Closure of Section 8 Company

What is Closure of Section 8 Company?

When a Non Profit Organization or NGO wants to register as a company under the companies act 2013 it is called a Section 8 company. A section 8 company is basically registered for charitable purposes and to promote non-profit activities such as sports, art and culture, education, research, social welfare, religion, environmental protection, and so on. The main objective behind the formation of these companies is to carry out non profit activities, promotion of charitable work and getting more funding. For these purposes first an NGO is registered, then a separate and exclusive license is opted from the government to register the NGO as Section 8 company.

A section 8 company comes under the control of the Ministry of Corporate Affairs, whereas other NGOs who are either registered as trust or society are governed by the Registrar of Societies under state government. Registering your NGO as a section 8 company has numerous advantages. It enjoys a good reputation and greater credibility among donors, government agencies, and the general public. The company should be registered for charitable deeds. All incomes and profits must be used for welfare purposes as mentioned in the act.

There is no minimum capital requirement for forming a company under section 8. Section 8 companies have 100% tax exemption as their profits are used for charitable purposes. The members of Section 8 company have limited liability and are not responsible for the company's losses. Donation to Section 8 companies is exempted from tax under section 80G. Documents required and registration process to register Section 8 company is quite similar to private limited company registration. A section 8 company is actually a Non Profit Organization that is registered as a company under the Companies Act of 2013. It is under the control of Ministry of Corporate Affairs (MCA). When compared to trusts and societies, registering an NGO as a company has numerous advantages like enhanced credibility in front of donors, government and private bodies and the public, various channels of donation, limited liability etc.

Closure of Section 8 Company Regulations

In India, NGOs are registered under the following laws:

1. Trust under Indian Trust Act 1882
2. Society under Societies Registration Act
3. As a company under Section 8 of Company Act 2013. 
4. An NGO which is registered as a company under section 8 is governed by companies act 2013.

What is Reasons for Section 8 Company Closure?

Many reasons can be cited to shut down a company. Among the common reasons to wind up a company are if the company fails to fulfill compliance, if the company is lacking funding, if the company is continuously making losses or it has been deemed bankrupt. Similar reasons can be responsible for closure of section 8 companies like inactive or dormant firms, poor compliance, loss making, lack of funding etc. As per the Companies Act a business must maintain regular compliance. If a company fails to register its compliance on time, it has to face fines and penalties, and the directors are barred from founding another company.

Thus it is advised to close an inactive company to avoid future fines or liabilities. Unlike winding up or closing off other companies, strike off section 8 company or section 8 company closure is a complex procedure which requires many compliances. The process of closing a section 8 company involves closing its operations, settling its debt obligations and liabilities, distributing its assets and surrendering its registration to the MCA. Strike off section 8 company is initiated when either the company faces financial troubles, it is unable to carry out its objectives, it is undergoing structural changes or it is merged or about to be merged with another company.

When compared with the costs of maintaining compliance for a dormant corporation, it may be cost-effective to dissolve a corporation and re-incorporate it later when situations are favourable. Here are some of the main reasons why the directors or partners might close down their Section 8 company:

• Inability to generate sufficient revenue: A company during its operation may face operational issues and thus fail to generate enough revenue to cover its expenses and make profit. This is one of the biggest reasons for any company closure. 
• Increasing Debts and Outstanding Payments: Another major reason for any company shutting down its operations is its increasing debts and pending payments. A section 8 company may have accumulated huge debts and may have outstanding payments that it is unable to pay off. 
• Violation of Objectives: Sometimes a company may end up violating its own objectives and policy. This can also become a reason for closure. 
• Lack of Funding: A company may shut down in a scenario of lack of funding and donation from investors and donors. It is also one of the biggest reasons for shutting down a company. 
• Structural changes: Sometimes a company undergoes structural changes in its organization that make it difficult to continue further operations.
• Lack of Interest: Sometimes the directors or owners lose interest in running a company. A section 8 company may also shut down on pretext of lack of interest in operations from its directors.
• Legal Issues: Sometimes legal issues make it difficult for companies to continue operations.
• Unskilled Management: A section 8 company may shut down if the management is not skilled or experienced enough to run it efficiently. 
• Lack of support: A company may lack support from the community or other stakeholders. This may also force a company to shut down. 
• Outside Factors: Sometimes there are some factors which are not in control of either management or shareholders. These factors may also affect company operations and force it to shut down. 
• Changing Government Policy: A change in current government policy or a new policy may also force the shutdown of a company. 
• Failing Compliances: A section 8 company has strict compliance requirements failing which may lead to strike off section 8 company. 
• Social or Political Reasons: Sometimes social and political changes may also force owners to shut down their section 8 company.

A section 8 company can be also be strike off on the basis of following reasons:

• The company has failed to carry operations within one year of its incorporation

• The company was operational in the last two financial years and failed to apply for dormant company status under section 455 of companies act. 
• The company has failed to align with its changed objects

What is Closure of Section 8 Company?

Closure of section 8 companies can be done by surrendering their charitable license. Because a section 8 company has the license of a charitable company, first it is required to surrender that license by converting the company into a normal company from a Section 8 Company. Unlike other companies the assets of a Section 8 company are not transferred to the company’s shareholders or management when it is closed. The Section 8 company’s assets are merged with those of another Section 8 company. The section 8 company closure process starts from conveying a general meeting to convert the company, appointment of a liquidator, paying off debts, settling liabilities, distributing the company’s assets, filing a closure application and in the end obtaining a closure certificate. 

Prerequisites Before Section 8 Company Closure:

Before proceeding with closure a section 8 company needs to convert into another company. Any existing section 8 company, to convert itself into another type of company shall make an application to the Regional Director for conversion of its status. Once the Regional Director gives approval the company ceases to enjoy all the privileges and concessions of a Section 8 company and becomes a normal company. Below are the details of conversion process:

1. Organize a meeting of board of directors and enact board motions for surrendering the license and holding a general meeting to obtain shareholder approval for closure. 
2. If shareholders agree to such a decision, organize an Extraordinary General Meeting (EGM) and pass a special resolution (SR). Only then may the closure procedure can start. 
3. Within 30 days of passing the special resolution in the EGM, submit form MGT-14 along with all applicable documents, DSC, and costs to the ROC
4. Now fill form INC-18 and submit it to the regional director (RD) along with the necessary paperwork and fees. This form is used for converting section 8 companies to normal companies.

What is Closure of Section 8 Company Process?

Detailed process of winding up section 8 company is given below:

To strike off a section 8 company, first of all a general meeting of board of directors is conducted. Here the directors discuss reasons for closure of 8 section companies and motions for surrendering the license and holding a general meeting to obtain shareholder approval. If the shareholders agree to strike off section 8 companies, then the Extraordinary General Meeting (EGM) is conducted and a Special Resolution (SR) is passed. Only then the process of closure may start. 

After the agreement to convert and strike off section 8 company is reached, form INC-18 is filled and submitted to the regional director (RD) along with all the necessary paperwork and fees. This form is required along with compulsory documents to file an application to convert section 8 company to normal company.

Below is the list of documents needs to be attached along with form INC-18:

• A copy of the EGM notice given to members 
• A copy of Special Resolution (SR)
• A copy of advertising in the INC-19 format – one in English and one in a vernacular language newspaper
• Copy of an explanatory statement
• Copy of list of creditors
• A copy of the application, along with delivery proof, is to be sent to the Chief Commissioner of Income Tax, the Income Tax Officer in whose jurisdiction the company falls, the Charity Commissioner, the Chief Secretary of the state where the registered office of the company is located, and any other authority/department of the Central or State Government in whose jurisdiction the company falls
• A statement by the board of directors declaring that no part of the company’s earnings, assets, or property is paid or transferred to any other member or person
• If the company got any special grant, privilege or exemption from any authority or agency, a copy of the NOC from the authority is required
• Copy of financial statements and annual returns submitted to the MCA up to the financial year before the application for license surrender was filed with the Regional Director.
• Copy of the certificate from a practicing professional like Chartered Accountant, Company Secretary, or Cost Accountant.

After the assent of Regional Director is obtained to convert the section 8 company to normal company, the next step in closure of section 8 company is appointment of a liquidator. Either the court or the company members, both can appoint a liquidator to oversee the closure process. He is appointed to manage the company’s assets and convert them into liquid assets or cash, settle and pay its debts and distribute the remaining assets among company members thereby making the closure process smooth and hassle free. 

After appointment the liquidator will closely examine the company’s financial records, balance sheet and profit and loss accounts. This way he will identify, list and verify all outstanding debts and liabilities. After this he will notify all creditors about the company closure and shall invite them to submit their claims, if any. 

In  the next step, the liquidator must now obtain a fair valuation of the company's assets from a qualified valuer. The valuer’s report provides a fair valuation of the company's assets. This way it is made sure that the company’s assets are distributed equally among the members according to their interests. 

Now the liquidator will file the section 8 company closure application. The closure application is filed by Form INC-20 to the Ministry of Corporate Affairs to start the closure process and submit the company’s registration. This form serves as a formal communication to the MCA that the company directors want to close the section 8 company and it must initiate the process. 

Upon receiving the closure application the MCA will review the closure application and check all supporting documents. 

After verification of documents and checking compliance details, if it is satisfied then the MCA will complete the closure process and shut down the section 8 company. It will issue a closure certificate. This closure certificate declares that the section 8 company stands legally closed.

The liquidator must retain all the records of the closure process with him for eight years, from the closure certificate issue date. This ensures that companies legal records are available for future enquiries and references. 

The following documents must be filed with the Registrar of Companies for Closure:

• A certified copy of the Regional Director’s approval to be sought within 30 days of receiving the order in Form INC -20. 
• Amended memorandum of association and articles of association of section 8 company
• Copy of  directors statement mentioning that all of the Regional Director’s conditions have been fulfilled. 

Once the company has been converted to a normal company, it can be closed down using the procedures prescribed in the Companies Act of 2013 or the Insolvency and Bankruptcy Code of 2016.

What is Documents Required for Closure of Section 8 Company?

Following documents are required to be filed for section 8 company closure:

• Certificate of Incorporation
• Audit Report
• Memorandum of Association
• Article of Association
• Last Audited Balance Sheet
• Profit and Loss Account Details
• DSC of Existing Directors
• Copy of EGM notice to members
• Copy of Special Resolution SR approving winding up of section 8 company
• Copy of board resolution
• Certificate issued by practicing CA/CS/CWA
• Company’s asset valuation report
• Copy of PAN 
• Copy of list of creditors

What is Benefits Closure of Section 8 Company?

There are several benefits of section 8 company closure like:

• Avoid Compliance: A section 8 company has to fulfill many compliances which is tough to do looking at small sizes and limited scope of operation of section 8 companies. Closure is a way to avoid those compliances permanently. 
• Avoid Running Cost: Closure of section 8 company saves the cost of operations. 
• Low Cost of Strike Off: Closure of section 8 company is not very costly which is why directors opt for it if  they fail to run the company.

What is the Section 8 Company Closure Fees?

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