Introduction to companies incorporated under section 8 of Companies Act:
Companies incorporated under section 8 of Companies Act, 2013 (‘Companies Act’) are formed with an object of promoting commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object. According to the Company Law, the company shall apply its profits, if any, or other income in promoting its objects. Such companies are prohibited from payment of any dividend to its member.
In India, social entrepreneurs have an option to incorporate a company under section 8 of the Companies Act for their social activities. Such companies are preferred by entrepreneurs as the formation of the entity is online, it runs like any other company (directors, shares, shareholders, meetings, etc.), basic master data of the company is accessible to public at large (without payment of any fees) and it can have some benefits under Income Tax Act, 1961 (subject to application / registration with authorities).
A company incorporated under section 8 of the Companies Act shall enjoy all the privileges and be subject to all the obligations of limited companies.
Subject to the conditions, restrictions and prohibitions as prescribed by Central Govt. in the license, the Central Govt. allows such companies to not have ‘Private Limited’ and ‘Limited’ in its name. Such companies can have Foundation, Forum, Association, Federation, Chambers, Confederation, Council, Electoral Trust and the like, in its name.
Based on the provisions of section 8 of the Companies Act and the Rules made there under, such companies are not engaged in any business activities like trading of goods, import/ export of goods/services, rendering of any services, consulting/advisory, etc. Section 8 are generally engaged in promoting social activities, creating awareness through electronic mode and one-to-one communication in society. Therefore, section 8 companies are not engaged in any ‘business activities’.
Commencement of Business:
With effect from November 2, 2018 (u/s 10A of the Companies Act), a company having a share capital shall not commence any business or exercise any borrowing powers unless:
- Declaration is filed by a director within a period of 180 days of the date of incorporation of the company in prescribed form with the Registrar that every subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of making of such declaration; AND
2. Company has filed with the Registrar a verification of its registered office as provided.
These provisions were re-introduced by Companies (Amendment) Act, 2019.
Moot question – Whether company incorporated u/s 8 of Companies Act is under any legal obligation to file e-Form for commencement of ‘business’?
Based on the above discussion, companies incorporated under section 8 are engaged in prescribed ‘activities’ which are social and/or promotional in nature and not engaged in ‘business’ activities. Such companies ought to have been exempted from the compliance of section 10A of the Companies Act. However, there is no section or Rules or notification which creates an exception for such companies. e – Form INC 20A also requires all companies to file such e-Forms, no exception created.
Section 10A of the Companies Act are not applicable to ‘company without capital’. Therefore, section 8 company without share capital is exempted from the said compliance.
The compliance under section 10A of the Companies Act would have been introduced with an objective to ensure accountability of promoters towards the company, avoiding shell companies, etc.
This is one more case wherein e-Forms mandates the compliance for all companies whereas such provisions ought not have been applicable to companies incorporated under section 8 of the Companies Act. Or the provisions ought to have been ‘Commencement of business and activities’.