SECTION 8 COMPANY Act, 2013 - Formation of companies with charitable objects etc.

[Mr. M. GOVINDARAJAN]

Section 8 of the Companies Act, 2013 (‘Act’ for short) provides for the formation of companies with charitable objects etc., This section is akin to Section 25 of the erstwhile Companies Act, 1956.

Object

The objects of Sec 8 companies are prescribed under Section 8(1) as below:

• Has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other objects;
• Intends to apply its profits, if any, or other income in promoting its objects; and
• Intends to prohibit the payment of any dividend to its members.

Formation

Section 8 company may formed by a person or an association of persons proposed to be registered under this Act as a limited company having its objects as discussed above subject to the satisfaction of the Central Government.   It is onus on the part of the applicants to prove to the satisfaction of the Central Government that the proposed company is to be formed for the charitable objects as discussed above. The company will be formed by means of a licence granted by the Central Government subject to the conditions imposed by the Central Government to be registered as a limited company under this Section without the addition to its name of the word ‘Limited’ or ‘Private Limited’.   The Registrar shall, on application, register such person or association of person as a company under this section.  Section 8 company shall enjoy all the privileges and be subject to all the obligations of limited companies.  A firm may be a member of the company.

Licence

Rule 19 of the Companies (Incorporation) Rules, 2014 provides for the procedure for issue of licence to Section 8 Companies.  The following is the procedure for grant of licence:

• An application shall be made in Form No. INC 12 to the Registrar of Companies for getting licence;
• The form INC 12 contains 2 parts.  Part A deals with the new company to be formed under Section 8 of the Act and Part B deals with the existing company to get licence;
• The application shall be accompanied with the fee as provided in the Companies (Registration Offices and fees) Rules, 2014;
• The application shall be accompanied with the following:

• Draft Memorandum of Association in Form – INC 13;
• Draft Articles of Association;
• Declaration in Form INC -1 4 by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in practice, that the draft memorandum and articles have been drawn up in conformity with the provisions of Section 8 and rules made there under and that all of the requirements of the Act and the rules made there under relating to registration of the company under Section 8 and the matters incidental thereto have been complied with;
• Declaration as in Form INC – 15;
• An estimate of the future income and expenditure of the company for next three years, specifying the sources of the income and the objects of the expenditure;

The Registrar, after satisfying himself about the correctness of the application may issue a licence in Form No. INC – 16.  Registrar is having power to include in the licence such other conditions as may be deemed fit by him. 

Licence for existing companies

Section 18(5) of the Act provides that where it is proved to the satisfaction of the Central Government that a limited company registered under this Act or under any previous company law has been formed with any of the objects and with the restrictions and prohibitions, it may, by licence, allow the company to be registered under this Section to such conditions as the Central Government deems fit and to change its name by omitting the word ‘Limited’ or ‘Private Limited’ from the name.

The procedure for granting licence to the existing companies is prescribed under Rule 20 of the Companies (Incorporation) Rules, 2014 which is as detailed below:

• A limited company which is desirous of being registered under Section 8, without the addition to its name of the word ‘Limited’ or ‘Private Limited’ shall make an application in Form No. INC-12 (Part B);
• The application shall be accompanied by a fee as provided in the Companies (Registration Offices and fees) Rules, 2014;
• The application shall be accompanied by the following documents:

• The memorandum and articles of association of the company;
• The declaration as given in Form No. INC-14 by an Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in practice, that the memorandum and articles of association have been drawn up in conformity with the provisions of section 8 and rules made there under and that all the requirements of the Act and the rules made there under relating to registration of the company under Section 8 and the matters incidental or supplemental thereto have been complied with;
• The following in respect of each two financial years immediately preceding the date of application or when the company has functioned only for one financial year, for such year-

• The financial statements;
• The Board’s Reports;
• The audit reports relating to the existing company;

• A statement showing in detail the assets and the liabilities of the company as on the date of application or within 30 days preceding that date;
• An estimate of future annual income and expenditure of the company for next 3 years, specifying the sources of income and the objects of expenditure;
• The certified copy of the resolutions passed in general/board meetings approving registration of the company under Section 8; and
• A declaration by each of the persons making the application in Form No. INC -15;
• The  company shall publish a notice in Form No. INC 26 at its own expense within a week from the date of making the application;
• A copy of the said notice shall be sent forthwith to the Registrar;
• The notice shall be published at least once in a vernacular newspaper in the principal vernacular language of the district in which the registered office of the proposed company is to be situated or is situated, and circulating in that district, and at least once in English language in an English newspaper circulating in the district and on the websites as may be notified by the Central government;
• The Registrar may require the applicant to furnish the approval or concurrence of any appropriate authority, regulatory body, department or Ministry of the Central Government or the State Government(s);
• The Registrar shall after considering the objections, if any, received by it within 30 days from the date of publication of the notice, and after consulting any authority, regulatory body, Department or Ministry of the Central or the State Government(s), as it may, in its direction, decide whether the license should or should not be granted;
• The licence shall be issued in Form INC – 17;
• The Registrar shall have power to include in the licence  such other conditions as he may be deemed necessary by him;
• The Registrar may direct the company to insert in its memorandum, or in its articles or partly in one and partly in the other, such conditions of the licence as may be specified by the Registrar in this behalf.

Revocation of the licence

Rule 8(6) provides for the revocation of licence. The said section provides that the Central Government may, by order, revoke the licence granted to a company if the company contravenes any of the requirements of this section or any of the conditions subject to which a licence was granted or the affairs of the company are conducted fraudulently or in a manner violative of  the objects of the company or prejudicial to public interest. Without prejudice to any other action against the company, the Central Government may direct the company to convert its status and change its name to add the word ‘Limited’ or ‘Private Limited’ to its name and there upon the Registrar shall, without prejudice to any action that may be taken, on application, in the prescribed form, register the company accordingly.  Such order shall not be passed unless the company is given reasonable opportunity of being heard.  A copy of such order is to be given to the Registrar.

The Central Government may direct the company, the licence of which has been cancelled, if it is satisfied that it is essential in the public interest,   to be wound up or amalgamated with another company registered under this section. Such order shall be passed only after giving reasonable opportunity to the company of being heard.

In case of amalgamation the Central Government may provide for such amalgamation to form a single company with such constitution, properties, powers, rights, interest, authorities and privileges and such liabilities, duties and obligations as may be specified in the order.

In case of winding up or dissolution of a company, the debts and liabilities, any asset of the said company may be transferred to another company registered under this Section and having similar objects, subject to such conditions as the Tribunal may impose or may be sold and proceeds thereof credited to the Rehabilitation and Insolvency Fund formed under Section 269.

Penalty

Section 8(11) provides that if a company makes any default in complying with any of the requirements laid down in this section, the Company shall, without prejudice to any other action under the provisions of this section, be punishable with fine and which shall not be less than ₹ 10 lakh which may extend to ₹ 1 crore and the directors and every officer of the company, who is in default shall be punishable with imprisonment for a term which may extend to 3 years or with fine which shall not be less than ₹ 25,000/- but which may extend  to ₹ 25 lakhs or with both.

When it is proved that the affairs of the company were conducted fraudulently, every officer in default shall be liable for action under Section 447 which provides punishment for fraud.   The punishment may be imprisonment for a term which shall not be less than 6 months but which may extend to 10 years and shall also be liable to fine which shall not be less than the amount involved in the fraud, but which may extend to 3 times the amount involved in the fraud.    Where the fraud in question involves public interest, the term of imprisonment shall not be less than 3 years.