Position of Subscription Money Not Paid in Balance Sheet of Company & under various provisions of Companies Act, 2013

In case of newly incorporated company, situation may occur when subscribers to the Memorandum of Association (‘MOA’) fails to pay subscription money as agreed by them in MOA. Earlier there was no time limit prescribed in the Companies Act, 2013 (the ‘Act, 2013’) for depositing the subscription money by the subscribers to the Company. As per the recent amendment, a Company which has been incorporated on or after 02 November 2018, shall within 180 days of incorporation required to file the declaration by the director with the Registrar of Companies (‘ROC’) stating that every Subscriber to the Memorandum has paid the value of shares taken by them.

As per Section 3(1) of the Companies Act, 2013, “a company may be formed for nay lawful purpose by-

(a) Seven or more person, where the company to be formed is to be a Public Company;

(b) Two or more person, where the company is to be formed is to be a Private Company; or

(c) One person, where the company to be formed is to be One Person Company that is to say, a Private Company:

by subscribing their names or his name to memorandum and complying with the requirements of this Act, in respect of registration.”

The minimum paid-up share capital requirement of Rs. 100,000 (in case of a Private Company) and Rs. 500,000 (in case of a Public Company) under the Act, 2013 has been done away by Companies (Amendment) Act, 2015 w.e.f. 29th May, 2015. Accordingly, no minimum paid-up capital requirements will now apply for incorporating private as well as public companies in India.

If any entity has been formed for the lawful purpose it requires capital to carry out the business. Such Capital is infused by the Individual or Corporates by subscribing the shares of the entity, such shares have a nominal value which is to be paid by the subscriber as “Subscription Money”. These persons are termed as “Subscribers”. Subscribers are also considered as first shareholders of the company and later on members of the company.

‘Subscribers’ are those persons whose name is entered in MOA and by signing the MOA they are giving consent to take some number of shares of the company by contributing capital to the entity. It is to be noted that any person who is competent to contract can be a subscriber. A company being a legal person can subscribe. A partnership not being a legal person cannot do so. In this case an individual partner must subscribe. Signing of MOA by subscribers is a contract with the company and subscription money not received from the subscriber then it will be considered as breach of contract by the subscriber and will attract civil dispute for breach of contract.

The ‘liability of each subscriber’ is equal to the total amount due on the shares subscribed for by him. Each subscriber is liable to pay to the company the full amount of the shares for which he has subscribed when a call to pay up is made on him by the directors or on the date or dates fixed for payment.

The term “Subscription Money” refers to that amount where subscriber is willing to subscribe shares of the company at a face value and need to deposits the amount in bank of the company. There is no prohibition/restriction under the Act, 2013 for receiving the subscription money in cash (i.e. not through account payee cheque or other banking channel). However, the Company and/or subscribers have to comply with the provisions of the Income Tax Act with regard to cash transaction.

Deemed Allotment.

In case of incorporation of new company, the shares are deemed to be allotted on the date of incorporation of the Company and subscription amount is received subsequently.

Time limit for depositing the Subscription Money.

In case of a newly incorporated company, the recent amendments [via Companies (Amendment) Ordinance, 2018 dated 02.11.2018] specify that the subscribers are mandatorily required to bring in subscription money within 180 days from the date of incorporation and the Directors are required to file a declaration to this effect with the Registrar [Section 10A of the Companies Act, 2013].

It is submitted that situation may occur when subscribers to the Memorandum of Association (‘MOA’) fails to pay subscription money as agreed by them in MOA. In this situation, the various provisions of the Act, 2013 have to deal for different aspects.

Subscribers are Members.

The definition of “Member” is given under Section 2(55) of the Act, 2013 in relation to a company, means-

(i) The subscriber to the memorandum of the company who shall be 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.

(ii) Every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

(iii) Every person holding shares of the company and whose name is entered as a

beneficial owner in the records of a depository.”

It is clear from the definition that subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not.

Register of Member.

Pursuant to Section 88 of the Act, 2013 ‘Register of Member’ every company shall keep and maintain a register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India.

It is to be noted that as subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not, therefore name of the subscriber as a member of the company will be entered in the register of Member.

Issuance of share certificates.

Every company pursuant to Section 56 of the Act, 2013, shall deliver the certificates of all securities allotted within a period of 2 months from the date of incorporation, in the case of subscribers to the memorandum.

As per Section 56 of the Act, 2013, company have to issue share certificate within a period of 2 months of incorporation of the company irrespective of the fact that subscription money is received or not.

Whether subscription money not received, shall be included in the share capital of the Company?

As per Section 2(50) of the Act, 2013, “Issued capital” means such capital as the company issues from time to time for subscription.

As per Section 2(86) of the Act, 2013, “Subscribed capital” means such part of capital which is for the time being subscribed by the members of a company.

As per Section 2(64) of the Act, 2013, “Paid up Share Capital” or “share Capital Paid-up” means 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.”

From the above definitions, it is clear that subscription money not paid, shall be included in the issued capital and subscribed capital. However, in respect of the paid-up share capital, it is submitted that the definition of paid-sup share capital can be seen in two parts.

  • One, aggregate amount received and credited as paid-up in respect of shares issued;
  • Second, any amount credited as paid-up in respect of shares of the company.

At second instance paid up share capital means ‘any amount credit as paid up.’ In this situation, company can credit the subscription money not received as paid up in the Balance Sheet of the company, which is still receivable

Quorum in the Meeting.

Pursuant to provisions of Section 103 of the Act, 2013, members personally present shall be the quorum for a meeting of the company. As we have already mentioned that subscriber of MOA will be member of Company irrespective of the fact that subscription money is received or not. Therefore, such subscribers will be count for the quorum under Section 103 of the Act, 2013.

Restriction on Voting Rights.

As per Section 106(1) of the Act, 2013, “Notwithstanding anything contained in the Act, the articles of a company may provide that no members shall exercise any voting rights in respect of any shares registered in his name on which any calls or other sums presently payable by him have not been paid, or in regard to which the company has exercised any right of lien.”

In view of the above, articles of a company should be checked first whether it contain any restriction clause that a member shall not exercise any voting right in case of any sums payable by him have not been paid to the Company. If such clause is existing then such member shall not get right to vote in the meeting. But if there is no such clause in the article of a company then member will get the right to vote in meeting.

Transfer of subscribed shares on which subscription money is not paid.

As per Section 56(3) of the Act, 2013, “Where an application is made by the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the company gives the notice of the application, in such manner as may be prescribed, to the transferee and the transferee gives no objection to the transfer within two weeks from the receipt of notice.”

Please note that pursuant to the provisions of Section 56(3) of the Act, 2013, the Company cannot restrict the transfer of such shares (subscribed shares on which subscription money is not paid), as the transferor is the registered owner of those shares. However, his debt to the company cannot be transferred in favour of any other person.

Subscription money not paid- position in Balance sheet of the company.

In case of where subscription money not received has been credited as paid-up, pursuant to the provision of Section 2(64) of the Act, 2013, in the Balance Sheet of the company, then as per Schedule III of the Act, 2013 the debts due from the subscriber should be appropriately disclosed as an asset in the balance sheet.

Crux of above various provisions:

1. As per Section 2(55) of the Act, 2013, subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not.

2. As per Section 56 of the Act, 2013, company have to issue share certificate within a period of 2 months of incorporation of the company irrespective of the fact that subscription money is received or not.

3. As per Section 2(64) of the Act, 2013, subscription money not received shall be credited as paid-up in the Balance Sheet of the company.

4. As per Section 2(55) & 88 of the Act, 2013, as subscriber will become a member on the registration of the company irrespective of the fact that subscription money is received or not, therefore name of the subscriber as a member of the company will be entered in the register of Member.

5. Subscriber of MOA will be member of Company irrespective of the fact that subscription money is received or not. Therefore, such subscribers will be count for the quorum under Section 103 of the Act, 2013.

6. If article do not contain any restriction clause that a member shall not exercise any voting right in case of any sums payable by him have not been paid to the Company, then member will get the right to vote in meeting.

7. Pursuant to the provisions of Section 56(3) of the Act, 2013, the Company cannot restrict the transfer of such shares (subscribed shares on which subscription money is not paid), as the transferor is the registered owner of those shares.

Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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