Changing or Closing a Section 8 Company: Amending Objects, Conversion and Winding Up

A Section 8 company gets a licence from the government on the basis that it will pursue charitable objects and never distribute its income or assets to its members. That bargain shapes what happens later. Changes that an ordinary company can make on its own often need government approval, and when a Section 8 company converts or closes, its assets can't simply go back to its members. This guide covers the main situations.

Changing the MOA or AOA

A Section 8 company can't alter its memorandum or articles of association without the prior approval of the central government, a power exercised through the Regional Director. This covers changes to:

• The objects, for example adding a new area of work.
• The rules on members, directors or how the company is run.
• Anything else in the MOA or AOA.

The usual process is a board meeting, a special resolution of the members, an application to the Regional Director with the proposed changes and the reasons, and then filing the approved changes with the ROC. New objects still have to be charitable, and the restrictions on distributing income and assets stay in place.

Changing objects also affects tax registrations. If the objects change, the company may need to tell the income-tax authorities and seek fresh registration, so plan the tax side before the change.

Changing Name or Registered Office

A change of name follows a process similar to other companies, with the extra condition that the name has to remain appropriate for a Section 8 company. Moving the registered office within a state or between states follows the normal company process, with government approval where the law requires it for any company.

Converting to Another Kind of Company

A Section 8 company can apply to convert into another kind of company, but only with the approval of the Regional Director, and on conditions. Typically:

• The company must have a good reason, and the application is advertised so that objections can be raised.
• It may have to pay back tax benefits, concessions or grants it received as a non-profit, or give up assets acquired with them.
• Accumulated profits and unused income from the Section 8 period generally have to be transferred to another Section 8 company with similar objects, or otherwise dealt with as the approval requires.

On the tax side, an exempt charitable institution that converts or loses its registration can face a special tax on its accumulated net assets, known as tax on accreted income. Factor this in early.

When the Licence Is Revoked

The government can revoke a Section 8 licence if the company breaks the licence conditions, or if its affairs are run fraudulently, against its objects or against the public interest. The company is given a chance to be heard first. After revocation, the company may be directed to convert, wind up or amalgamate with another Section 8 company, and the name has to drop any reference to being a Section 8 company.

Closing a Section 8 Company

A Section 8 company can close by applying to have its name struck off, if it meets the conditions, or through winding up. Either way, one rule stands out: surplus assets can't be distributed to members. After meeting all liabilities, the remaining assets are generally transferred to another Section 8 company with similar objects, or as otherwise required by law.

Before closing, settle all liabilities, complete pending ROC and tax filings, close FCRA accounts if any, and deal with the 12A and 80G registrations. Remember the possible tax on accreted income.

Merging With Another NGO

Sometimes the better route is to amalgamate with another Section 8 company with similar objects, keeping the work going under one organisation. This needs approval under the Companies Act and careful planning of tax registrations and donor commitments.

Common Mistakes

• Changing objects or articles without prior government approval.
• Starting new activities outside the objects before amending them.
• Planning a conversion or closure without accounting for tax on accreted income.
• Trying to return surplus assets to members or founders.

Getting Help

Think Filing handles object changes, conversions, amalgamations and closures for Section 8 companies, including the government approvals and the tax consequences.

Sources

• Companies Act, 2013, and the Companies (Incorporation) Rules, 2014.
• Income-tax provisions on charitable institutions and tax on accreted income.