As per section 3 of Companies Act, 2013 A company may be formed for any lawful purpose by minimum 7 member in case of public Company, minimum 2 member in case of private Company or one member in case of OPC. The number of shares each subscriber to the memorandum intends to take indicated opposite his name in MOA. By signing of subscriber sheet of MOA they enter into a contract with the Company.
Sometime situation occurs when subscribers to the MOA fails to pay subscription money as agreed by them in MOA. In this article we will discuss what are the compliances to be done by the Company in such situation.
Let’s first understand who can be subscriber or who can’t
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; an individual partner must subscribe.
A person becomes a subscriber by signing the memorandum as a subscriber and at the place intended for that purpose. If a person's name does not appear in the list of subscribers he is not a subscriber even if his signature appears on all the other pages of the memorandum. Arthanari Transports (P.) Ltd. v. K.P. Swami Goundar, (1965) 35 Com Cases 930.
Liability of subscribers
The subscribers of the memorandum of a private or public company need pay nothing to the company on subscription; their undertaking to pay when called upon is sufficient. 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 obligation to pay for the shares subscribed applies even if the subscriber is the nominee of another person.
The liability of each subscriber is equal to the total amount due on the shares subscribed for by him. The liability will not be discharged by his taking a transfer of the shares allotted to any other person nor by the allotment to him of any shares credited as fully paid up to which some other person is entitled. Migotti's case, Re, South Blackpool Hotel Co., (1867) LR 4 Eq 238; Forbes and Judd’s case, Heyford Iron Works Co., (1870) 5 Ch App 270.
Provisions under Companies Act, 2013:
A. Whether the share subscription money is to be paid immediately on the incorporation of the Company?
There is no time period provide under the CA, 2013 for payment of subscription money by the subscribers to the Company. Therefore, we can say that it is not mandatory to pay share subscription money immediately on the incorporation of Company.
Issuance of share certificates
Every company pursuant to section 56(2) shall deliver the certificates of all securities allotted within a period of two months from the date of incorporation, in the case of subscribers to the memorandum.
As per the provision of the section 56 Company have to issue share certificate within a period of 2 months of incorporation of the company. Whether money received or not from the subscribers.
B. Does the paid up capital include
Let’s read the definition of Paid-up Capital
“Paid-up share capital” 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;
Discussion on definition of Paid up Capital:
a. At first instance Paid up capital means ‘amount credited as paid and received as paid up.’ In this situation, Company received the amount and credited the same in balance sheet of the Company as paid up capital.
b. At second instance paid up capital means ‘any amount credit as paid up.’ In this situation Company doesn’t receive the money, money is still receivable but same has been credited in the balance sheet of the Company as paid up capital.
As per the above analyze we can say that paid up capital includes both money received and credited as paid-up or money receivable and credited as paid up.
Let’s discuss the situation:
If a Company after Incorporation doesn’t receive the amount from the subscribers then what will be the situation. There are some questions came in our mind in such Situation:
- Whether such subscriber will be considered as Member.
- Whether the name of such member will be mention in the Register of Member.
- Whether such person will be count for the quorum in the General Meeting.
- Whether such subscriber will get right to vote in the Meeting of the Shareholders.
- Whether Company can issue Share Certificate to them without receipt of Money.
- Whether Subscriber can transfer the shares and authorise new person to make payment to the Company.
- Whether Company can transfer their shares to anyone else.
C. Whether such subscriber will be considered as Member.
As per Section 2(55) “Member”, in relation to a company, means 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.
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.
D. Whether the name of such member will be mention in the Register of Member.
As stated in section 88 ‘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 clear from the extract of Section 88 name of the subscriber as a member of the Company will be entered in the register of Member.
E. Whether such person will be count for the quorum in the General Meeting.
As stated in section 103 in the case of a private company, two members personally present, shall be the quorum for a meeting of the company.
As we discussed above subscriber of MOA will be member of Company irrespective of the fact that subscription money is received or not. Therefore, such person will be count for the quorum under section 103.
F. Whether such subscriber will get right to vote in the Meeting of the Shareholders.
As stated in section 106 the articles of a company may provide that no member shall exercise any voting right 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.
As per the section 106 if there is any clause in the AOA of the Company that a member shall not exercise any voting right in case of any sums payable by him have not been paid to the Company. In this situation such member shall not get right to vote in the Meeting. But if there is no provision in the AOA regarding such situation that Member will get the right to vote in Meeting of shareholders of the Company.
G. Is the payment of subscription money by the first subscribers a pre-condition for issuance of share certificates to him?
As stated in section 56(2) every company shall deliver the certificates of all securities allotted within a period of two months from the date of incorporation, in the case of subscribers to the memorandum.
There is no provision in the act for condition of payment of subscription money by the first subscriber for issuance of share certificate. But there is a provision in the act for the issue of shares within 2 month from the date of incorporation of Company. Therefore, it is concluded that it’s not a precondition on the subscriber to pay subscription money to the Company to get Share Certificates.
H. Whether Company can issue Share Certificate to subscribers without receipt of Money.
Yes, Company has to issue Share Certificate to subscribers irrespective of the fact that subscription money is received or not. Below given are the facts in favor of my statement.
First point in favor: Share Certificate
Every company pursuant to section 56(2) shall deliver the certificates of all securities allotted within a period of two months from the date of incorporation, in the case of subscribers to the memorandum.
Second point in favor: Paid up share Capital
Paid up Capital means ‘any amount credit as paid up.’ In this situation Company doesn’t received the money but same has been credited in the balance sheet of the Company as paid up capital.
Third point in favor: No need of allotment
The Company will neither made allotment or nor file PAS-3 to issue shares to subscriber of MOA. They become member from the date of registration of Company as discussed above.
It is clear from above mentioned four points that Company will issue Share certificates to the subscribers within 60 days of incorporation of Company irrespective of the fact that subscription money is received or not.
I. In case the subscription monies are not received from the first subscribers, how the subscription monies receivable is to be reported in the Balance Sheet? Is it deducted from the paid up capital?
As per revised schedule VI 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.
It is clear that how to represent the transaction in the balance sheet and same will not deduct from the paid up capital.
J. Whether Subscriber can transfer the shares and authorize new person to make payment to the Company.
As per section 56(3) If shares are partly paid up and application made by the transferor then company shall not be registered the transfer, 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.
Therefore, if the shareholder (transferor) made application to Company for transfer of his shares which are shown as fully paid up at the share certificates and standing as debt in the books of the Company. The Company can’t restrict the transfer of such shares, as the transferor is the registered owner of those shares.
He can transfer his shares to anyone but his debt can’t be transfer in favor of any other person. In such situation transferor only will be the debtor of the Company.
K. Whether Company can transfer their shares to anyone else without any approval from the Members in case of non-payment of subscription money.
No Company is not the owner of those shares after issue of share certificates. Only the subscriber (member) will be owner of those shares. Company can’t transfer these shares to anyone else.
L. What is the legal recourse available to the company in case of non-payment of subscription monies by first subscribers?
Subscription of MOA by the subscriber is a contract b/w the subscriber and the Company. In which Company will issue share certificates to the subscriber and in consideration of the same subscriber will make payment to the Company. If company issued share certificates to the subscriber, company has performed its part. But consideration (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.
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