Certificate of Commencement of Business: Procedural Analysis

Dear Members,

This Article is in continuation to my previous Article titled “PROCEDURES FOR INCORPORATION AND REGISTRATION OF COMPANIES”. Kindly excuse me if you fine any typing error.

The date of incorporation of a company may not be the date of commencement of business. A private company and a public limited company not having share capital are not required to comply with any other formalities and may commence its business activities immediately after obtaining the certificate of incorporation from the concerned Registrar of Companies.

A private limited company, which has converted into public limited company, is also not required to obtain certificate of commencement of business.

Requirement for obtaining commencement of business certificate

A public limited company having share capital cannot commence business until it has obtained the certificate to commence business (COB) from the concerned Registrar of Companies.

Normally a new company will comply with the required formalities and obtain the commencement of business certificate (COB) from the Registrar as soon as possible after formation because it cannot commence any business activities or exercise its borrowing powers without it.

ACTION REQUIRED ON THE PART OF THE COMPANY TO OBTAIN COB (Refer Section 149)

1.      WHERE A COMPANY NOT ISSUES PROSPECTUS FOR PUBLIC SUBSCRIPTION

For obtaining a certificate to commence business, the following actions are required to be taken:—

(i)  the company shall file with the Registrar a statement in lieu of prospectus (SLP) (signed by every director) electronically at the MCA portal in the form given in Schedule III to Act together with the E-Form 62 and shall pay the prescribed fee by online or offline as per Schedule X of the Companies Act, 1956.

(ii) the directors should pay the value of the shares to the extent money is payable in cash with application/allotment;

(iii) a duly certified declaration shall be filed electronically at the MCA portal in the E-Form 20 and a stamped copy shall be simultaneously filed with the Registrar signed by a director/secretary or by secretary in practice where there is no secretary, to the effect that the requirements of section 149(2) have been complied with.

(iv) the company shall not allot any share or debenture at least for three days after filing of statement in lieu of prospectus with the Registrar. [Section 70(1)];

(v) the company shall pay the prescribed filing fee by online or offline under Schedule X on SLP and on e-Form 20 to the Registrar of Companies.

The Registrar of Companies shall then issue the requisite certificate of commencement of business.

NATURE OF ABOVE REQUIREMENTS

It was decided in the case of  Malabar Iron & Steel Works Ltd. v Registrar of Companies (1963) that COB cannot be issued if the company has not complied with the provisions of section 149(1), even though it has issued a SLP u/s 70.

2.      WHERE A COMPANY ISSUES PROSPECTUS FOR PUBLIC SUBSCRIPTION

Where a company issues a prospectus immediately after its formation, it need not file a statement in lieu of prospectus. The following points have to be ensured in this connection:—

(i) shares arranging the amount at least equal to the amount of minimum subscription under section 69 have been allotted. [Section 149(1)(a)]

(ii) every director has paid to the company, in respect of shares taken or contracted to be taken by them subject to payment in cash, a sum equal to at least the amount payable on application and allotment on the shares offered to public for subscription. [Section 149(1)(b)];

(iii) application has to be made to the recognised stock exchange for obtaining permission for dealing in shares/debentures;

(iv) filing of following documents electronically with the ROC is necessary:--

(a) prospectus;

(b) E-Form 19 duly certified by a director/secretary or by secretary in whole time practice where there is no secretary declaring that all the conditions as stated in (i) to (iii), above have been duly fulfilled and stamped copy shall be physically delivered simultaneously to the Registrar.

(v) payment of prescribed filing fee under Schedule X on prospectus and E-Form 19 by online or off line system.

The Registrar of Companies shall thereupon issue the requisite certificate of commencement of business.

Certificate to commence business is conclusive evidence

The Registrar, on perusal of the declaration in e-Form 19 or 20 and the statement in lieu of prospectus, as may be applicable, shall certify that the company is entitled to commence business and to exercise borrowing powers. The certificate shall be the conclusive evidence that the company is entitled to commence its business. [ Refer Section 149(6)]

STATUS OF CONTRACTS

Status of Contracts made before or after incorporation but before obtaining the COB

Only after obtaining the certificate of incorporation a public company can enter into binding contracts. After obtaining certificate of incorporation but before obtaining certificate for commencement of business, the company may, however, enter into PROVISIONAL CONTRACTS subject to the condition that they will be binding only after the company has obtained the commencement certificate.

It was decided in the case of Merchants Ltd., Lahore, In re (1932) and  Ambica Textiles Ltd., In re (1950) that the liabilities incurred by company before it is entitled to commence business, are not binding and shareholders cannot be asked to contribute towards them in event of winding up.

Consequences on commencing business before obtaining certificate to commence business

If any public company commences business or exercises borrowing powers without obtaining the commencement certificate, every person who is responsible for the contravention shall be punishable with fine of Rs. 5,000 for every day during which the contravention continues, under sub-sections (2A) and (6) of section 149 of the Companies Act, 1956.

Also refer 433(c) which provides that a company may be wound up by the High Court (Tribunal) if it does not commence business within a year from its incorporation or suspends its business activities for a whole year.

PROCEDURE FOR OBTAINING CERTIFICATE OF COMMENCEMENT OF BUSINESS

In order to obtain COB, a public company shall file the following documents with the Registrar of Companies as desired by section 149:—

(1) A prospectus/statement in lieu of prospectus as the case may be along with following documents:—

(a) list of the members of the company with their shareholdings;

(b) confirmation for paid up share capital to the extent of Rs. 5,00,000 and proof thereof, viz copy of bank statement etc.

(c) list of Directors, Manager, Secretary, Auditors and changes among them, if any;

(d) consent of the Auditors to include their name in the Prospectus/Statement in lieu of Prospectus;

(e) copy of the agreements for appointment of Managing Director, Underwriters, contracts entered into by the promoters before incorporation of the company, etc. if any;

(f)  printed and certified copy of the Memorandum and Articles of Association of the company;

(g) details of the preliminary expenses incurred by the company;

(h) power of attorney to make corrections in the Prospectus/Statement in lieu of prospectus and to obtain certificate for commencement of business from the Registrar of Companies;

(i)  certified copy of the resolution passed by the Board for approval of prospectus /statement in lieu of prospectus for filing with the Registrar.

(2) A duly verified declaration on stamp paper that provisions of section 149 of the Act have been complied with, by one of the directors or secretary or, where there is no secretary, by  a secretary in whole time practice, in e-Form 19/20 as the case may be.,

SAMPLE BOARD RESOLUTION FOR THE ADOPTION OF S.L.P.

“RESOLVED THAT the draft of the Statement in Lieu of Prospectus made in accordance with the provisions of Schedule III of the Companies Act, 1956, Parts I, II and III, as placed before the Board duly initialed by the Chairman for the purpose of identification be and is hereby approved and that the same be signed by all the directors of the company and delivered to the Registrar of Companies, Uttar Pradesh for obtaining the Certificate of Commencement of Business.

FURTHER RESOLVED THAT Mr. Rajesh Gupta, Director of the Company be and is hereby authorised to sign and file e-Form 20 to the Registrar of Companies, Uttar Pradesh.

FURTHER RESOLVED THAT the directors of the company be and is hereby authorised to give Power of Attorney in favour of Mr. Rajesh Gupta, the Director and/or Mr. Neeraj Mehra, Advocate to do all such acts, deeds and things for filing of the above said Statement in Lieu of Prospectus and to make any additions, corrections, alterations, etc. for and on behalf of the Board of directors of the company as may be required or directed by the Registrar of Companies for taking on record and to issue the certificate for Commencement of Business.”