis for professional discussion and does not constitute legal or audit opinion on any specific fact pattern. Readers should verify current statutory and regulatory text before relying on any position taken here.