There are certain rules and regulations to be followed while establishing any legal venture, it gives an entity a legal identity. Establishing a business in any country requires diligent acknowledgment and adherence to the prevailing laws. In India, the Ministry of Corporate Affairs (‘the Ministry’) is the primary regulator of the corporate sector and these regulations are continuously modified for better control and governance.
The Ministry vide an ordinance dated 21st February, 2019 (The Companies (Second Amendment) Ordinance, 2019), reintroduced the concept of Commencement of Business. Such a provision originally existed under Section 11 of the Companies Act, 2013, which was later on omitted vide the Companies (Amendment) Act, 2015 to cater ease of doing business for newly incorporated entities.
Tracking The Change:
Requirement under the old Act: The provision of obtaining a certificate for commencement of business was applicable only on public Companies (Section 149 of the Companies Act, 1956). Public Companies could commence their business only after obtaining a Certificate of commencement of business from their respective Registrar.
The Companies Act, 2013: On emergence of the Companies Act, 2013 (effective from 1st April, 2014), Section 11 of the Act mandated every newly incorporated company, whether private or public, to file a ‘Declaration’ with the relevant Registrar before it commenced any business. However, this requirement was done away with on 26th May, 2015 when the Ministry brought in the necessary amendments (Companies (Amendment) Act, 2015) aiming to promote ease of doing business. As a result, the provision of filing a declaration before commencement of a business was eliminated.
The Companies (Amendment) Ordinance, 2018: In the current scenario, the Ministry has re-introduced a section for filing of a declaration before commencement of business pursuant to Companies (Amendment) Ordinance, 2018.
Citing The Change:
- As per Section 10A, every Company, incorporated after the date of the ordinance i.e. 2nd November, 2018, is obliged to file a declaration in E-Form 20A with the Registrar of Companies within a period of 180 days from the date of incorporation declaring that the Company has received the entire subscription money from its subscribers to the Memorandum and has filed a Form INC-22 for verification of its registered office.
- This provision is applicable to all newly incorporated Companies (incorporated after 2nd November, 2018) having a share capital.
- It is pertinent to note that a Company cannot commence its business or exercise any borrowing power unless a declaration has been filed.
- After filing a declaration, ROC shall take note of the same although no certificate shall be issued for the same.
- Companies are mandated to attach a proof that it has received the subscription amount from the subscribers.
*Companies can attach a copy of bank statement as a proof.
- In case of failure of filing Form 20A with the ROC, Company shall be liable for penalty of 50,000/- and every officer shall be liable to penalty of Rs. 1,000/- for each day till the default continues subject to maximum amount of Rs. 1,00,000/-.
- Non-compliance of the Section could be a ground for striking-off the Company under Section 248 of the Companies Act, 2013.
Why The Change:
The purpose of re-introducing the old law is to identify the dummy Companies and this shall also assist Ministry in early identification and strike off of defunct Companies.
The provision for making declaration before commencement of business was abolished by the Companies (Amendment) Act, 2015. The aim was to facilitate newly incorporated Companies by easing the norms for incorporating a Company and to promote the corporate form of business organization. Pursuant to this omission, it was noticed that this relaxation was misused by many of the corporate entities, the Companies were formed only for the purpose of circulating money.
Just as one bad fish spoils the entire pond, this was a much needed step on the part of Government to curb such malpractices. Thus, on notice of any such unethical and illegal ventures, the ROC can suo-moto strike off the Companies formed with mala fide intentions.