Section 8 Companies
Chapter Eleven
Syllabus topic 1, "FORMATION OF COMPANY"
Pages 51 to 55 of 998
In one line
A section 8 company is a company formed for charitable or similar objects which applies its income to those objects and pays no dividend, and in return is licensed to drop "Limited" from its name and is given concessions across the Act.
In exam wording: under section 8(1), where the Central Government is satisfied that a person or association proposed to be registered as a limited company 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, intends to apply its profits or other income in promoting those objects, and intends to prohibit the payment of any dividend to its members, it may by licence allow registration as a limited company without the addition of "Limited" or "Private Limited" to its name.
Why the law has this at all
Not-for-profit activity needs a legal vehicle, and the alternatives are imperfect. A trust is rigid and its management structure is inflexible; a society under the Societies Registration Act 1860 varies from State to State and gives weak recognition outside its State; neither offers the settled internal machinery, the register of members, the board and general meeting structure, the audit discipline, that a company has.
But an ordinary company is built to distribute profit, and a body raising money for a public purpose must not distribute it. Section 8 solves this by taking the corporate form and removing exactly one feature, distribution, and by removing one signal, the word "Limited", which exists to warn creditors that they deal with a limited-liability entity for profit.
The bargain is conditional throughout, and that is the theme of the section. The licence is granted on conditions the Government deems fit; the constitution cannot be changed without permission; conversion is possible only on prescribed conditions; and the licence can be revoked. Section 8 is the Act's clearest instance of a status held on terms, and it is worth saying so in an answer.
Section 8, sub-section by sub-section
8(1): the licence and its three conditions. The objects test in clause (a) is a list ending in "or any such other object", so it is illustrative rather than closed; the application test in clause (b) requires profits and other income to be applied in promoting the objects; and the distribution test in clause (c) requires the prohibition of any dividend to members. On satisfaction, the Central Government issues the licence and the Registrar registers the company without "Limited" or "Private Limited" in its name.
8(2): full corporate status. The company enjoys all the privileges and is subject to all the obligations of limited companies. This is the sub-section a candidate should quote when asked whether a section 8 company is a real company: it is, and the absence of "Limited" from its name changes nothing about the limited liability of its members.
Section 8 Companies
8(3): a firm may be a member. A partnership firm, which is not a person in law for most purposes, may hold membership. The concession recognises that professional and trade bodies are often composed of firms.
8(4): the constitution is frozen without consent. Clause (i): the company shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. Clause (ii): it may convert itself into a company of any other kind only after complying with such conditions as may be prescribed. Both protect the bargain: the objects and the no-dividend rule are what earned the licence, so they cannot be edited away, and conversion out of the status is policed.
8(5): conversion in. An existing limited company formed with section 8 objects and the same restrictions may be licensed into the status, changing its name by omitting "Limited" or "Private Limited".
8(6): revocation. The Central Government may by order revoke the licence where the company contravenes any requirement of the section or any condition of the licence, or where its affairs are conducted fraudulently, or in a manner violative of the objects of the company, or prejudicial to public interest. The order also directs the company to convert its status and change its name, adding "Limited" or "Private Limited", and the Registrar registers it accordingly. Two provisos protect the company: no such order without a reasonable opportunity of being heard, and a copy of every order goes to the Registrar.
8(7) and 8(8): what may follow revocation. Where a licence is revoked, the Central Government may, if satisfied that it is essential in the public interest, order that the company be wound up under the Act or amalgamated with another section 8 company having similar objects. Section 8(8) provides the machinery for such a compulsory amalgamation into a single company, with the constitution, properties, powers, rights and interests specified in the order, notwithstanding anything to the contrary in the Act.
8(9): the asset-lock. Where a section 8 company is wound up or dissolved and assets remain after satisfaction of debts and liabilities, they may be transferred to another section 8 company having similar objects, subject to 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. This completes the design: money given for a purpose stays with the purpose even when the vehicle dies. The reference to the Insolvency and Bankruptcy Fund is a substituted one, and the substitution is itself worth knowing: the original text named the Rehabilitation and Insolvency Fund of section 269, a section the Insolvency and Bankruptcy Code omitted when it arrived, so the destination of locked assets moved with the rest of the insolvency machinery.
Section 8 Companies
8(10) and 8(11): amalgamation and penalty. Section 8(10) provides that such a company shall amalgamate only with another company registered under this section and having similar objects, so the asset-lock cannot be defeated by merging into an ordinary company. Section 8(11) punishes default in complying with the section's requirements: the company with a fine not less than ten lakh rupees, extending to one crore rupees, and the directors and every officer in default with a fine not less than twenty-five thousand rupees, and a proviso adds that where the affairs are conducted fraudulently, every officer in default is liable for action under section 447, treated in [Offences, Fraud and Decriminalisation].
Where the concessions actually appear
Section 8 status is not a self-contained code; it works by exempting these companies from ordinary rules scattered through the Act, and an answer that can name a few earns the marks.
The company is excluded from small-company status by the proviso to s.2(85), which matters because it prevents a section 8 company claiming the small-company reliefs on top of its own. It is subject to lighter requirements on board composition and on secretarial and meeting formalities under the exemption notifications issued under s.462, taught in [Delegation, Exemptions and Rule-making]. And it is not permitted to declare dividends at all, so the entire dividend machinery in [Dividends] is inapplicable to it by its own constitution.
Two overlaps are worth flagging. Corporate social responsibility: a section 8 company is a common implementing agency for another company's CSR spending under s.135, [Corporate Social Responsibility], so the two provisions meet in practice. And tax: registration under s.8 is a matter of company law and does not by itself confer any exemption under the income tax legislation, which has its own registration regime. Confusing the two is a standard error.
A worked example
Four doctors wish to run a diagnostic centre for low-income patients in Nashik. They intend to charge subsidised fees, to use any surplus to expand the service, and to take nothing out for themselves. They want a structure that will survive them, can employ staff, can hold the building, and can receive institutional donations.
Why not an ordinary private company. It could do everything except credibly commit not to distribute. Articles can be altered by special resolution, so a promise of no dividend today is revocable tomorrow, and a donor cannot rely on it.
Section 8 Companies
Why section 8 fits. Objects: social welfare and charity, within s.8(1)(a). Application of income: the surplus is ploughed back, s.8(1)(b). No dividend: prohibited by the constitution, s.8(1)(c). On the licence, the company is registered as "Nashik Community Diagnostics" with no "Limited" in the name, and by s.8(2) it has all the privileges and obligations of a limited company, so the doctors' liability is limited and the building can be owned by the company.
What the status then costs them. If in 2028 they wish to add commercial pathology services for paying customers as a separate object, they cannot simply pass a special resolution: s.8(4)(i) requires previous approval of the Central Government to alter the memorandum. If they later wish to convert into an ordinary private company so that a strategic investor can take dividends, s.8(4)(ii) permits it only on the prescribed conditions, and the surplus built up under the licence cannot simply be carried across for distribution. And if the centre were run for the promoters' private benefit, the licence could be revoked under s.8(6), the name would regain "Limited", and the Government could order winding up or amalgamation with a similar body under s.8(7), with the asset-lock ensuring the accumulated funds go to another section 8 company rather than to the members.
Run the counterfactual once, because it is the examiner's favourite. Suppose the doctors instead formed a trust. They would have limited liability nowhere, no statutory register of members, a rigid deed alterable only by the court in many cases, and no ready mechanism for adding or removing managers. Section 8 gives them corporate machinery with the profit motive removed, which is the whole point of the provision.
Distinctions
| Section 8 company | Ordinary limited company | |
|---|---|---|
| Name | No "Limited" or "Private Limited", s.8(1) | Must carry it |
| Dividend | Prohibited by the constitution, s.8(1)(c) | Permitted, subject to s.123 |
| Objects | Charitable or similar; illustrative list in s.8(1)(a) | Any lawful purpose |
| Altering the memorandum or articles | Previous approval of the Central Government, s.8(4)(i) | Special resolution, ss.13 and 14 |
| Conversion | Only on prescribed conditions, s.8(4)(ii) | Section 18 |
| Assets on dissolution | Asset-lock: to a similar section 8 company or as the section provides | To the members after creditors |
| Loss of status | Licence revocable, s.8(6), with winding up or amalgamation possible, s.8(7) | Not applicable |
What it does NOT mean
Not unlimited liability. Dropping "Limited" from the name does not drop limited liability; s.8(2) preserves the privileges of limited companies. The word is omitted precisely because the company is not trading for members' profit, not because members are exposed.
Not a tax exemption. Company-law status and income-tax exemption are granted under different statutes by different authorities on different tests.
Section 8 Companies
Not a body that cannot earn. A section 8 company may trade, charge and make a surplus; what it may not do is distribute that surplus to members. The restriction is on distribution, not on earning, and that distinction is often the whole answer.
Quick revision
s.8(1): objects (commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object), income applied to objects, dividend prohibited; licence from the Central Government; no "Limited" in the name. s.8(2): all privileges and obligations of a limited company. s.8(3): a firm may be a member. s.8(4): no alteration of memorandum or articles without previous Central Government approval; conversion only on prescribed conditions. s.8(5): existing company may be licensed in. s.8(6): revocation after hearing, on contravention, fraud, or conduct violative of objects or prejudicial to the public interest. s.8(7) to (9): winding up or amalgamation with a similar section 8 company; asset-lock on dissolution. s.8(11): fraudulent conduct draws s.447.
Test yourself
1. Does a section 8 company have limited liability although its name omits "Limited"? Yes. Section 8(2) gives it all the privileges and obligations of limited companies; the omission signals the absence of profit distribution, not the absence of limited liability.
2. The members of a section 8 company pass a special resolution altering the objects clause. Effective? No. Section 8(4)(i) requires the previous approval of the Central Government for any alteration of the memorandum or articles, so the resolution alone achieves nothing.
3. On what grounds may the licence be revoked, and what may follow? Under s.8(6), contravention of the section's requirements or the licence conditions, or affairs conducted fraudulently or in a manner violative of the objects or prejudicial to the public interest, after an opportunity of being heard; the Government may then order winding up or amalgamation with another section 8 company having similar objects.
4. What happens to the surplus assets of a section 8 company on dissolution? They are subject to the asset-lock: after debts and liabilities, they may be transferred to another section 8 company with similar objects, or dealt with as the section provides, and are not distributed to members.
5. Can a firm be a member? Yes, by the express provision in s.8(3), an exception to the general position of a firm in company law.
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.