Companies Act Section 8

Companies Act Section 8: Formation of Companies with Charitable Objectives

1. Registration Without the Use of "Limited" or "Private Limited" in Company Name

Under Section 8 of the Companies Act, the Central Government has the authority to grant permission for the registration of a company without the inclusion of "Limited" or "Private Limited" in its name. 

This is an important provision that allows for the formation of companies with charitable or non-profit objectives. 

In order to qualify for this special status, certain conditions must be satisfied:

A. Charitable Objectives

The company must be formed with the primary objective of promoting activities that are considered beneficial to society. 

These objectives may include:

Commerce: Activities that promote trade and business for the public good.

Art: Support and development of artistic and cultural initiatives.

Science: Promoting scientific research and innovation for societal advancement.

Sports: Encouraging sports and physical education.

Education: Providing educational services or supporting research and educational development.

Research: Engaging in research that benefits society in various fields.

Social Welfare: Supporting initiatives that enhance the well-being of the public.

Religion: Engaging in religious or spiritual activities aimed at promoting harmony and personal development.

Charity: Undertaking charitable activities to help the underprivileged or those in need.

Environmental Protection: Supporting activities aimed at preserving and protecting the environment.

B. Use of Profits

The company must have a clear intention to use its profits or any other income solely for the promotion of its objectives. 

The distribution of profits or income among members is strictly prohibited. 

All proceeds must be reinvested in furthering the company’s goals.

C. Prohibition of Dividends

The company must prohibit the payment of dividends to its members. 

This means that no profits can be distributed to shareholders, and all surplus income must be used for the company’s stated purposes.

Once these conditions are met, the Central Government will issue a license allowing the company to register without the use of "Limited" or "Private Limited" in its name. 

The Registrar will then proceed with the company's registration under this special status, provided that all applications and documentation are submitted in the prescribed form.

2. Privileges and Obligations of Registered Companies

Companies registered under this section are subject to the same privileges and obligations as those of limited companies. 

This means that while these companies benefit from limited liability, they must still comply with the obligations that come with being a limited company under the Companies Act.

3. Firm Membership

Interestingly, a firm may become a member of a company registered under this section. 

This provision allows firms to actively participate in charitable endeavors by becoming a part of such companies.

4. Alteration of Memorandum or Articles of Association

Once a company is registered under Section 8, it cannot make changes to its Memorandum or Articles of Association without prior approval from the Central Government. 

This ensures that the company remains committed to its original charitable objectives and does not deviate from its purpose.

Additionally, companies registered under this section may only convert into another type of company after fulfilling specific conditions laid down by the law. 

This ensures that the transformation of the company aligns with legal and regulatory requirements.

5. Conversion of Existing Companies

In cases where an existing limited company was originally formed with charitable objects, it may be allowed to change its name by removing "Limited" or "Private Limited" from its name. 

This can be done if the Central Government is satisfied that the company operates under charitable objectives similar to those specified in this section.

If the government approves, it will issue a license to the company allowing the name change. 

Once the license is granted, the Registrar will update the company’s registration, and all provisions of Section 8 will apply to it as if it were registered under this section from its inception.

6. Revocation of License

The Central Government has the authority to revoke the license of a company registered under this section if it:

Contravenes any conditions or requirements stipulated in the license.

Conducts its affairs fraudulently or in a manner that is inconsistent with its objectives or is detrimental to the public interest.

In the event of such violations, the government may direct the company to convert its status by adding "Limited" or "Private Limited" back to its name. 

The Registrar will then proceed with the updated registration. 

However, before revoking the license, the company must be given a reasonable opportunity to be heard, and a copy of the order will be sent to the Registrar.

7. Winding Up or Amalgamation

If the license is revoked, and it is deemed in the public interest, the Central Government may direct the company to be wound up under the provisions of the Companies Act. 

Alternatively, the company may be ordered to amalgamate with another company registered under this section that shares similar objectives.

Again, the company will be given an opportunity to be heard before any such orders are made.

8. Amalgamation with Similar Companies

When the Central Government deems it necessary, it may issue an order for a company registered under Section 8 to be amalgamated with another company that has similar charitable objectives. 

This amalgamation will ensure that both companies continue to operate in line with their original missions. 

The constitution of the new entity, including its properties, powers, rights, and obligations, will be clearly outlined in the order.

9. Disposal of Assets Upon Winding Up

If a company registered under Section 8 is wound up or dissolved, any assets remaining after settling the company’s debts and liabilities may be:

Transferred to another company registered under Section 8 that has similar charitable objectives.

This transfer will be subject to conditions imposed by the Tribunal.

Sold, with the proceeds credited to the Insolvency and Bankruptcy Fund created under Section 224 of the Insolvency and Bankruptcy Code, 2016.

This ensures that the company’s remaining assets continue to benefit society even after its dissolution.

10. Restriction on Amalgamation

A company registered under Section 8 is restricted from amalgamating with any company that is not registered under the same section. 

The purpose of this restriction is to ensure that the company continues to operate within the charitable framework established by Section 8 and does not merge with for-profit entities or those that have different objectives.

11. Penalties for Non-Compliance

If a company registered under Section 8 fails to comply with the requirements of this section, it will face substantial fines. Specifically:

The company itself may be fined between ten lakh rupees and one crore rupees.

The directors and officers in default may be fined between twenty-five thousand rupees and twenty-five lakh rupees.

In cases where the company’s affairs are found to have been conducted fraudulently, the officers in default may also face legal action under Section 447 of the Companies Act, which deals with punishment for fraud.