29 January 2024
CAN A SECTION 8 COMPANY DO A BUY-BACK THROUGH NORMAL BUY BACK PROVISIONS OF COMPANIES ACT, 2013? IF NOT, CAN THE COMPANY DO IT AFTER CONVERSION IN PRIVATE COMPANY? AND WHAT ARE THE WAYS OF CLOSURE OF SECTION 8 COMPANY ?
11 July 2024
A Section 8 Company, which is established for promoting charitable objectives, has certain restrictions under the Companies Act, 2013 regarding activities like buy-back of shares. Here’s a detailed explanation regarding buy-back, conversion, and closure options for Section 8 Companies:
### Buy-back of Shares by Section 8 Company:
1. **Restrictions**: - Section 8 Companies are primarily formed for charitable purposes and are not permitted to distribute dividends to members. - The Companies Act, 2013 restricts Section 8 Companies from carrying out buy-back of its shares under the normal buy-back provisions (Section 68 and related provisions) meant for other types of companies.
2. **Conversion to Private Company**: - If a Section 8 Company decides to convert into a Private Company (under Section 8 of the Companies Act, 2013), it can then avail of the provisions applicable to Private Companies. - Private Companies are allowed to undertake buy-back of their own shares subject to compliance with specific conditions laid down in the Companies Act, 2013.
3. **Process of Conversion**: - Conversion from a Section 8 Company to a Private Company involves passing a special resolution by its members, altering the MOA and AOA to remove the charitable objects, and obtaining approval from the Registrar of Companies (ROC). - After conversion, the company can then follow the procedures for buy-back of shares as per the Companies Act, 2013.
### Closure of Section 8 Company:
1. **Ways of Closure**: - Section 8 Companies can be closed or wound up under the provisions of the Companies Act, 2013. The methods include: - **Voluntary Winding Up**: The members of the company can decide to wind up voluntarily by passing a special resolution and following the procedures outlined in the Act. - **Compulsory Winding Up**: This can be initiated by the Tribunal (National Company Law Tribunal or NCLT) based on various grounds such as inability to pay debts, just and equitable grounds, etc.
2. **Voluntary Winding Up**: - For voluntary winding up, the company must prepare a declaration of solvency, convene a general meeting to pass a special resolution for winding up, appoint a liquidator, and file necessary documents with the ROC.
3. **Distribution of Assets**: - Upon winding up, any surplus assets after payment of debts and liabilities must be transferred to another Section 8 Company, a charitable organization, or to a fund specified by the Tribunal.
4. **Compliance and Legal Advice**: - Closure of a Section 8 Company involves compliance with legal requirements and may require legal advice to ensure proper adherence to the Companies Act, 2013 and other applicable regulations.
### Conclusion:
- A Section 8 Company cannot conduct buy-back of shares under normal provisions but can do so after conversion to a Private Company. - Closure of a Section 8 Company can be voluntary or compulsory, following procedures stipulated under the Companies Act, 2013. - Legal consultation is advisable to understand specific requirements and implications of these processes for your Section 8 Company.
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