The Confusion Surrounding Commencement of Business: decoding the provisions of sections 10A and 248 of the Companies Act 2013 and Rule 23A of the Companies (Incorporation) Rules 2014 in light of the power of the registrar to remove the name of the companies from the register of companies
Introduction:
The provisions relating to the commencement of business by a company in the Companies Act 2013 are not free from doubt. The main issue is that if a “Declaration of Commencement of Business” is already filed under Section 10A(1)(a), the first ground of strike-off under Section 248(1)(a) appears to lose its relevance in its entirety. Simply put, if a company has declared that it has commenced its business within 180 days, it appears absurd to say that a strike-off action can be initiated for the non-commencement of business within one year. Even in the event of non-compliance with Section 10A(1)(a), Section 248(1)(a) does not make any sense, as the correct provision based on which a strike-off action can be initiated is 248(1)(d). Having regard to these issues, this paper attempts to decode the provisions of Sections 10A & 248 of the Companies Act 2013 and Rule 23A of the Companies (Incorporation) Rules 2014 to understand the meaning of the term “commencement of business” and to identify absurdity, if any, which exists in these provisions. The paper also draws a distinction between the declaration made under Section 10A and the commencement of business and holds that the incorrect naming of Rule 23A and Form INC-20A is the main culprit of the confusion.
Analyzing the Provisions: Sections 10A & 248 of the Companies Act 2013 and Rule 23A of the Companies (Incorporation) Rules 2014
As per Section 10A(1)(a) of the Companies Act 2013, “a company incorporated after the commencement of the Companies (Amendment) Act, 2019 and having a share capital is prohibited from commencing any business or exercising any borrowing powers unless it has filed a declaration within one hundred eighty days of the date of its incorporation 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 making of such declaration.” Accordingly, the said declaration should ideally operate as an authorisation to the company that, given its compliance with the provisions of Section 10A(1)(a), the company can now commence its business. As per Rule 23A of the Companies (Incorporation) Rules 2014, the declaration under Section 10A(1)(a) is filed in Form No. INC-20A.
Shaping the Interpretation: Distinguishing Declaration and Business Commencement
Further, Rule 23A of the Companies (Incorporation) Rules 2014 is titled “Declaration at the time of commencement of business” and the sub-heading of Form INC-20A provides that it is a “Declaration of commencement of business.” Both these terms taken together indicate that filing of Form No. INC-20A shall mean that the company has commenced its business at the time of making the declaration. However, such an understanding goes against the provisions of Section 10A(1)(a) of the Companies Act 2013 and does away with the line of demarcation between the declaration and commencement of the business, which is established by the provisions of Section 10A(1)(a).
Unfortunately, the term “commencement of business” has not been defined either in the Companies Act 1956, the Companies Act 2013, or the Companies (Incorporation) Rules 2014. A search of the judgements relevant to the scope of this paper also led to nowhere, as most of the cases that made a reference to Section 248(1) and discussed the said term did so either in relation to the issues concerning Section 248(1)(c) or in relation to the issues that are beyond the scope of this paper. The placitum of the cases such as Bhagavan Das Dhananjaya Das vs Union Of India (2018) 6 MLJ 704, Agd Private Limited vs Registrar Of Companies (CRP (NPD) No. 1476 of 2018), and The Future Management & Consultancy Pvt Ltd vs M/S.Lancor Holdings Limited (CS No. 630 of 2011) indicate that by commencing its business, a company starts carrying on business or operations; however, they cannot be relied upon.
In such a scenario, the only option left is to interpret the relevant provisions of the Companies Act 2013. Starting with the provisions of Section 10A(3), it says that as a consequence of the non-compliance of Section 10A(1)(a) of the Companies Act 2013, and where “the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, among others, initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.” Thus, the Registrar shall not only take into account the failure to make the declaration but he is also mandated to consider if the company is carrying on any business or operations. It means that the declaration filed under Section 10A(1)(a) by itself is not a piece of evidence that a company has commenced its business. Rather, it is merely filed for the purpose of the information that “every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration.” Subsequent to making the declaration, the company becomes eligible to commence any business or exercise any borrowing powers.
Now, it is important to discuss the provisions of Section 248(1)(a) and 248(1)(d). Section 248(1)(a) provides that where the Registrar has reasonable cause to believe that “a company has failed to commence its business within one year of its incorporation”, he may remove the name of the company from the register of the companies. On the other hand, Section 248(1)(d), says that if “the subscribers to the memorandum have not paid the subscription which they had undertaken to pay at the time of incorporation of a company and a declaration to this effect has not been filed within one hundred and eighty days of its incorporation under sub¬-section (1) of section 10A,” the Registrar may remove the name of the company.
Considering the fact that non-compliance with the provisions of Section 10A(1)(a) is specifically dealt with under Section 248(1)(d), which does not mention the term commencement of business, the distinction between the declaration under Section 10A(1)(a) and commencement of business under Section 248(1)(a) becomes more prominent. In other words, the failure to make a declaration is dealt with separately under the provisions of Section 248(1)(d) while the failure to commence the business or failure to start “carrying on any business or operations” within one year of incorporation is dealt with under Section 248(1)(a) of the Companies Act 2013. The commencement of business for the purpose of Section 248(1)(a) of the Companies Act 2013 is, therefore, nothing but the first instance of a newly incorporated company carrying on any business or operations in pursuance of its objects.
Now, going back to Section 10A(1)(a) of the Companies Act 2013 and taking the declaration filed under Rule 23A of the Companies (Incorporation) Rules 2014 as a “declaration of commencement of business”, it appears that if a company made the said declaration, it shall be free from the ambit of Section 248(1)(a). Conversely, if the declaration in Form No. INC-20A is not filed, the Registrar shall have the discretion to remove the name of the company from the register of the companies. However, as discussed in the preceding paragraphs, non-compliance with Section 10A(1)(a) is already dealt with under Section 248(1)(d). Accordingly, the entire existence of Section 248(1)(a) of the Companies Act 2013 becomes questionable, particularly when the declaration under Section 10A(1)(a) is seen as a “declaration of commencement of business” without distinguishing it from the actual start of or carrying on of any business or operations.
This is mainly because there is no point in providing a ground of strike-off which is similar to that of Section 248(1)(d) with rather a larger timeframe for the Registrar to exercise his powers. If Form No. INC-20A is not filed, the action lies under Section 248(1)(d) and not under Section 248(1)(a), and if it is filed, the Registrar loses his power under both Sections 248(1)(a) and 248(1)(d). Thus, in both circumstances the provisions of Section 248(1)(a) become irrelevant. The line of demarcation that is carefully drawn between the declaration under Section 10A(1)(a) and the term “commencement of business,” therefore, fades away because Rule 23A apparently makes commencement of business relevant for both Sections 248(1)(a) and 248(1)(d) of the Companies Act 2013. Having regard to the same, the main culprit is Rule 23A of the Companies (Incorporation) Rules 2014. Its heading taken together with the sub-heading of Form No. INC 20A makes it look as if a company has commenced its business as of the date of making the declaration, which is an incorrect understanding of the provisions of Sections 10A and 248(1) of the Companies Act 2013.
Conclusion: Clearing the Confusion Surrounding the Term “Commencement of Business”
In conclusion, the term “commencement of business” appearing under Section 248(1)(a) is nothing but the first instance of a newly incorporated company carrying on any business or operations in pursuance of its objects. The provisions of Sections 10A(1)(a) and 248(1)(a) and 248(1)(d) are all in harmony and suit the said interpretation. Further, the main reason for the confusion is Rule 23A of the Companies (Incorporation) Rules 2014 which is titled “Declaration at the time of commencement of business.” Read together with the sub-heading of Form INC-20A, “Declaration of commencement of business,” it indicates that filing of Form No. INC-20A shall mean that the company has commenced its business at the time of making the declaration, which goes against the provisions of the Companies Act 2013. In reality, the declaration under Section 10A(1)(a) operates as an authorisation to the company that, given its compliance with the provisions of Section 10A(1)(a), the company can now commence its business. The filing of the declaration is not the commencement of the business per se.
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Disclaimer: This article provides an interpretation of the provisions of the Companies Act 2013 and the Companies (Incorporation) Rules 2014. The interpretation and application of these provisions can be subject to legal nuances, and thus, it is always advisable to seek legal advice from professionals for company-specific matters. For further discussion on the topic, feel free to reach out at [email protected].
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thanks for valuable information
Thanks, Kusum.