Commencement of Company – Company Registration in Madurai

Section 149 of Companies Act, 1956

As section 11 of the 2013 Act corresponds to s. 149 of the 1956 Act with a few modifications in commencement of business therefore the analysis and case law set out below on section 149 of the relevant in interpreting the provisions under section 11 of the 2013 Act to the extent that it is similar to s. 149 of the 1956 Act.

Meaning of “germane” [Explanation to section 149(2A) of Companies Act, 1956]

The Explanation to sub-section (2A) of section 149 of the 1956 Act provides that a company shall be deemed to commence any business only if it commences (i) a new business and (ii) this new business is not ‘germane’ to the existing business. The Act does not define the word ‘germane’. The RANDOM HOUSE DICTIONARY defines ‘germane’ as ‘closely or significantly related; relevant; pertinent’. BLACK’s LAW DICTIONARY, 5th Ed. defines ‘germane’ as ‘in close relationship; appropriate; relative; pertinent’. Therefore passing of a special resolution and filing of the same with the Registrar are necessary only if the business which the company intends to carry on is a new business and it is not germane, i.e. is unrelated to the existing business. Where a contract to start a new business which requires approval under sub-section (2A) of section 149 of the 1956 Act is entered into without complying with the formalities under the sub-section, the contract does not become void but is provisional only, i.e. it does not bind the company until the formalities are complied with. The case law and commentary above will not be applicable to section 11 of the 2013 Act as it does not have a provision corresponding to section 149(2A) of the 1956 Act. The discussion is for academic interest.

Restrictions on commencement of business

To the restrictions already existing, a further restriction under sub-section (1)(c) of section 149 of the 1956 Act on the lines of section 109 (1)(c) of the English Act, 1948 was added, requiring a condition under which there should be no waiver of liability for repayment of any money to applicants for shares or debentures, by reason of failure to apply for or obtain permission for the shares or debentures to be dealt in on a recognized stock exchange. The reason for the addition of the sub-section (1)(c) was: “The addition will prevent companies from commencing business until it has been ascertained that no money is liable to be repaid to applicants for shares or debentures offered for public subscription by reason of failure to obtain permission for the shares or debentures to be dealt in a stock exchange”.  It has to be noted that the language of the section 149 of the 1956 Act was that “the company shall not commence any business”. This would imply that the company shall not be bound by any transactions whatever in the nature of business.

“Commence any business” does not mean merely the business for which the company was started, but any transaction including sale, purchase, etc. But the taking of such preliminary steps as the issuing of prospectus, making of provisional contracts, or allotment of shares or the appointment of experts or technicians will not be considered as “commencement of business”.

The 2013 Act does not provide for additional restrictions upon commencement of business for pursuance of objects other than its main objects. This is a consequence of Section 4 (1)(c) of the 2013 Act which has done away with the division of objects into three heads, including other objects’ as was provided for under the 1956 Act.

Commencement Certificate

The certificate under s. 149 of the 1956 Act is conclusive evidence that a company is entitled to commence business. No distinction can be drawn between the power to commence business and the power to borrow. The company is entitled to do both after the issue of the certificate.  A writ cannot be issued to cancel the commencement certificate of a company under the Companies Act.

Commencement certificate not required by private companies becoming public under Companies Act, 1956

The Department’s Clarification will still hold good under Part IX of the 1956 Act with respect to companies incorporated. However, since s. 165 of the 1956 Act does not find a corresponding position in the 2013 Act, the above clarification will be of academic interest only with respect to section 165 of the 1956 Act.

As far as the portion of clarification on s. 149 of the 1956 Act is concerned the requirement of certification of commencement of business is dispensed with under 2013 Act, thus again the clarification will be of academic interest only. The effect of section 149 of the 1956 Act is to make the company not bound by any contract or transaction until and unless the company is entitled to commence business and on the commencement of business, without any further act on the part of the company to make it free to be bound in respect of all transactions from the date of incorporation. Section 11 of the 2013 does not provide for the issuance of a certificate of commencement of business. The company shall be entitled to commence its business upon fulfilling the requirements stipulated under s. 11(1) of the 2013 Act.

Contracts “shall become binding” [Section 149(4) of Companies Act, 1956]

The words “shall become binding” in sub-section (4) of s. 149 of the 1956 Act do not mean that the company is bound to recognize all contracts made between the date of incorporation and the date of commencement of business. If a contract is oppressive, fraudulent or voidable for any reason, the company may avoid them by taking appropriate proceedings. Sub section (4) of s. 149 of the 1956 Act only means that contracts which were till then provisional would become good thereafter, for what they might be worth. Any liability incurred under any contract which remains provisional and does not become binding cannot be enforced against the company. If the company has gone into winding up the shareholders (contributories) cannot be called upon to make any contribution towards such liability.

Section 11 of the 2013 Act does not have a corresponding provision on the status of contracts entered into by the company before the date it is entitled to commence business, therefore the case law and analysis on section 149(4) of the 1956 Act is for academic interest and guidance.

Section 149 of Companies Act, 1956 and section 12(1-B) of SEBI Act are independent

A certificate for commencement of business under the 1956 Act does not by itself satisfy the requirement of s. 12(1-B) of the SEBI Act. They are independent requirements. One cannot be a substitute for the other. Section 12(1B) of the SEBI Act pertains to commencement of business of venture capital funds, mutual funds and collective investment schemes, which cannot be commenced without a certificate of registration from SEBI. Likewise, there might be commencement of business of venture several other laws requiring registration with relevant authorities before a business can be commenced. For example, the Reserve Bank of India Act prohibits commencement of the business of banking, or of a non-banking finance company, without registration with the RBI.

As the 2013 Act does not provide for a certificate for commencement of business the analysis above is for academic interest. Contracts made before and after incorporation and “provisional contracts”. A contract made before incorporation of a company will not bind the company unless a new contract embodying the terms of the old one or adopting the old one is made afresh. As regards contracts made by the company itself after incorporation, such contracts will become binding on the company only on its becoming entitled to commence business. The expression “provisional,” means that the contract will not be binding on the company until the certificate of commencement of business is granted by the Registrar. If it is liable to be avoided for fraud or misrepresentation, the company may question its validity. The wording of the sub-section is so wide that it may apply to all contracts including contract of membership itself, that is to say, even allotment of shares to a person may be questioned.

Notification requirements to stock exchange

Clause 36 of the standard listing agreement requires prompt information about a change in the nature of business. A proposal to initiate a new business needs to be notified to stock exchange as well. Clause 36 of the Listing Agreement will also apply to the 2013 Act.

Penalty for default (Section 149(2A) and (6) of Companies Act, 1956)

If a company commences any business or exercises borrowing powers in contravention of sub-section (2-A) or sub-section (6) of section 149 of the 1956 Act, every person who is responsible for the contravention is, without prejudice to any other liability, was punishable with fine which may extend to five thousand rupees for every day during which the contravention continues.

Compoundable offence

 The offence was compoundable under section 621A of the 1956 Act. Under the 2013 Act, in addition to the officer who is in default the company is also made liable. Offence under section 11 of the 2013 Act is a continuing offence and is compoundable under section 441 of the 2013 Act. For detailed discussion on liability under s. 11(3) of the 2013 Act see under the heading “Companies Act, 2013: Section 1” supra.

Private company [Section 149(7) of Companies Act, 1956]

Section 149 of the 1956 Act did not apply to a private company, even if it is a subsidiary of a public company. It also did not apply to a company registered before the first day of 1914, which has not issued a prospectus inviting the public to subscribe for its shares. At the time of going to press, private companies are not exempted under section 11 of the 2013 Act. However it may be exempted by a notification under section 462 of the 2013 Act.

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