Commencement of Business

So a company limited by guarantee without a share capital is outside section 10A altogether, and so is a company incorporated before the 2019 Amendment came into force. Both limits are on the face of the section and both are worth stating, because they are the easiest marks in the topic.

The two conditions: section 10A(1)

A company to which the section applies shall not commence any business or exercise any borrowing powers unless:

• (a) a declaration is filed by a director within a period of one hundred and eighty days of the date of incorporation of the company, in such form and verified in such manner as may be prescribed, 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; and
• (b) the company has filed with the Registrar a verification of its registered office as provided in sub-section (2) of section 12.

Both, because the clauses are joined by "and". A company that has taken the subscription money but not verified its office may not trade, and neither may one that has verified its office but not collected the money.

Take the wording of (a) apart, because every phrase in it does work:

• "a declaration is filed by a director": any one director will do, and it must be a director, not the auditor or the company secretary.
• "within a period of one hundred and eighty days of the date of incorporation": the clock runs from the date on the certificate under section 9, not from the date of filing.
• "every subscriber": not most of them, and not the majority in value.
• "has paid the value of the shares agreed to be taken by him": the whole of what he agreed to take under section 4(1)(e)(ii), not a part.
• "on the date of making of such declaration": the payment must be complete when the declaration is made, so a director cannot certify an intention to pay.

And note what is not there: no minimum paid-up capital. Section 10A does not require any particular amount. It requires that whatever was agreed has actually been paid. A company whose subscribers agreed to take one share of ten rupees each satisfies section 10A when those rupees are in.

The penalty: section 10A(2)

If any default is made in complying with the requirements of this section:

• the company shall be liable to a penalty of fifty thousand rupees; and
• every officer who is in default shall be liable to a penalty of one thousand rupees for each day during which the default continues, but not exceeding an amount of one lakh rupees.

Two features to note. The company's penalty is a flat fifty thousand rupees, while the officer's is a daily one thousand rupees. And the officer's exposure is capped at one lakh rupees, which is reached after one hundred days of default.

The striking off consequence: section 10A(3)

This is the sub-section that gives the section teeth, and it did not exist in the old section 11.

Where no declaration has been filed with the Registrar under clause (a) of sub-section (1) within a period of one hundred and eighty days of the date of incorporation, and the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may, without prejudice to the provisions of sub-section (2), initiate action for the removal of the name of the company from the register of companies under Chapter XVIII.

Three conditions before the Registrar may move:

1. No declaration has been filed within one hundred and eighty days; and
2. The Registrar has reasonable cause to believe that the company is not carrying on any business or operations; and
3. He acts without prejudice to sub-section (2), so the penalties still run.

The second condition is a genuine safeguard. Failure to file is not by itself enough; the Registrar must also have reason to think the company is dormant in fact. A trading company that simply forgot to file faces the penalty, not extinction.

A worked example

Kolhapur Foundry Private Limited is incorporated on 12 January 2027. Its two subscribers, Vikas and Sameena, each agreed in the memorandum to take five thousand shares of ten rupees, so fifty thousand rupees each.

The clock. One hundred and eighty days from 12 January 2027 runs to 11 July 2027.

What must happen by then. Vikas and Sameena must actually pay their fifty thousand rupees each, and a director must file a declaration with the Registrar stating that every subscriber has paid the value of the shares agreed to be taken, as at the date of the declaration. Separately, the company must have filed verification of its registered office under section 12(2), which section 12(2) itself requires within thirty days of incorporation.

Until both are filed, the company may not commence any business or exercise any borrowing powers. So it cannot sign a supply contract as a trading company and cannot take the working capital loan the bank has offered.

Suppose Sameena pays only thirty thousand rupees. A director cannot make the declaration, because it must state that every subscriber has paid the value of the shares agreed to be taken. A declaration made anyway is a false particular filed with the Registrar and exposes the director to section 447 through the general machinery of the Act.

Suppose nothing is filed by 11 July 2027 and the company has in fact never traded. Two things follow. Under section 10A(2) the company incurs a penalty of fifty thousand rupees and every officer in default incurs one thousand rupees a day, capped at one lakh rupees. And under section 10A(3), since no declaration was filed within one hundred and eighty days and the Registrar has reasonable cause to believe the company is not carrying on any business or operations, he may initiate action to remove its name from the register under Chapter XVIII.

Change one fact. Suppose the company had been trading vigorously throughout but its director simply overlooked the filing. The penalties under section 10A(2) still apply, but section 10A(3) does not, because the Registrar cannot have reasonable cause to believe it is not carrying on business.

Change another. Suppose Kolhapur Foundry had been a company limited by guarantee without a share capital. Section 10A would not apply to it at all, because it applies only to a company having a share capital.

Distinctions that carry marks

What this does NOT mean

It does not mean the company does not exist until the declaration is filed. It exists from the date on the certificate under section 9. What it may not do is commence business or exercise borrowing powers.

It does not mean every company must file it. Only a company with a share capital, incorporated after the 2019 Amendment.

It does not mean there is a minimum capital. There is none, in this section or anywhere else, since 29 May 2015.

It does not mean failing to file destroys the company. Section 10A(3) requires the Registrar to have reasonable cause to believe the company is not carrying on business as well.

And it does not mean section 11 is the answer. Section 11 is printed in the Act as omitted, in square brackets, with no text under it. Citing it is citing a provision that has not existed since 29 May 2015.

Quick revision

• Applies to: a company incorporated after the Companies (Amendment) Act 2019 and having a share capital.
• Two conditions, section 10A(1): (a) a declaration by a director within one hundred and eighty days of incorporation, filed with the Registrar, that every subscriber has paid the value of the shares agreed to be taken, as at the date of the declaration; and (b) verification of the registered office filed under section 12(2). Both.
• Prohibition: may not commence any business or exercise any borrowing powers.
• Penalty, 10A(2): company fifty thousand rupees; every officer in default one thousand rupees per day, maximum one lakh rupees.
• 10A(3): no declaration in one hundred and eighty days plus reasonable cause to believe the company is not carrying on business or operations equals action to strike off under Chapter XVIII, without prejudice to the penalty.
• Section 11 is OMITTED, with effect from 29 May 2015.

Test yourself

1. Which section governs commencement of business, and what happened to section 11? Section 10A, inserted by the Companies (Amendment) Act 2019. Section 11 was omitted by the Companies (Amendment) Act 2015 with effect from 29 May 2015, and the Act prints it as omitted, in square brackets, with no text under it.

2. What are the two conditions in section 10A(1)? A declaration filed by a director with the Registrar within one hundred and eighty days of incorporation that every subscriber has paid the value of the shares agreed to be taken by him as at the date of the declaration; and the filing of verification of the registered office under section 12(2). Both are required.

3. What may a company not do until they are satisfied? It may not commence any business or exercise any borrowing powers: section 10A(1).

4. State the penalties. The company, fifty thousand rupees. Every officer in default, one thousand rupees for each day the default continues, subject to a maximum of one lakh rupees: section 10A(2).

5. When may the Registrar move to strike the company off? Where no declaration has been filed within one hundred and eighty days of incorporation and he has reasonable cause to believe the company is not carrying on any business or operations. He may then initiate action under Chapter XVIII, without prejudice to the penalties: section 10A(3).

6. Does section 10A apply to a company limited by guarantee with no share capital? No. The section applies only to a company having a share capital, and only to one incorporated after the commencement of the Companies (Amendment) Act 2019.