Demystifying Section 10A: Compliance & Implications under Companies Act, 2013

“Unravel the intricacies of Section 10A under the Companies Act, 2013, focusing on compliance and implications. Learn the essentials of obtaining a Certificate of Commencement of Business, its implications, and the consequences of non-compliance. Understand the intricacies of Form INC 20A, fees, and potential penalties for non-compliance. Stay informed with recent orders and penalties imposed by ROCs, and explore practical challenges and dilemmas faced by companies. Navigate the complexities of post-incorporation compliance for a well-governed and thriving business.”

More than often promoters overlook the post incorporation compliance which puts them in a situation where the statement ‘if you think compliance is expensive, try non-compliance’ comes true. The situation can get all the more serious if the adjudication proceedings and actions of strike off are initiated by the Registrar. To avoid putting yourself, the Company and your passion in such a grave situation it is important to not take legal and statutory compliance lightly throughout the life of the Company.

Though there are many, this article in particular deals with one important post incorporation compliance i.e. Obtaining Certificate of Commencement of Business, its implication and possible consequences of non-compliance.

The provision for obtaining certificate of commencement of business existed in the erstwhile Companies Act, 1956.The same found its place in the Companies Act, 2013 (Section 11) as well which was omitted by the Companies (Amendment) Act, 2015. Surprisingly the same was again brought into picture again and was inserted in the Act as Section 10A by Companies (Amendment) Act, 2019 dated 31^st July, 2019 clearly indicating the Ministries concern and considerations over the same. The amendment was brought in effect retrospectively from 02^nd November, 2018.

In terms of Section 10A of the Act read with Rule 23A of the Companies (Incorporation) Rules, 2014, a Company incorporated after 02.11.2018 and having a share capital shall not commence business or exercise any borrowing powers unless:

1. It has filed a declaration by the director that every subscriber has paid the value of shares agreed to be taken by him, within a period of 180 days of the date of incorporation of Company in Form INC 20A certified by a Company secretary, Chartered Accountant or cost accountant in practice;

2. It has obtained a registration or approval from the sectoral regulators (if applicable) like SEBI, RBI and filed the attached the same with the Directors’ declaration as provided in point 1 i.e. filed the same in Form INC 20A;

3. It has filed with a registrar a verification of its registered office as per Section 12.

Intricacies of Form INC 20A

1. Longitude and latitude according to the registered address of the Company

2. Details of subscriber payment; number of shareholders, name of subscriber, name of the bank along with IFSC, Account number, date and amount of receipt

3. Declaration by Director to be provided in the form of a Board Resolution

4. Provide proof of deposit of subscribers amount in the Company’s Bank account as attachment

5. Provide Photograph of Registered Office showing external building and inside office also showing therein at least one Director/ KMP as attachment

6. The form is to be verified by a practicing professional; Cost Accountant, CA or CS.

The fees of the form is dependent on the Paid up Share Capital of the Company and starts from Rs 200 for a paid up share capital of up to Rs 1,00,000 and goes maximum up to Rs 600 for a paid up share capital of Rs 1 crore or more. Additional fees is charged if the form is not filed within 180 days from date of incorporation of the Company.

Consequences of Non-compliance of Section 10A

The consequences as provided in the section are:

1. That the company shall be liable to a penalty of Rs 50,000 and every officer who is in default shall be liable to a penalty of Rs 1000 for each day during which the default continues but not exceeding Rs 100,000;

2. That the registrar may initiate action for removal of name of company from the register of company where no declaration has been filed within period of 180 days and he has reasonable cause to believe that the company is not carrying on any business or operations.

Other consequences of Non-compliance of Section 10A

1. Company cannot exercise its borrowing powers and not accept loan from any one before completing the filing of Form INC 20A

2.  Company won’t be able to file forms for change of capital like SH-7, PAS-3 or for creation of charge or even MGT-14

3. Contracts and agreements, if any entered into by the Company shall not be valid

4. Adjudication pursuant to section 454 of the Act

In short, Company cannot actually start the business before the receipt of subscriber’s money and filing of the same with the respective Registrar of Companies.

Orders & Penalties

Some recent order and penalties as imposed by respective ROC’s is compiled

[The following is collected from the Orders passed by the various ROC which are based on facts particular to each case and the intent is not to misguide as to the maximum/ minimum amount of penalty or and is presented here to bring forward the information for your knowledge and awareness purposes only.]

Practical problems and dilemma’s

Sub 4 of Section 56 talks about the delivery of the certificates of securities that are allotted, transferred or transmitted. Accordingly, as per its clause (a), the share certificates are to be delivered to the subscribers to the memorandum within 2 months from the date of incorporation. This creates a confusion as there exist a contrast between the timeline of filing of Form INC 20A pursuant to receipt of money an issue of certificates.

It is well established fact that certificates can only be issued after the receipt of money from the subscribers and the law itself is providing for around 180 days for the subscribers to deposit the amount equivalent to the shares subscribed. Whereas in total conflict to this is the provision for issue of certificate whereby the same shall be issued maximum within 2 months from date of incorporation.

If we go by the strict interpretation of law, the subscribers actually less than 2 months to deposit the subscribers’ amount. This would allow the company to comply with both the provisions of law.

Alternatively, if we go by the rule of liberal construction, we might go by the assumption that the share certificates may be issued within 2 months from the receipt of money provided the money is received and filed within 180 days of incorporation. However, this would lead to a non-compliance of section 56(4)(a) which might even lead to a penalty on Company and officers in default amounting to Rs 50,000.

Since there is no present jurisprudence to shed some light on the contrast existing between the provisions it is best advised to follow a strict interpretation of statute to avoid levy of any penalty or non-compliance of law. After all it is only rationale to pick a common ground that allows you to comply two provisions instead of one.

Conclusion

The founders, promoters, directors and officers of the Company should be mindful of the legal maxim ‘ignorantia juris non excusat’ roughly translated to ‘ignorance of law is no excuse’ and must always ensure complete compliance in letter and in spirit of all the applicable laws and regulations on the Company and shall at all times ensure its timely compliance. Only a well governed business can someday become a well grown business.

[1] https://www.mca.gov.in/bin/dms/getdocument?mds=NK4yUroy8duR5yxHFkJ6UQ%253D%253D&type=open

[2]https://www.mca.gov.in/bin/dms/getdocument?mds=GY%252BBCgvcIyT0v6Vf1khZhA%253D%253D&type=open