Companies with Charitable Objects
Chapter Seven
Syllabus topic 1.1, label: "Types of Companies"
Pages 35 to 40 of 830
In one line
A section 8 company is a company formed to do good rather than to make money for its members, and in exchange for promising not to pay dividends it is allowed to drop "Limited" from its name.
In exam wording: section 8 of the Companies Act 2013 empowers the Central Government to license an association with charitable objects, which intends to apply its profits in promoting those objects and to prohibit the payment of dividend to its members, to be registered as a limited company without the word "Limited" or "Private Limited" in its name.
Why the law has this at all
A charity that wants to hold property, employ people, take donations and be sued in one name needs exactly what a company offers: separate personality and perpetual succession. A trust or a society can do some of this, less conveniently.
But the word "Limited" at the end of a name signals a business, and a charity does not want it. More importantly, a body that keeps its surplus for its objects is not really a trading company at all, and forcing it to look like one misleads the public.
So section 8 makes a trade. Give up the two things that make a company commercial, the power to distribute profit and the right to be treated as an ordinary registrant, and the law gives you the corporate form with a plain name and a lighter tax and fee burden. The licence is the instrument by which the Government polices that bargain, and most of section 8 is about the licence.
Some words this chapter uses
A licence here is the Central Government's written permission, without which the company cannot be registered under this section. A dividend is a distribution of profit to members. To revoke is to cancel. Amalgamation is the merging of two companies into one. Dissolution is the final ending of a company's existence.
The three conditions: section 8(1)
The Central Government must be satisfied that the person or association proposed to be registered as a limited company:
- (a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
- (b) intends to apply its profits, if any, or other income in promoting its objects; and
- (c) intends to prohibit the payment of any dividend to its members.
All three, because the clauses are cumulative. A body with charitable objects that intends to pay dividends is not a section 8 company.
Two drafting points worth noticing. The list in (a) ends with "or any such other object", so it is illustrative and not closed; a purpose of the same general character qualifies. And (b) says "profits, if any", which concedes that a section 8 company may well make a profit. What it may not do is hand that profit to its members.
Companies with Charitable Objects
Where satisfied, the Government may by licence, issued in the prescribed manner and on such conditions as it deems fit, allow registration as a limited company without the addition to its name of the word "Limited" or the words "Private Limited", and the Registrar shall then register it on application.
The consequences: section 8(2), (3) and (4)
Section 8(2): it is a real company. It shall enjoy all the privileges and be subject to all the obligations of limited companies. Losing the word "Limited" does not lose the limited liability, and it does not buy any exemption from the rest of the Act except where the Act says so.
Section 8(3): a firm may be a member. This is a genuine exception. A partnership firm is not a person in law, and ordinarily cannot be a member of a company. Section 8(3) lets it be one here.
Section 8(4): two restrictions.
- (i) The company shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. So the constitutional documents are frozen without permission, which is how the Government keeps the objects charitable.
- (ii) The company may convert itself into a company of any other kind only after complying with such conditions as may be prescribed. Conversion out of section 8 is possible but controlled.
Bringing an existing company in: section 8(5)
An ordinary limited company already registered under this Act or a previous company law, which is found to have been formed with the section 8(1)(a) objects and with the (b) and (c) restrictions, may be licensed to be registered under section 8 and to change its name by omitting "Limited" or "Private Limited". Every provision of the section then applies to it.
Revocation: section 8(6), (7) and (8)
Section 8(6): when the licence can be revoked. The Central Government may by order revoke the licence if:
- the company contravenes any of the requirements of this section; or
- it contravenes any of the conditions subject to which the licence was issued; 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.
On revocation the Government directs the company to convert its status and change its name to add "Limited" or "Private Limited", and the Registrar registers it accordingly.
Two safeguards. The first proviso: no such order shall be made unless the company is given a reasonable opportunity of being heard. The second proviso: a copy of every such order shall be given to the Registrar.
Companies with Charitable Objects
Section 8(7): what may follow revocation. Where a licence is revoked, the Central Government may, if satisfied that it is essential in the public interest, direct that the company be wound up or amalgamated with another company registered under this section. Again, only after a reasonable opportunity of being heard.
Section 8(8): a forced amalgamation. Where the licence is revoked and the Government is satisfied that it is essential in the public interest that the company be amalgamated with another section 8 company having similar objects, it may by order provide for the amalgamation, notwithstanding anything to the contrary in this Act, specifying the constitution, properties, powers, rights, interests, authorities, privileges, liabilities, duties and obligations of the merged company. This is one of the few places where the Act allows a merger to be imposed by executive order rather than approved by a Tribunal.
What happens to the assets: section 8(9) and (10)
Section 8(9). If on winding up or dissolution any asset remains after satisfaction of the debts and liabilities, it may be:
- transferred to another section 8 company having similar objects, on such conditions as the Tribunal may impose; or
- sold, and the proceeds credited to the Insolvency and Bankruptcy Fund formed under section 224 of the Insolvency and Bankruptcy Code 2016.
Notice what is missing: the members get nothing. In an ordinary company the surplus after paying creditors goes to the members. Here it cannot, because the whole basis of the licence is that members do not take value out.
Section 8(10). A section 8 company shall amalgamate only with another company registered under this section and having similar objects. So charitable assets cannot be walked out of the sector through a merger.
The penalty: section 8(11)
If a company makes any default in complying with the requirements of the section, then without prejudice to any other action under the section:
- the company shall be punishable with a fine not less than ten lakh rupees and up to one crore rupees; and
- the directors and every officer in default shall be punishable with a fine not less than twenty-five thousand rupees and up to twenty-five lakh rupees.
The proviso: 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, the Act's fraud provision.
A worked example
A group of doctors in Nagpur wants to run a free diagnostic centre. They want corporate form so that the equipment can be owned in one name and the centre can survive them.
Companies with Charitable Objects
They apply for a licence under section 8, showing objects of social welfare and charity within clause (a), an intention to plough back any surplus under clause (b), and an article prohibiting dividends under clause (c). The Central Government grants a licence and they register as Vidarbha Free Diagnostics, with no "Limited" at the end.
Year three. The centre has a surplus of eleven lakh rupees. The doctors may spend it on a new scanner. They may not distribute it among themselves, because clause (c) and their own articles forbid it, and doing so would be a contravention exposing the company to a fine of at least ten lakh rupees under section 8(11).
Year five. They want to change the objects to include running a paid pharmacy. They cannot simply pass a special resolution: section 8(4)(i) requires the previous approval of the Central Government for any alteration of the memorandum or articles.
Year seven. It emerges that two directors have been routing payments to a firm they own. The Government may revoke the licence under section 8(6), because the affairs are being conducted fraudulently, after giving the company a hearing. On revocation the company must add "Limited" to its name. The Government may also direct winding up or amalgamation with another section 8 company under section 8(7), and the two directors face section 447 by the proviso to section 8(11).
On winding up. Suppose four lakh rupees remain after the debts are paid. It does not go to the doctors. Under section 8(9) it goes to another section 8 company with similar objects on the Tribunal's conditions, or is sold with the proceeds credited to the Insolvency and Bankruptcy Fund under section 224 of the Insolvency and Bankruptcy Code 2016.
Distinctions that carry marks
| Section 8 company | Ordinary limited company | |
|---|---|---|
| Name | May omit "Limited" or "Private Limited" | Must carry it |
| Requires a licence | Yes, from the Central Government | No |
| Dividend | Prohibited, section 8(1)(c) | Permitted, Chapter VIII |
| Alteration of memorandum or articles | Needs previous Central Government approval, section 8(4)(i) | By resolution, sections 13 and 14 |
| A firm as member | Allowed, section 8(3) | Not allowed |
| Surplus on winding up | To another section 8 company or to the Insolvency and Bankruptcy Fund | To the members |
| Amalgamation | Only with another section 8 company with similar objects | With any company, Chapter XV |
| Small company status | Excluded, proviso (B) to section 2(85) | Available if within the limits |
What this does NOT mean
It does not mean a section 8 company cannot make a profit. Section 8(1)(b) says "profits, if any", so profit is expected. What is forbidden is distributing it to members.
Companies with Charitable Objects
It does not mean there is no limited liability. Section 8(2) preserves all the privileges of limited companies. The word is dropped from the name, not the protection.
It does not mean it is exempt from the Act. Section 8(2) subjects it to all the obligations of limited companies as well.
It does not mean the licence is permanent. Section 8(6) lists three grounds of revocation, and section 8(7) allows a compulsory winding up or amalgamation to follow.
Quick revision
- Three conditions, section 8(1): charitable objects in the list, which ends "or any such other object"; profits applied to the objects; dividends prohibited. All three.
- The reward: registration as a limited company without "Limited" or "Private Limited", by Central Government licence on such conditions as it deems fit.
- 8(2): all the privileges and all the obligations of limited companies.
- 8(3): a firm may be a member.
- 8(4): no alteration of memorandum or articles without previous Central Government approval; conversion only on prescribed conditions.
- 8(5): an existing limited company may be brought in and drop the word from its name.
- 8(6): revocation for contravention of the section, of a licence condition, or where affairs are fraudulent, against the objects, or prejudicial to public interest. Hearing required; copy to the Registrar.
- 8(7) and (8): winding up, or amalgamation with another section 8 company, in the public interest.
- 8(9): surplus to another section 8 company on the Tribunal's conditions, or sold and credited to the Insolvency and Bankruptcy Fund under section 224 of the Insolvency and Bankruptcy Code 2016.
- 8(10): may amalgamate only with another section 8 company having similar objects.
- 8(11): company, ten lakh to one crore rupees; directors and officers in default, twenty-five thousand to twenty-five lakh rupees; fraud attracts section 447.
Test yourself
1. What three things must the Central Government be satisfied of before granting a section 8 licence? That the body has charitable objects within section 8(1)(a); intends to apply its profits or other income in promoting those objects, section 8(1)(b); and intends to prohibit the payment of any dividend to its members, section 8(1)(c).
2. Can a section 8 company change its objects by special resolution alone? No. Section 8(4)(i) requires the previous approval of the Central Government for any alteration of the memorandum or articles.
3. On what grounds may the licence be revoked? Section 8(6): contravention of the requirements of the section; contravention of a condition of the licence; or the affairs being conducted fraudulently, or in a manner violative of the objects, or prejudicial to public interest. The company must first be given a reasonable opportunity of being heard.
4. A section 8 company is wound up and two lakh rupees remain after the creditors are paid. Who gets it? Not the members. Under section 8(9) it may be transferred to another section 8 company with similar objects on such conditions as the Tribunal imposes, or sold and the proceeds credited to the Insolvency and Bankruptcy Fund under section 224 of the Insolvency and Bankruptcy Code 2016.
Companies with Charitable Objects
5. Can a partnership firm be a member of a section 8 company? Yes. Section 8(3) expressly permits it, which is an exception to the general position.
6. Can a section 8 company be a small company? No. Proviso (B) to section 2(85) excludes a company registered under section 8 from the definition, whatever its capital or turnover.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.