This article is written by Anjali Sinha, a legal professional. The article talks about oppression and mismanagement as provided under Chapter XVI of the Act, the related provisions, its application, and landmark judgements supporting and explaining the contentions.

It has been published by Rachit Garg.

Introduction  

Chapter XVI of the Companies Act, 2013, comprising Sections 241-246 incorporates the statutory provisions for intercepting oppression and mismanagement in a company.

Although the Act does not specifically outline the terms ‘oppression’ or ‘mismanagement’, an aggrieved shareholder may make a motion to the National Company Law Tribunal (hereinafter referred to as the NCLT) under Section 241 if there is a reason to believe that the affairs of the company are being carried out in a manner prejudicial to the concern of the company/public or is prejudicial to it or any other member(s). 

Similarly, such a motion may also be initiated if the shareholder believes that there has been a minimal change in the company’s management or control, which is not the concern of shareholders and can also lead to the company’s affairs being carried out in a manner prejudicial to the interests of the company or its members. This consists of a turnaround or substitution in the Board, managers, or alteration in the ownership of the company’s shares. 

A detailed explanation of Section 241 

An analysis of clause (1) provides that Section 241 can be described as:

• A misuse of powers by a person in charge of the administration of the company.
• An insufficient administration does not result in oppression but may amount to mismanagement of the company under Section 241 of the Act.
• When the company is operated against the views and concerns of the majority shareholders, involving the company in expensive litigations, the management might be deemed to be prejudicial to the company’s interest.
• If there is any such unusual practice, then members of the company may approach the tribunal. However, it is pertinent to note that the member should have a right under Section 244 of the Act to an order under this Chapter.

An analysis of clause (2) provides that if the Central Government is of the opinion that the company’s affairs or other practices are contrary to the public interest, then an approach to the Tribunal can be made to resolve the issue or to take legal action under the provisions mentioned under this Act. Further, an application under this subsection may be made before the Principal Bench of the Tribunal, and those applications should relate to the company or class of companies that may be specified.

An analysis of clause (3) provides that if the Central Government is of the opinion that under certain circumstances, a person is a fit and proper person to hold and be connected with the conduct and management of the companies, the Central Government may initiate a proceeding and refer the same to the Tribunal with a request to inquire into the case and record a decision regarding the fitness of the person. The circumstances are as follows:

• Any person involved with the management and function of the company is or has been guilty of fraud, misconduct or negligence and failure to perform duties and functions.
• Affairs of the company are not being managed by a person having sound knowledge of business principles and practices.
• Affairs of the company being managed by the person having malafide intentions. 

An analysis of clause (4) provides that any person against whom an application by virtue of sub-section (3) is made shall be added as a respondent to the application. 

Likewise, clause (5) provides that every application made by virtue of sub-section (3) contains a brief description of facts and circumstances that the central government takes into consideration while investigating. Also, the signature and verification procedures will be as per the Civil Procedure Code, 1908).

How can an application be made under Section 241

If any of the members authorised, depositors, or classes of them believe that the company’s management is acting in a way that is prejudicial to the company’s interests, an application must be submitted to the tribunal.

The statutory remedy envisaged in Section 241-242 is an effective option for an aggrieved investor whose interests have been harmed. However, it is not a time-barred procedure. The action envisaged as the statutory remedy under the Section may be effective until an interim or final measure is granted. 

Also, an aggrieved party may approach the NCLT for immediate relief in the course of such proceedings. If any such immediate or final relief is granted during the course of action, it would be applicable as such.

The NCLT has a wide range of powers within the meaning of the Act,the most important of which is the power to grant just and equitable reliefs. In addition, there is no restriction on the persons who may be the parties to the proceedings. The reliefs granted by the NCLT are also not limited to particular persons and may operate on a substantive basis.

Who can file an application under Section 241 of the Companies Act, 2013

Earlier in the Companies Act, 1956, Section 397 dealt with applications against oppression and mismanagement. The Companies Act, 2013, provides for the provision of an application against oppression under Section 241. Chapter XVI of the Companies Act clearly sets out who may make a complaint and under what circumstances a complaint of oppression or mismanagement may be made.

Consider first a situation where a member of the company files a complaint about the affairs of the company when the matter appears to affect the interest of the general public or the company, or when the company’s affairs are oppressive in nature and against the complainant member or any other member of the company. 

The member may also file a complaint in relation to a material change in management or control of the company that could appear to be prejudicial to the company. The Central Government itself can bring an application for oppression and mismanagement in a tribunal against a company if it considers that the company’s affairs are prejudicial .

Further, Section 244 of the Companies Act, 2013, describes who has the right to make such an application. The right is widely shared between the company and the entitlement of a member to make applications on behalf of other members. 

In a company, the right can be further differentiated between companies holding share capital and companies not holding share capital. In numerical terms, it should be 100 or 1/10 of the total members, and in terms of value, it must be the members holding 1/10 of the share capital value. In the case of companies without share capital, ⅕ of the total number of members can apply. 

Besides, a member’s authority to make requests on behalf of the other members, the only condition is that the person doing so has the written consent of the others.

Landmark rulings related to Section 241 of the Companies Act, 2013

Tata Consultancy Services Limited v. Cyrus Investments Pvt. Ltd. & Ors. (2021)

In this landmark case, the Supreme Court examined the issue of oppression and mismanagement. 

Facts- Mr. Cyrus Mistry was removed as the non-executive director of Tata Sons, along with directorships in other companies of the Tata Group, following resolutions passed at shareholder meetings. Subsequently, two companies holding shares in the Tata Group filed a complaint under Sections 241, 242, and 243 for discrimination. 

Issue- On a complaint being made under sections 241, 242, and 243, the NCLT found no evidence to uphold these allegations, but this was reversed by the NCLAT, which reinstated Mr. Mistry as director of various companies within the group.

Judgement- Further, on appeal to the Hon’ble Supreme Court, it was held that no matter existed for winding up under Section 242 due to a lack of justifiable confidence in management, and mere lack of confidence between majority and minority shareholders would not be sufficient grounds; nor did Sections 241 and 242 provide power for reinstatement; nor could an apprehension of future conduct arising from the company’s Articles be adjudged by a Tribunal under Section 241.

Union of India v. Delhi Gymkhana Club (2021)

This is yet another notable judgement relating to oppression and mismanagement. 

Facts- Delhi Gymkhana is a 107-year-old club registered under Section 8 of the Companies Act. The main objective of clubs other than those mentioned in the MOA is to promote sports and pastimes. The club has a limited membership of 5600 permanent members.

Issue- Following a complaint from the government, the Ministry of Corporate Affairs decided to take penal action against the club and moved to NCLT, alleging mismanagement of the club and affairs being conducted in a manner prejudicial to the public interest.

Judgement- In this case, an application for oppression and mismanagement was filed by the Government of India under Section 241(2). The NCLAT discussed the scope of Section 241(2) and made the following observations:

If the Central Government lodges a complaint under the aforementioned Section, it is required to record its position on the company’s affairs being conducted in a manner prejudicial to the public interest, and the recording of such position is a necessary condition for making an application under Section 241(2).

The Tribunal cannot review the sufficiency or otherwise of the material on the basis of which the government has formed its opinion, more so when no mala fide intention is imputed to the Central Government.

The phrase ‘public interest’ cannot be extended to include all citizens of India. It would be enough if the rights, safety, economic well-being, health and safety of even a fraction of society – such as candidates seeking membership from the category of ordinary citizen – were affected, regardless of the fat that only a few individuals are involved.

Smt. Shreyans Shah v. The Lok Prakashan Ltd. & Ors.

The NCLAT held that the tribunal can pass interim orders under Section 242 if a prima facie case is made out. He pointed out that the issuance of a preliminary injunction by the tribunal beyond the scope of Section 242(4) postulates a situation where the affairs of the company were not or are not conducted in accordance with the provisions of law and the articles of association. In order to make out a prima facie case, a member alleging oppression and mismanagement must demonstrate that he has raised justiciable issues in the company petition that require examination.

Aruna Oswal v. Pankaj Oswal & Ors.

In this case, the Hon’ble Supreme Court held that since the questions of right, title, and interest in the shares by virtue of the nomination were pending before the civil court, which ordered status quo in relation to the SC matter, the shareholder, whose title to the shares was in dispute and would be ineligible to stand on a Section 244 motion, would not be able to agitate matters relating to the disputed shares through a motion for oppression and mismanagement, including seeking a waiver of Section 244.

Conclusion

The management of the company is based on the majority rule, but at the same time, the interests of the minority cannot be completely ignored. When we talk about majority and minority, we are not talking about numerical majority or minority, but about majority and minority voting powers. The reason for this distinction is that a small group of shareholders may hold a majority share, while the majority of shareholders may hold a very small percentage of the share capital between them.

Once in control, the majority can, for all practical purposes, do whatever they want with the company with virtually no control or oversight, because even when they are questioned about their actions at  a general meeting, they always come out victorious because of their great voting power. Thus, modern company laws contain a large number of provisions to protect minority interests in companies.

The recent downfall of major companies and corporations around the world has made such entities think carefully about their actions towards company affairs. Liability has increased through the use of class action lawsuits brought against executives for their acts of oppression and mismanagement. The company’s individual shareholders and minority shareholders were empowered to take action against the unauthorised abuse of power and authority by executives under oppression and mismanagement. An individual can file an  application with the court reporting oppression and mismanagement committed by key employees towards him or another shareholder of the company. 

Frequently Asked Questions (FAQs)

Can a suit be filed without notice?

There is no mandatory requirement of issuing a notice before filing a suit. It is optional as there is no statutory requirement of service nor there is statutory fixed period for such notice.

Can a company file a case against an employee?

A lawsuit can be filed in a civil court or labour court against an employee by the employer who is negligent in performing his duties and functions for the interests of the affairs of the company.

What action can be taken against a director?

If a director is found to have breached their fiduciary duties towards the company, the company may initiate legal action against the director.

Can directors be personally held liable to pay?

Generally, the liability of the company is not transferred to the directors. However, the directors can be held personally liable within the provisions of the Companies Act, 2013, if there is a breach of fiduciary duty or an instance of fraud.

References

• https://ibclaw.in/section-241-of-the-companies-act-2013-application-to-tribunal-for-relief-in-cases-of-oppression-etc/ 
• https://taxguru.in/company-law/oppression-mismanagement-companies-act-2013-section-241-246.html 

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This article is authored by Anushka Singhal from Symbiosis Law School, NOIDA. This article throws light on Section 8 of the Companies Act 2013 and explains its incorporation procedure, advantages, disadvantages, etc.

It has been published by Rachit Garg.

Introduction

The word ‘company’ is defined under Section 2(20) of the Companies Act, 2013 as “a company incorporated under this Act or under any previous company law.” Several types of companies are mentioned under the Companies Act, 2013.

Following are the types of companies which may be registered under the Companies Act:—

• Private company, 
• One-person company,
• Small company, 
• Public company. 

The above mentioned companies may be incorporated as – 

1. limited liability companies, and
2. unlimited liability companies. 

Limited liability companies may be—

1. Companies limited by shares;
2. Companies limited by guarantee;
3. Companies limited by guarantee as well as shares. 

Apart from the above classification, companies may be further classified into-

• Statutory companies;
• Registered companies; 
• Existing companies; 
• Associations not for profit; 
• Government companies; 
• Foreign companies; 
• Holding and Subsidiary companies.

What is Section 8 of Companies Act, 2013

Section 8 of the Companies Act, 2013, discusses associations and not-for-profit organisations. The companies under this Section are commonly known as ‘Section 8 companies’ and are made for a charitable purpose rather than to earn profit. Section 8 companies enjoy certain benefits under the Companies Act and are exempted from certain compliances. 

Prerequisites for a Section 8 company

The following conditions must be fulfilled to be a Section 8 company-

1. The company established under this Section must promote trade, art, science, sports, education, research, social welfare, religion, charity, environmental protection, or any other such object.
2.  It aims to use any earnings or other revenue to further its objectives; and
3. It intends to restrict the distribution of any dividends to its members.

Upon fulfilment of the above-mentioned conditions, a company gets registered under Section 8 by the Central Government. The words “limited” or “private limited” are not added to such a company’s name. The names of such companies should include suffixes like “council,” “forum,” “trust,” “foundation,” “federation,” “chambers,” etc., as per Rule 8 (7) of the Companies (Incorporation) Rules, 2014. The gymkhana club and the Delhi District Cricket Association (DDCA) are some examples of Section 8 companies. These companies are also given several tax benefits under the Income Tax Act, 1961. They are exempted from paying income tax, and owners have several tax benefits. 

History of Section 8 companies

The Companies Act, 1913, prescribed setting up some companies with charitable objects without using the words “limited” and “private limited.” Later on, when the Companies Act, 1956, came into force, these companies were incorporated under Section 25 of the said Act. The Bhabha Committee’s recommendation led to the establishment of this new Act. Later on, in the year 2013, Section 8 was added. It is pertinent to note that under Schedule VII of the Indian Constitution, ‘Trust and Trustees’ find mention at Entry No. 10 in the Concurrent List, and ‘Charities & Charitable Institutions, Charitable and Religious Endowments, and Religious Institutions’ find a place at Entry No. 28 of the Concurrent List. Therefore, both the Centre and the States are competent to legislate and regulate charitable organisations.

Procedure for incorporation

Following is the procedure for incorporation of a Section 8 company-

Application for the desired name

Once it is decided that a Section 8 company has to be established, a SPICe+(Simplified Proforma for Incorporating Company Electronically Plus) form must be filled out to reserve the company’s name. Two new names have to be chosen and filed with the proposed business activity.

Application for digital signature

The incorporation of a company is an entirely online procedure. Therefore, one has to apply online to procure a digital signature online. A digital signature certificate will be issued then. These signatures are needed so that the members and directors can subscribe to the memorandum and articles of association. 

Application for incorporation

After filing for reservation of name, the application for incorporation has to be filed. There are several documents to be filed, but with the help of SPICEe+, all of these forms are now combined into one. Name reservation, incorporation, applications for DIN (Director Identification Number), TAN (Tax Deduction and Collection Account Number), and PAN (Permanent Account Number) applications, EPFO (Employee Provident Fund Organisation) registration, ESIC (Employees’ State Insurance Corporation) registration, and GST (Goods and Services Tax) registration are now done with a single form. Then, a memorandum and an article of the association are drafted, which are subscribed to by the subscribers, and their photos are then suffixed. For Section 8 companies specifically, the physical copy of the MOA draft duly signed by members and witnesses: The physical copy of the AOA draft duly signed by members and witnesses. A declaration-14 by any practising professional must be filed. The declaration in Form 14 has to be filed by a chartered accountant, cost accountant, or company secretary, who must attach a declaration in Form No. INC-14 that the requirements under Section 8 have been complied with. The subscribers will make an estimate of the income and expenditures that would be incurred by the company in the next three years and will also state the sources from which the income would be made. Then a declaration would be authorised by the directors and subscribers and stamped papers. 

Certificate of commencement of business

Once the company’s incorporation application is approved and the ROC issues the Certificate of Incorporation, the company must file for approval to begin operations within 180 days of its incorporation.

Number of directors in a Section 8 company

Unlike public and private companies, there is no maximum or minimum limit on the number of directors in a Section 8 company. These companies are not required to have an independent director. Still, they are required to have a minimum of one resident director, i.e., a director who has resided in India for at least 182 days (one hundred and eighty-two days) or more within the previous calendar year. There is no provision for minimum directorships in such companies. 

Annual, quarterly and monthly compliance for a Section 8 company

Appointment of an auditor

Under Section 139 of the Companies Act 2013, an auditor has to be appointed within thirty days.

Maintenance of statutory registers 

According to Section 8 of the Companies Act 2013, the company is required to keep a statutory register of its members, loans received, charges made, directors, and others.

Board meetings 

Board meetings have to be called every six months.

Statutory audit

The books of account have to be audited every year by the chartered accountant.

General meeting notice

Before every general meeting, a notice of 21 days has to be given. 

Annual general meetings

The annual general body meeting would be held once a year, within six months of the fiscal year’s end. However, in the case of the first annual general meeting, the company could hold the AGM in less than nine months after the first fiscal year ends.

Board reports

Board reports have to be prepared each year and submitted. 

Tax returns

Tax returns must be filed by March 31 every year. 

Tax audit

Form 10B would be filed by a charitable or religious trust or institution that is enrolled under Section 12A or has filed an application for registration by filing Form 10A.

DIN KYC

Every person who receives a DIN dated March 31st of the fiscal year must submit his KYC on or before September 30th of the following fiscal year.

GST return

Like a tax return, a GST return has to be filed each year. There must be GST compliances that are to be done on a monthly and quarterly basis. These are the monthly and quarterly compliances. 

Additional compliance for a Section 8 company

Following are the additional compliances for Section 8 companies-

1. The director has to acquire an approval form and join the office within 30 days of such approval.
2. Return forms must be filed within 60 days of the appointment] of a managing director, manager, or another key managerial posting.
3. If such a company has more than eight employees, it has to mandatorily make its employees members of the employee provident fund organisation (EPFO). 
4. The donations received by such companies are exempted from taxes. Such companies must enrol under Sections 80G and 12A of the Income Tax Act. 

Alteration of memorandum and articles of association

Unlike other companies under the Companies Act 2013, associations not for profit cannot alter their memorandum or articles. The permission of the Central Government is needed for the same. The same was held in the case of N.C. Bakshi v. Union of India (2012), wherein the approval to change articles of association given by the Central Government was nullified because the petitioner’s representation was not considered. The High Court of Delhi held that the Central Government should give the permission after considering all the necessary factors. Thus, the petitioners were given a post-decisional hearing to determine if the alteration was in contravention of the Companies Act. 

Conversion of a Section 8 company into a company of any other kind

Such companies can convert themselves into companies of any other kind by passing a special resolution at a general meeting. Still, Rule 21 of the Companies (Incorporation) Rules, 2014 has to be complied with. While giving notice of conversion, one should provide an explanation as to why the company is being converted. Moreover, other pertinent details like the conversion’s date, motive, and impact must also be stated. 

Rule 21 of the Companies (Incorporation) Rules, 2014

Rule 21 lays down the procedure for conversion of a Section 8 company into another company-

1. Such a company has to pass a special resolution for conversion.
2. A notice has to be sent containing an explanatory statement as to why such a conversion has to happen-

1. The objectives as set out in the memorandum of association;
2. Reasons for conversion;
3. The altered objects after conversion and reasons for such alteration;
4. The privileges and exemptions enjoyed by such a company; and
5. Details of the proposed conversion’s impact on the company’s members, including any benefits that may accrue to the members as a result of the conversion.

3. Such a certified copy of the notice has to be filed with the registrar. 

Exemptions granted to Section 8 companies

1. It is not mandatory for these companies to appoint a company secretary. 
2. Unlike other companies wherein meetings have to be held during business hours only and never on a national holiday, such companies are allowed to hold meetings before or after business hours and even on a national holiday. The board of directors must decide the date, time and place beforehand.
3. Unlike the mandate of 21 days’ notice to conduct annual general meetings, these companies can give a notice of 14 days for AGMs.
4. These companies are not bound to prepare the minutes of their meetings as per Section 118 of the Companies Act, 2013. However, the minutes must be recorded within 30 days of the meetings when articles of association provide so. 
5. There is no mandate to appoint a maximum and minimum number of directors as given under Section 149 of the Companies Act, 2013.
6. They are not bound to appoint independent directors.
7. Instead of four board meetings in a year, these companies are allowed to hold only two meetings within a span of six months. 
8. Unlike other companies, such companies are not bound to follow the limit of 20 directorships. 
9. The provision requiring the director’s consent to function in that position to be lodged with RoC within 30 days of appointment, as required by Section 152(5), shall not apply to associations not for profit.
10. The quorum for board meetings shall be eight members or 25% of its overall strength, whichever is less, provided that it is not less than two as opposed to 1/3rd of the total strength or two directors, whichever is greater.
11. The ability of the board of directors to borrow money, invest business cash, grant loans, offer guarantees, or provide security for loans may be exercised by the board by circulation rather than at a meeting.

Section 8 companies and the Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code (IBC), 2016, applies to Section 8 companies. They are recognised as corporate personalities under the IBC and can either initiate or be subject to insolvency procedures launched by their creditors. When they file for insolvency under IBC, they must be able to show that they are insolvent and unable to pay their debts. When insolvency proceedings are launched, a resolution expert is assigned to handle the firm’s affairs and develop a resolution plan to reorganise or resuscitate the company. Similarly, the creditors can also initiate insolvency proceedings if there are unpaid debts. The experts have said that the regular insolvency proceedings under the IBC should not be applied to associations not for profit, given their charitable purpose. 

Amalgamation and winding up

A Section 8 company can only be amalgamated with a company of the same kind. It cannot be amalgamated with any other company, like a private or public company. Even if the objects of the two amalgamating companies are not the same but similar, they can both amalgamate. The objectives of any two Section 8 companies do not have to be identical. The phrase “having similar objects” should not be interpreted narrowly.

A Section 8 company can apply for winding up like any other company. The name of such a company can be struck off from the register of companies on a suo-moto basis under Section 248 of the Companies Act, 2013. 

Contravention of provisions under Section 8 of Companies Act, 2013

The following are the consequences for contravention of provisions under Section 8-

1. Revocation of status- The company would be changed from an association not for profits to a public or private company, and the words ‘limited’ or ‘private limited’ as the case may be added.
2. Amalgamation with a company with similar objects
3. Winding up order
4. Imposition of penalties under the Companies Act, 2013 – A fine, not less than ten lakhs and up to one crore may be imposed on the company and the director’s Imprisonment for a term which may extend to 3 years or a fine not less than Rs 25000 which may extend to Rs 25 lakhs or with both. 

If the acts of the company are conducted in a fraudulent manner, then Section 447 of the Companies Act 2013 may apply. It prescribes a punishment of imprisonment for a term not less than six months, which may be extended to 10 years, and a fine not less than the amount involved in the fraud, which may be increased to three times the amount involved in the fraud.

Corporate social responsibility (CSR)

In spite of the fact that Section 8 companies are themselves involved in charitable work, they are also required to perform their corporate social responsibility. As per the Corporate Laws Committee Report, Section 135 applies to every company, including Section 8 companies. The company has to spend on a cause different from that in which it is already engaged. The expenditures for corporate social responsibility must not be for the benefit of such a company and its employees. 

Advantages of Section 8 companies

Distinct identity

This is a separate entity with its own existence. Because the business and its members are both independent individuals in the eyes of the law, the members have no accountability for the company’s obligations. As a result, a corporation is an artificial person with a separate legal personality.

Limited liability

The state of being legally accountable for a company’s obligations only up to a certain amount is referred to as “limited liability.” The members of the company are not personally liable for the company’s wrongdoing. 

No minimum capital

There is no requirement to have a minimum capital for such companies. 

Less stamp duty

There is minimal stamp duty livable while forming Section 8 enterprises. The government grants benefits to Section 8 on business incorporation. Therefore, it charges less stamp duty on incorporation.

Tax benefits

Section 8 companies may get tax benefits under the Income Tax Act, 1961, if they are registered under Section 80G and 12AA of the IT Act.

Disadvantages of Section 8 companies

Limited scope

Section 8 firms are restricted in their operations and are not permitted to make a profit. They are also barred from paying out profits to their members, limiting their operations’ scope.

Complicated compliance

Notwithstanding significant legal advantages, Section 8 enterprises must comply with several legal and regulatory restrictions. The compliance procedure may be time-consuming and difficult, thus making it difficult for them to carry out charitable activities. 

Increased scrutiny

As non-profit organisations, Section 8 companies are subject to increased scrutiny by regulators and the public. Any financial irregularities or mismanagement can have severe consequences for the company’s reputation and credibility.

Limited control

Section 8 companies are required to have a minimum of two directors, and the board of directors is responsible for managing the affairs of the company. However, the company’s members have limited control over the company’s operations and cannot directly influence the board’s decisions.

Limited ability to raise funds

Section 8 companies are prohibited from raising funds through the issue of equity shares. They can only raise funds through donations, grants, and other forms of non-equity capital. This can limit the company’s ability to raise capital and expand its operations.

Points to be noted

Relaxation in stamp duty payment on the issuance of share certificate 

The Indian Stamp Act, 1899, governs the imposition of stamp duty on issuing share certificates. No state has provided a special rate of stamp duty exemption for stamp duty payable on the issuance of share certificates by a Section 8 company. Similarly,  stamp duty payable on the transfer of shares has not been exempted for Section 8 companies. However, as with other companies, no stamp duty is payable on transfers of section 8 company shares made in demat mode.

Receiving contributions from overseas or non-residents

Before a Section 8 Company can accept contributions or donations from non-residents from overseas/outside India, special requirements must be met under the Foreign Contribution and Regulation Act, 2010. The provisions of the aforementioned Act are in addition to those of the Companies Act.

Registration of foreign company under Section 8 Company

The registration of a foreign company cannot be done under Section 8 of the Companies Act, 2013, as the definition of such a company does not fall within the definition of a foreign company as provided under Section 2(42) of the Companies Act, 2013. But if registered under the Foreign Exchange Management Act, 1999, such not-for-profit companies or bodies incorporated outside India can promote and register a Section 8 Company in India as a distinct entity.

Recent developments

Simplifying the registration procedure

The Ministry of Corporate Affairs (MCA) recently streamlined the Section 8 company registration process by creating a web-based form called SPICe+. This has sped up and improved the process of forming a Section 8 corporation.

Relaxation of compliance requirements

The MCA has also simplified several compliance requirements for Section 8 firms, such as holding an annual general meeting (AGM) and appointing an auditor for small Section 8 companies.

Expenditure through corporate social responsibility

Companies with a net worth of INR 500 crore or more, a turnover of INR 1,000 crore or more, or a net profit of INR 5 crore or more are required by the Companies Act, 2013, to spend at least 2% of their average net profits over the previous three fiscal years on corporate social responsibility (CSR) activities. Section 8 companies are also eligible to receive cash from these corporations for CSR initiatives.

Contributions from foreign entities

The Foreign Contribution (Regulation) Amendment Act, 2020, has made it mandatory for all Section 8 companies to register under the Foreign Contribution (Regulation) Act, 2010, if they receive foreign contributions.

Landmark judgments

Mohanram Sastry v. Swadharma Swarajya Sangha (1995)

In this case, the Madras High Court held that because the object of a “not-for-profit company” is entirely charitable, no member or director can claim that he was ignored while charity was being done. A member can only ensure that the activities are channelled to achieve the charitable objectives by exercising his rights. In the case of such a company, members’ personal interests are not to be considered. The members can contend that the company is being mismanaged as the charitable objectives are not being fulfilled. 

Financial Planning Supervisory Foundation v. SEBI (2015)

In this case, the Court held that charitable associations could claim tax exemptions only if they were registered under Section 25 of the Companies Act, 1956 (currently Section 8 of the Companies Act, 2013). As the company in the given case did not get registered under the relevant Section, it could not get benefits under SEBI. 

Some misleading facts about the incorporation of Section 8 company

1. It is often believed that the notarization of AOA and MOA is compulsory, but this is not true.
2. It is believed that the government fees for such companies is on the higher side but it is false. 
3. Directors in form no INC 15 affidavit is required. This is also a prevailing misconception. 
4. There are also misconceptions about the applicability of INC 33 and 34.

Conclusion

Section 8 companies are one of the many companies mentioned under the Companies Act, 2013. These are not-for-profit organisations and are thus very important for the purpose of philanthropy. If one wishes to do charitable work, then these companies can be established by following the procedure under the Companies Act, 2013.  Such companies have been given certain exemptions as they promote a noble cause, and there are additional compliances upon these companies. Section 8 companies are an essential part of the Companies Act, 2013. 

Frequently asked questions (FAQs)

What are Section 8 companies under Companies Act, 2013?

Section 8 companies are not-for-profit organisations established under Section 8 of the Act. These companies aim to promote charitable purposes, art, commerce, etc. 

What are the documents required for companies to be registered under Section 8 of Companies Act, 2013?

Documents required for companies to be registered under Section 8 of the Act are:

• Digital Signature Certificate;
• Memorandum of Association;
• Articles of Association;
• Passport-size photographs;
• Members’ Id Proof such as Aadhar Card, Passport, and Voter Id;
• Details of director (when the members are other companies/LLPs);
• Address evidence; and
• Director Identification number;

Do the accounting standards apply to such companies?

Yes, the accounting standards apply to such companies

Is there a limit on Section 8 companies from doing investments, furnishing loans, etc.?

These companies must comply with Sections 180, 185 and 186 and other relevant sections of the Companies Act while doing investments etc. 

Can a partnership firm or a Limited Liability Partnership become a member of a Section 8 company?

Yes, under the Companies Act 2013, a partnership firm or an LLP can become a member of Section 8 company. The partnership firm or LLP must comply with the provisions of the respective Acts, as the case may be.

Who is authorised to issue licences to a Section 8 companies?

 The registrars of companies of respective jurisdictions are delegated with the powers of the Central Government to issue licences to Section 8 companies. 

Can a One Person Company (OPC) be incorporated as or converted into a Section 8 company?

No. Rule 3 of the Companies (Incorporation) Rules, 2014 prohibits a one-person company from being incorporated as a Section 8 company or converting into a Section 8 company.

Can a partnership firm or a Limited Liability Partnership become a member of a Section 8 company? 

Yes, under the Companies Act, 2013, a partnership firm or an LLP can become a member of a Section 8 company. The partnership firm or LLP must comply with the provisions of the respective Acts, as the case may be. 

Will the directorship in a Section 8 company be counted for calculating the total number of maximum directorships i.e., twenty as prescribed under Section 165 of Companies Act, 2013? 

No, directorships in Section 8 Companies will not be counted for calculating the ceiling with respect to the maximum number of directorships as prescribed under Section 165 of the Companies Act 2013. 

References

• TAXMANN’S COMPANY LAW AND PRACTICE, A Comprehensive Textbook on Companies Act, 2013
• A Ramaiya: Guide to the Companies Act, 19th Edition – Volume 1
• https://www.taxmann.com/post/blog/what-is-a-company-definition-characteristics-and-latest-case-laws/
• https://taxguru.in/company-law/section-8-companies-under-companies-act-2013.html

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