Company to accept unpaid share capital although called up

May 28, 2023

This article is written by Calista Chettiar, a Second-Year BA. LL.B. (Hons.) student from NMIMS, School of Law, Bangalore.

INTRODUCTION:

In India, corporations are established, managed, and administered in accordance with the Companies Act of 2013. Section 50, which addresses the issue of a company accepting unpaid share capital, is a pivotal part of this legislation. The criteria and outcomes of the issuance of unpaid share capital have far-reaching repercussions for the enterprise and its shareholders, as set forth in this section. In order to protect one’s financial interests as a business owner or investor, one must fully grasp the complexities of Section 50. In this piece, we’ll analyze this key section of the Companies Act 2013 and give you the rundown on everything you need to know to accept unpaid share capital.

SECTION 50, THE COMPANIES ACT 2013:

Company to accept unpaid share capital, although not called up –

Even though none of the outstanding debt on a member’s shares has been called up, a firm may, if permitted by its articles, take the full or a portion of that debt from that member.
Prior to the amount being called up, a member of the firm limited by shares is not eligible to vote with regard to the sum that he paid pursuant to subsection (1).

UNPAID SHARE CAPITAL:

The term “unpaid share capital” refers to a scenario in which the monetary consideration for issued shares has yet to be reimbursed. Share capital sometimes goes unpaid and remains owed to a company perpetually, especially in smaller enterprises. Unless otherwise authorized in the company’s articles of association and the memorandum of association, the share capital is not required to be fully paid. Only in the event of a firm dissolution is this not the case. Although shareholders may be shielded from personal culpability, this does not relieve them of their responsibility to pay for issued shares. When a company is first incorporated, issuing as few shares as feasible is preferable unless there is a compelling reason to do otherwise (often just one). In this way, the maximum sum a subscriber would be obligated to pay in the eventuality of dissolution is reduced to an acceptable level.

EXAMPLE OF UNPAID SHARE CAPITAL:

The unpaid share capital has been received by numerous businesses in India in order to raise money for expansion and growth. Tata Steel is one of these businesses. In order to obtain money for the purchase of the British steel manufacturer Corus Group, Tata Steel issued partially paid-up shares in 2008.

Another example is Reliance Industries. In order to generate money for its entry into the telecom industry, Reliance Industries issued partially paid-up shares in 2016. The corporation received unpaid share capital of more than Rs. 15,000 crores from its stockholders.

DIFFERENCE BETWEEN PAID-UP CAPITAL AND UNPAID CAPITAL:

The total sum of funds received from shareholders for shares issued is known as paid-up share capital. Hence, paid-up capital refers to the capital that shareholders have allocated and paid. This displays the sum that the company got from those who received shares through subscriptions, whether it be in cash or in kind. ‘Calls in Arrears’ or ‘Unpaid Share Capital’ refers to the subscribed capital that has not yet been paid in full. As a result, after subtracting the subscribed capital and the unpaid share capital, the paid-up share capital is displayed.

CONDITIONS FOR ACCEPTING UNPAID SHARE CAPITAL:

Unpaid share capital may only be accepted with the approval of the company’s articles of association – As a result, the company’s articles of association must contain explicit language enabling it to accept unpaid share capital.
The unpaid share capital cannot be greater than the company’s authorized share capital – The maximal amount of capital that the corporation is entitled to issue is the authorized share capital. The unpaid share capital should not exceed this amount.
All unpaid share capital must be acquired by the corporation within two months after the date of allocation – This means that after receiving their shares, the shareholders have two months to settle the unpaid share capital.
A call notice for the settlement of unpaid share capital is required to be sent to the shareholders by the corporation – The amount of overdue share capital that the shareholders are obliged to pay, the deadline by which they’re required to do so, and any fines or interests that could be levied if they don’t make timely payments must all be specified in the call notice.

NON-COMPLIANCE WITH SECTION 50 OF THE COMPANY ACT OF 2013:

The corporation and its officers risk severe repercussions if this section is violated. Non-compliance with Section 50 of the 2013 Companies Act may result in the following sanctions:

Penalty: If Section 50 is violated, the corporation and its officers may be required to pay a fine. Depending on the length of the default, the fine might be anywhere between INR 10,000 and INR 1,00,000.
Lack of capacity for upholding shareholder rights: Shareholders may not be able to exercise their rights, such as the right to vote or the right to receive dividends, if a corporation does not have an accurate and precise record of members.
Legal action: The corporation and its officials may also be subject to legal action if they fail to keep a register of members.

SIGNIFICANCE OF UNPAID SHARES TO THE SHAREHOLDER:

Making a “call” for payment is shorthand for requesting payment. It’s possible that the shareholders won’t get much notice before being asked to make a payment. Additionally, there are repercussions for shareholders who hold partially or fully paid shares:

Whenever a corporation enters liquidation due to insolvency, the liquidator may demand full payment for whatever shares an investor owns. This will happen at a time when the company, and thus the shares, might not be worth anything.
If the shares have a potential liability, selling them to a third-party buyer is more challenging.
The majority of articles of association stipulate that failing to answer a call may result in share forfeiture, interest charges, and the loss of voting rights.

Businesses with low starting capital needs can always issue more shares as they grow, and unpaid or partially paid shares are rarely necessary.

RELEVANT CASE LAWS RELATED TO SECTION 50 OF THE COMPANY ACT, 2013:

Salomon v. Salomon & Co. [(1896) UKHL 1, (1897) AC 22] – According to the ruling, Mr. Salomon, the company’s inventor, is protected from the private obligation to the creditors because the business is a separate legal entity from its members. The Companies Act of 1862 introduced the notion of corporate personality, which the court upheld.

The unpaid share capital by a business is governed by Section 50 of the Companies Act of 2013. Both businesses and investors need to be aware of the legal restrictions on taking unpaid share capital. Companies can obtain capital and investors can purchase stock in firms without having to pay the whole amount upfront by adhering to the requirements and procedures outlined in Section 50. Yet, failing to comply with Section 50 may have detrimental effects on both businesses and investors. To avoid any legal concerns, it is crucial to make sure that all the requirements and guidelines are strictly followed.

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May 28, 2023