Companies Act Section 10A

Companies Act Section 10A: Commencement of Business and Related Requirements

Introduction

Section 10A of the Companies Act outlines the essential requirements for newly incorporated companies to begin their business activities and exercise borrowing powers. 

Introduced under the Companies (Amendment) Act, 2019, this provision emphasizes the need for companies to follow specific procedures before commencing business or undertaking any financial obligations. 

It mandates certain filings with the Registrar of Companies (RoC) to ensure transparency and accountability in the initial stages of corporate operations. 

In addition to these prerequisites, the section also details penalties for non-compliance and grants the Registrar the authority to take action against companies that fail to meet the requirements.

1. Requirements for the Commencement of Business

The central focus of Section 10A is to ensure that companies meet certain declaration and verification requirements before they can legally begin their business activities or exercise borrowing powers. 

This is particularly important for companies that have been incorporated after the Companies (Amendment) Act, 2019, and it helps prevent fraudulent or inactive companies from being registered without proper oversight.

(a) Declaration of Payment of Share Value

One of the primary conditions that must be fulfilled before a newly incorporated company can start business or borrow money is the filing of a declaration by a director of the company. 

This declaration must be submitted to the Registrar of Companies (RoC) within 180 days from the date of incorporation.

Content of the Declaration: 

The declaration must confirm that all subscribers to the memorandum have paid the value of the shares they agreed to subscribe to at the time of incorporation. 

In other words, the declaration ensures that the shareholders have actually contributed the agreed capital to the company.  

Form and Verification: 

The declaration must be submitted in the prescribed form and must be verified in a manner specified by the Act. 

This verification ensures that the information provided is accurate and truthful.

(b) Verification of Registered Office

In addition to filing the declaration, the company must also file verification of its registered office with the Registrar. 

This requirement is outlined under subsection (2) of Section 12 of the Companies Act, which mandates that companies must establish and verify the physical location of their registered office. 

The registered office is crucial for the company’s communication and legal proceedings.

The verification must confirm that the registered office exists and is operational, and it should be filed within the timeframe specified by the Act.

2. Penalties for Non-Compliance

If the company fails to comply with the requirements of Section 10A, both the company itself and its officers may face significant penalties. 

These penalties are designed to ensure strict adherence to the declaration and verification obligations, thereby preventing the incorporation of companies that are not serious about conducting legitimate business activities.

(a) Penalty for the Company

If the company fails to file the required declaration or verification of registered office within the stipulated timeframe, it shall be liable for a penalty of fifty thousand rupees.

This penalty is levied on the company as a whole for its failure to comply with the statutory requirements before commencing business or exercising borrowing powers.

(b) Penalty for Officers in Default

In addition to the company's liability, every officer who is in default (such as directors or company secretaries) will also be personally liable for non-compliance.

Each officer in default shall be subject to a penalty of one thousand rupees for every day during which the default continues, up to a maximum of one lakh rupees. 

This ensures that officers who are responsible for ensuring compliance cannot escape liability if they fail to fulfill their duties.

3. Actions for Non-Compliance

In cases where a company fails to meet the requirements of Section 10A, the Registrar of Companies has the authority to take specific actions. 

These actions are aimed at ensuring that companies that are not operating in accordance with the law do not remain on the register indefinitely.

(a) Authority of the Registrar

If the required declaration has not been filed with the Registrar within 180 days from the date of incorporation, and if the Registrar has reasonable grounds to believe that the company is not conducting any business or operations, the Registrar may initiate proceedings to remove the company's name from the register of companies.

Grounds for Action: 

The Registrar will assess whether the company is truly inactive or not engaged in legitimate business operations. 

If it is determined that the company is essentially dormant or fraudulent, the Registrar may move forward with the removal process.  

Removal from Register: 

The Registrar may take action under Chapter XVIII of the Companies Act, which deals with the removal of the company's name from the register. 

This process is also referred to as "striking off" the company. 

Once the company's name is struck off, it will no longer be recognized as a legal entity, and it cannot engage in any business activities or enter into legal contracts.

(b) Additional Penalties

The Registrar's action to strike off a company for failure to comply with Section 10A is in addition to any penalties imposed under subsection (2) of the same section. 

This means that the company and its officers could face both financial penalties and the risk of being struck off the register for non-compliance.