Chapter 2: Incorporation of Company and Matters Incidental Thereto - Test 2: answer key

Question 1 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Scenario. Vidya Daan Foundation is a company incorporated under Section 8 of the Companies Act, 2013, with the object of promoting education among underprivileged children. Its MOA and AOA were duly approved by the Regional Director (RD) at the time of incorporation, and the company was granted a licence. In FY 2025-26, the foundation received a substantial donation from a foreign philanthropic trust. The Board of Directors, in its meeting held on 10th April 2026, passed a resolution to alter the objects clause of the MOA to include 'vocational training and skill development' as an additional charitable object. The Board believed that since the new object is also charitable in nature, no prior approval is required. Accordingly, a special resolution was passed by the members on 25th May 2026, and the altered MOA was filed with the Registrar of Companies (ROC) on 5th June 2026. Meanwhile, the foundation also decided to change its name from 'Vidya Daan Foundation' to 'Vidya Daan Skill Foundation' to reflect the new object. For this name change, the Board filed an application with the ROC. Separately, the foundation had been irregular in holding its Board meetings. For the financial year 2025-26, the foundation held only two Board meetings. The company secretary pointed out that a Section 8 company is exempt from certain provisions but not from the minimum number of Board meetings. The Board also decided to amend its Articles to include a clause prohibiting the payment of any dividend to its members, although the existing Articles were silent on this point. The foundation also wanted to convert itself into a Section 8 company limited by guarantee from a company limited by shares, without seeking any fresh licence. The company is now facing a situation where it wants to convert itself into a regular private limited company to undertake commercial activities in the education sector.

Under Section 8(4)(i) of the Companies Act, 2013, whose prior approval is required for altering the objects clause of a Section 8 company's Memorandum of Association?

1. Registrar of Companies (ROC), exercising powers delegated by the Central Government. (correct answer)
2. National Company Law Tribunal (NCLT).
3. Governor of the Reserve Bank of India.
4. High Court having territorial jurisdiction.

Answer: A — Registrar of Companies (ROC), exercising powers delegated by the Central Government.

Explanation. Under Section 8(4)(i) of the Companies Act, 2013, a Section 8 company shall not alter the provisions of its memorandum or articles except with the previous approval of the Central Government. The Central Government has delegated this approval power to the Registrar of Companies (ROC).

Where it goes wrong. Students may assume that because the new object is charitable, the alteration is automatically valid, ignoring the mandatory prior approval requirement under Section 8(4)(i).

Authority. Section 8(4)(i) of the Companies Act, 2013; Notification S.O. 709(E) dated 10.02.2026 (delegation to RD)

Question 2 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Vidya Daan Foundation wants to change its name to 'Vidya Daan Skill Foundation' to reflect its new object. The Board filed an application with the ROC. Which authority is competent to approve this name change, and what is the correct procedure?

1. The ROC is competent, as the name change of a Section 8 company is governed by Section 13(2) and requires only the ROC's approval.
2. The Regional Director is competent, as the name change of a Section 8 company is treated as an alteration of the memorandum under Section 8(4)(i). (correct answer)
3. The Central Government is competent, and the company must file Form INC-24 for approval.
4. No approval is required for a name change that only adds a word reflecting the company's objects; the company can simply pass a board resolution.

Answer: B — The Regional Director is competent, as the name change of a Section 8 company is treated as an alteration of the memorandum under Section 8(4)(i).

Explanation. For a Section 8 company, any alteration of the memorandum, including a change of name, requires the previous approval of the Central Government, a power delegated to the Regional Director. The name change is not merely a Section 13(2) matter for the ROC. The company must first obtain approval from the RD, and then file the necessary forms with the ROC. A board resolution alone is insufficient.

Where it goes wrong. Students may incorrectly apply the general rule under Section 13(2) that the ROC approves name changes, overlooking the special restriction under Section 8(4)(i).

Authority. Section 8(4)(i) of the Companies Act, 2013; Section 13(2) of the Companies Act, 2013

Question 3 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Under Notification G.S.R. 466(E), what is the requirement regarding Board meetings for a Section 8 company?

1. It must hold four meetings every year with not more than 120 days between two consecutive meetings.
2. It must hold at least one Board meeting within every six calendar months. (correct answer)
3. It is completely exempt from holding any Board meetings.
4. It must hold a Board meeting every month.

Answer: B — It must hold at least one Board meeting within every six calendar months.

Explanation. Under MCA Notification G.S.R. 466(E) dated 5 June 2015 as amended, Section 173(1) applies to a Section 8 company only to the extent that the Board of Directors shall hold at least one meeting within every six calendar months, without the 120-day interval restriction.

Where it goes wrong. Students may wrongly assume that all procedural relaxations, including the OPC relaxation for Board meetings, apply to Section 8 companies.

Authority. Section 173(1) of the Companies Act, 2013; Notification G.S.R. 463(E) dated 05.06.2015

Question 4 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Vidya Daan Foundation wants to convert itself into a regular private limited company to undertake commercial activities. Which of the following is a mandatory legal requirement for this conversion?

1. The company can directly file an application for conversion with the ROC under Section 18.
2. The conversion is automatically permitted if the company has not paid any dividend for three consecutive years.
3. The company can convert by simply passing a special resolution, as the conversion is a matter of internal management.
4. The company must first surrender or get its Section 8 licence revoked by the Central Government before converting. (correct answer)

Answer: D — The company must first surrender or get its Section 8 licence revoked by the Central Government before converting.

Explanation. A Section 8 company cannot directly convert into any other kind of company. It must first apply to the Central Government for revocation or surrender of its licence under Section 8(6). Only after the licence is revoked can it proceed with conversion under Section 18. A special resolution alone is insufficient, and there is no automatic conversion based on dividend history.

Where it goes wrong. Students may think conversion under Section 18 is available to all companies, but Section 8 companies have a special exit route requiring licence revocation first.

Authority. Section 8(6) of the Companies Act, 2013; Rule 22 of the Companies (Incorporation) Rules, 2014

Question 5 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Scenario. Pragati Nidhi Limited is a Section 8 company that was granted a licence in 2018 to promote art and culture. The company has been running a successful art gallery and cultural centre. In 2025, the company decided to expand its activities to include 'sports promotion' as an additional object. The Board of Directors passed a resolution to alter the MOA and filed an application with the Regional Director (RD) for prior approval, as required under Section 8(4)(i). The RD, after considering the application, granted approval on 15th January 2026. Subsequently, the company passed a special resolution and filed the altered MOA with the ROC. However, the company failed to file the special resolution with the ROC within the prescribed time. Meanwhile, the company also wanted to convert itself into a company limited by guarantee to better reflect its non-profit nature. It filed an application in Form INC-12 with the RD for a fresh licence. The RD rejected the application, stating that a Section 8 company cannot convert its liability structure without first surrendering its existing licence. The company also faced an inquiry from the ROC regarding a complaint that it had distributed profits to its members in the guise of 'honorarium'. The ROC issued a show-cause notice for revocation of the licence. The company argued that since it had not paid any dividend, it had not violated Section 8. The company also wanted to change its registered office from one state to another. It was unsure whether the prior approval of the RD is required for this change, in addition to the approval of the Central Government. The company also wanted to know the consequences of revocation of its licence on its assets and whether it could be amalgamated with another Section 8 company.

Pragati Nidhi Limited altered its MOA to include 'sports promotion' after obtaining RD approval. However, it failed to file the special resolution with the ROC within the prescribed time. What is the consequence of this failure?

1. The company and every officer in default are liable to a penalty, but the alteration remains valid once RD approval is obtained. (correct answer)
2. The alteration becomes void ab initio because filing with the ROC is a condition precedent to the validity of the alteration.
3. The alteration is valid, but the company cannot implement it until the special resolution is filed.
4. The ROC can suo motu register the alteration without the special resolution.

Answer: A — The company and every officer in default are liable to a penalty, but the alteration remains valid once RD approval is obtained.

Explanation. The substantive requirement for alteration of a Section 8 company's MOA is the prior approval of the RD. Filing the special resolution with the ROC under Section 117 is a procedural requirement. Failure to file attracts penalties for the company and officers in default, but it does not invalidate the alteration itself, which is effective once RD approval is obtained.

Where it goes wrong. Students may confuse procedural filing requirements with substantive validity, thinking that failure to file makes the alteration void.

Authority. Section 8(4)(i) of the Companies Act, 2013; Section 117(2) of the Companies Act, 2013

Question 6 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Pragati Nidhi Limited wants to convert its liability structure from a company limited by shares to a company limited by guarantee. The RD rejected its application for a fresh licence. Was the RD's rejection correct?

1. Yes, because a Section 8 company cannot change its liability structure without winding up.
2. No, the RD's rejection is incorrect; a Section 8 company can convert its liability structure by obtaining a fresh licence under Section 8. (correct answer)
3. Yes, because a Section 8 company must always remain a company limited by shares.
4. No, but the conversion requires approval from the NCLT, not the RD.

Answer: B — No, the RD's rejection is incorrect; a Section 8 company can convert its liability structure by obtaining a fresh licence under Section 8.

Explanation. There is no bar under Section 8 for a company to be incorporated or converted into a company limited by guarantee. The RD's rejection is incorrect. A Section 8 company can seek a fresh licence reflecting the changed liability structure. The process involves an application in Form INC-12 to the RD. Winding up or NCLT approval is not required for this internal restructuring.

Where it goes wrong. Students may assume that a Section 8 company must always be limited by shares, which is not true; it can be limited by guarantee or even unlimited.

Authority. Section 8(1) of the Companies Act, 2013; Rule 19 of the Companies (Incorporation) Rules, 2014

Question 7 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

The ROC issued a show-cause notice to Pragati Nidhi Limited for revocation of its licence, alleging distribution of profits as 'honorarium'. The company argued it had not paid any dividend. Which of the following is the correct legal position?

1. The company's argument is valid; only the payment of a formal dividend violates Section 8.
2. The company's argument is valid, but the ROC can still revoke the licence if the honorarium exceeds ₹1 lakh.
3. The company's argument is invalid; Section 8 prohibits the application of profits or income for any purpose other than promoting its objects, and camouflaging profit distribution as honorarium is a contravention. (correct answer)
4. The company's argument is valid, but the ROC must first refer the matter to the Central Government for approval before revoking the licence.

Answer: C — The company's argument is invalid; Section 8 prohibits the application of profits or income for any purpose other than promoting its objects, and camouflaging profit distribution as honorarium is a contravention.

Explanation. Section 8(1)(b) requires that the company intend to apply its profits or other income only in promoting its objects. Any distribution of profits to members, regardless of the label used (e.g., honorarium), violates this condition. The ROC can initiate revocation proceedings under Section 8(6) for contravention of the conditions of the licence.

Where it goes wrong. Students may focus only on the word 'dividend' and overlook the broader prohibition on applying profits for non-charitable purposes.

Authority. Section 8(1)(b) of the Companies Act, 2013; Section 8(6) of the Companies Act, 2013

Question 8 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Pragati Nidhi Limited wants to change its registered office from one state to another. For a Section 8 company, which of the following is true regarding the approvals required?

1. Only the Regional Director's approval is required, as the change of registered office is an alteration of the memorandum.
2. Only the Central Government's approval is required, as Section 8 companies are exempt from Section 13(4).
3. No approval is required; the company can shift its registered office by passing a board resolution.
4. Prior approval of the Regional Director under Section 8(4)(i) is required, in addition to the Central Government approval under Section 13(4). (correct answer)

Answer: D — Prior approval of the Regional Director under Section 8(4)(i) is required, in addition to the Central Government approval under Section 13(4).

Explanation. The change of registered office from one state to another requires an alteration of the situation clause of the memorandum. For a Section 8 company, this alteration requires the prior approval of the RD under Section 8(4)(i). Additionally, Section 13(4) mandates the approval of the Central Government (delegated to the RD) for the change of registered office from one state to another. Both approvals are necessary.

Where it goes wrong. Students may think that the Section 8(4)(i) approval subsumes the Section 13(4) approval, but both are distinct statutory requirements.

Authority. Section 8(4)(i) of the Companies Act, 2013; Section 13(4) of the Companies Act, 2013

Question 9 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Scenario. Shiksha Setu Foundation is a Section 8 company incorporated in 2020 with the object of providing free education to children in rural areas. The company has been granted a licence by the Regional Director (RD) and is registered with the ROC. In 2025, the foundation received a notice from the ROC alleging that it had contravened the conditions of its licence by failing to apply its profits solely to its objects. The foundation had accumulated a surplus of ₹2 crore, which it had invested in fixed deposits instead of spending on its charitable activities. The ROC initiated proceedings for revocation of the licence under Section 8(6). The foundation, in its defence, argued that it was planning to use the surplus for a new school building and that mere accumulation of funds does not amount to contravention. The foundation also wanted to alter its Articles to include a provision for the appointment of a specific individual as a permanent director, which would be an entrenched provision. The company was unsure whether such entrenchment is permitted for a Section 8 company. The foundation also wanted to convert itself into a private limited company to start a commercial coaching centre to generate funds for its charitable activities. It was advised that it must first surrender its Section 8 licence. The company also faced a situation where its members wanted to inspect the minutes of the Board meetings. The company refused, claiming that as a Section 8 company, it is exempt from maintaining minutes. The company also wanted to know the penalty for contravening the provisions of Section 8, specifically the fines applicable to the company and its officers in default. The foundation also wanted to know whether it can be wound up voluntarily without the intervention of the Tribunal, given its charitable objects.

Shiksha Setu Foundation accumulated a surplus of ₹2 crore and invested it in fixed deposits instead of spending it on charitable activities. The ROC initiated revocation proceedings. The foundation argued it was planning to use the funds for a new school building. Which of the following is the most appropriate legal position?

1. The accumulation of surplus can be a ground for revocation if it is not applied to the objects of the company within a reasonable time, as it indicates a deviation from the charitable purpose. (correct answer)
2. Mere accumulation of surplus does not amount to contravention; the company has not violated Section 8.
3. The ROC can revoke the licence only if the surplus exceeds ₹5 crore.
4. The foundation is exempt from the requirement to apply its income to charitable objects for the first five years of incorporation.

Answer: A — The accumulation of surplus can be a ground for revocation if it is not applied to the objects of the company within a reasonable time, as it indicates a deviation from the charitable purpose.

Explanation. Section 8 requires the company to apply its profits or income in promoting its objects. Unreasonable accumulation of surplus without application to the objects can be construed as a contravention, as it defeats the purpose of the charitable company. The ROC has the power to revoke the licence if the affairs of the company are conducted in violation of its objects. A mere intention to use the funds in the future may not be a sufficient defence if the accumulation is unreasonable.

Where it goes wrong. Students may think that only active misapplication is a violation, ignoring that unreasonable passive accumulation can also trigger revocation.

Authority. Section 8(1)(b) of the Companies Act, 2013; Section 8(6) of the Companies Act, 2013

Question 10 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Can a Section 8 company incorporate entrenchment provisions in its Articles of Association under Section 5?

1. Yes; Section 8 companies are not exempt from Section 5(3)–(5), and entrenchment provisions can be included either on formation or by amendment. (correct answer)
2. No; Section 8 companies are strictly prohibited from having entrenchment provisions.
3. Yes, but only with prior written approval of the Reserve Bank of India.
4. No; only listed companies can have entrenchment provisions.

Answer: A — Yes; Section 8 companies are not exempt from Section 5(3)–(5), and entrenchment provisions can be included either on formation or by amendment.

Explanation. Section 8 companies enjoy no exemption from Section 5(3)–(5) of the Companies Act, 2013. They are fully entitled to include entrenchment provisions in their articles either on formation or by subsequent amendment.

Where it goes wrong. Students may apply the general rule that entrenchment is permissible for all companies, missing the specific exemption for Section 8 companies.

Authority. Section 5(3) to 5(5) of the Companies Act, 2013; Notification G.S.R. 463(E) dated 05.06.2015

Question 11 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Shiksha Setu Foundation wanted to convert into a private limited company to start a commercial coaching centre. It was advised to first surrender its Section 8 licence. What is the correct procedure for voluntary surrender of the licence?

1. The company can simply pass a board resolution and inform the ROC.
2. The company must file a writ petition in the High Court for surrender of the licence.
3. The company must apply to the Regional Director in Form INC-12 for surrender of the licence, and the RD may impose conditions. (correct answer)
4. Surrender of a Section 8 licence is not permitted; it can only be revoked by the Central Government.

Answer: C — The company must apply to the Regional Director in Form INC-12 for surrender of the licence, and the RD may impose conditions.

Explanation. Section 8(6) allows the Central Government (power delegated to the RD) to revoke the licence. A company can voluntarily seek surrender of its licence by applying to the RD. The application is made in Form INC-12. The RD may impose conditions to protect public interest. This is the prescribed route for voluntary exit.

Where it goes wrong. Students may not be aware that voluntary surrender is permitted and may think the licence can only be forcibly revoked.

Authority. Section 8(6) of the Companies Act, 2013; Rule 22 of the Companies (Incorporation) Rules, 2014

Question 12 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Shiksha Setu Foundation refused to allow its members to inspect the minutes of Board meetings, claiming exemption as a Section 8 company. Is this claim valid?

1. Yes, Section 8 companies are completely exempt from maintaining and allowing inspection of minutes.
2. No, but inspection is allowed only to members holding more than 10% of the share capital.
3. Yes, but only if the Board passes a resolution to that effect.
4. No, while Section 8 companies have certain exemptions under Section 118, they are not exempt from maintaining minutes; they may have a relaxation regarding the time limit for recording minutes. (correct answer)

Answer: D — No, while Section 8 companies have certain exemptions under Section 118, they are not exempt from maintaining minutes; they may have a relaxation regarding the time limit for recording minutes.

Explanation. The exemption for Section 8 companies under Section 118 is partial. They are exempt from certain procedural aspects, such as the requirement to record minutes within 30 days (they have a longer period), but they are not completely exempt from maintaining minutes or allowing inspection. The claim of total exemption is incorrect.

Where it goes wrong. Students may overstate the exemption, assuming Section 8 companies have a blanket waiver from all minutes-related requirements.

Authority. Section 118 of the Companies Act, 2013; Notification G.S.R. 463(E) dated 05.06.2015

Question 13 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

What is the penalty prescribed under Section 8 for a company and its officers in default for contravening the requirements of Section 8?

1. Company: ₹10 lakh to ₹1 crore; Officers: ₹25,000 to ₹25 lakh. (correct answer)
2. Company: ₹1 lakh to ₹10 lakh; Officers: ₹10,000 to ₹1 lakh.
3. Company: ₹5 lakh to ₹50 lakh; Officers: ₹50,000 to ₹5 lakh.
4. Company: ₹10,000 to ₹1 lakh; Officers: ₹1,000 to ₹10,000.

Answer: A — Company: ₹10 lakh to ₹1 crore; Officers: ₹25,000 to ₹25 lakh.

Explanation. Section 8(11) prescribes that if a company makes default in complying with the requirements of Section 8, the company is punishable with a fine of ₹10 lakh to ₹1 crore, and every officer in default is punishable with a fine of ₹25,000 to ₹25 lakh. Where the affairs are conducted fraudulently, Section 447 applies.

Where it goes wrong. Students may confuse these penalties with the general penalty provisions under Section 450 or other sections, or understate the fine amounts.

Authority. Section 8(11) of the Companies Act, 2013

Question 14 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Can Shiksha Setu Foundation be wound up voluntarily without the intervention of the Tribunal, given its charitable objects?

1. Yes, a Section 8 company can be wound up voluntarily like any other company.
2. No, a Section 8 company can only be wound up by the Tribunal, or as directed by the Central Government in public interest. (correct answer)
3. Yes, but only with the prior approval of the ROC.
4. No, a Section 8 company cannot be wound up at all; it can only be amalgamated.

Answer: B — No, a Section 8 company can only be wound up by the Tribunal, or as directed by the Central Government in public interest.

Explanation. A Section 8 company is not permitted to wind up voluntarily in the same manner as a commercial company. The winding up of a Section 8 company is typically ordered by the Tribunal or the Central Government, especially where the licence is revoked and the Central Government is satisfied that winding up is essential in public interest. The assets must be transferred to another Section 8 company with similar objects.

Where it goes wrong. Students may assume that all companies can opt for voluntary winding up, overlooking the special restrictions applicable to Section 8 companies.

Authority. Section 8(9) of the Companies Act, 2013; Section 8(6) of the Companies Act, 2013

Question 15 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Scenario. Zenith Agro Tech Private Limited was incorporated as a Section 8 company in 2022 to promote organic farming. In 2026, it wants to alter its Articles to include a clause allowing it to pay a nominal dividend of 2% to its members. The Board believes that since it is a private company, it can pay a nominal dividend. Is this permissible?

Zenith Agro Tech Private Limited was incorporated as a Section 8 company in 2022 to promote organic farming. In 2026, it wants to alter its Articles to include a clause allowing it to pay a nominal dividend of 2% to its members. The Board believes that since it is a private company, it can pay a nominal dividend. Is this permissible?

1. Yes, a nominal dividend of up to 5% is permitted for Section 8 companies.
2. Yes, but only if the dividend is approved by the Regional Director.
3. No, a Section 8 company is prohibited from paying any dividend to its members, and any provision permitting such payment is void. (correct answer)
4. No, but the company can pay interest on capital instead of a dividend.

Answer: C — No, a Section 8 company is prohibited from paying any dividend to its members, and any provision permitting such payment is void.

Explanation. Section 8(1)(c) expressly prohibits the payment of any dividend to the members of a Section 8 company. This is a fundamental condition of the licence. Any provision in the Articles permitting dividend payment would be void. The fact that it is a private company is irrelevant. There is no concept of a 'nominal dividend' for Section 8 companies.

Where it goes wrong. Students may import the general rule that private companies have flexibility in dividend declaration, ignoring the absolute prohibition under Section 8.

Authority. Section 8(1)(c) of the Companies Act, 2013

Question 16 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Scenario. Vayu Renewables Limited, a Section 8 company, wants to amalgamate with another Section 8 company, Prithvi Green Foundation. Which of the following is the correct legal position regarding such amalgamation?

Vayu Renewables Limited, a Section 8 company, wants to amalgamate with another Section 8 company, Prithvi Green Foundation. Which of the following is the correct legal position regarding such amalgamation?

1. The amalgamation requires the sanction of the National Company Law Tribunal (NCLT) under Section 230-232.
2. The amalgamation can be done by a simple board resolution of both companies.
3. The amalgamation is prohibited; Section 8 companies cannot merge.
4. The Central Government can order the amalgamation of the two Section 8 companies if it is essential in public interest, without NCLT approval. (correct answer)

Answer: D — The Central Government can order the amalgamation of the two Section 8 companies if it is essential in public interest, without NCLT approval.

Explanation. Section 8(10) empowers the Central Government to order the amalgamation of a Section 8 company with another Section 8 company having similar objects, if it is essential in public interest. This is a special power that operates notwithstanding the general NCLT amalgamation provisions. The order can provide for the constitution, properties, and liabilities of the amalgamated entity.

Where it goes wrong. Students may default to the NCLT route for all amalgamations, missing the specific power of the Central Government under Section 8(10).

Authority. Section 8(10) of the Companies Act, 2013

Question 17 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Scenario. A group of 15 individuals wants to incorporate a Section 8 company limited by guarantee without share capital. They intend to appoint 3 directors. What is the minimum number of members required, and can the company be incorporated as a private company?

A group of 15 individuals wants to incorporate a Section 8 company limited by guarantee without share capital. They intend to appoint 3 directors. What is the minimum number of members required, and can the company be incorporated as a private company?

1. Minimum 2 members; the company can be private. (correct answer)
2. Minimum 7 members; the company must be public.
3. Minimum 3 members; the company can be private or public.
4. Minimum 1 member; the company must be public.

Answer: A — Minimum 2 members; the company can be private.

Explanation. A Section 8 company can be incorporated as a private company, which requires a minimum of 2 members under Section 3(1)(b). The number of directors (3) does not determine the minimum membership. A Section 8 company is not required to be a public company. Therefore, a private Section 8 company with 2 members is valid.

Where it goes wrong. Students may conflate the minimum number of directors with the minimum number of members, or assume Section 8 companies must be public.

Authority. Section 3(1)(b) of the Companies Act, 2013; Section 8(1) of the Companies Act, 2013

Question 18 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Scenario. Prakash Educational Trust, a Section 8 company, applied for a licence. The Regional Director granted the licence subject to the condition that the company must invest 50% of its surplus in government securities. The company later failed to comply with this condition. What is the consequence?

Prakash Educational Trust, a Section 8 company, applied for a licence. The Regional Director granted the licence subject to the condition that the company must invest 50% of its surplus in government securities. The company later failed to comply with this condition. What is the consequence?

1. The licence automatically lapses after one year of non-compliance.
2. The Regional Director can revoke the licence after giving the company a reasonable opportunity of being heard. (correct answer)
3. The company is liable to a penalty of ₹1 lakh only, and the licence remains valid.
4. The condition is invalid because the RD cannot impose such a condition.

Answer: B — The Regional Director can revoke the licence after giving the company a reasonable opportunity of being heard.

Explanation. The RD has the power to grant a licence subject to conditions under Section 8(4). If the company contravenes any of the conditions, the RD can revoke the licence under Section 8(6) after giving a written notice and a reasonable opportunity of being heard. The revocation is not automatic, but it is a valid consequence.

Where it goes wrong. Students may think the licence automatically lapses or that the penalty is only monetary, overlooking the revocation power.

Authority. Section 8(6) of the Companies Act, 2013; Section 8(4) of the Companies Act, 2013

Question 19 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · medium

Scenario. Sanjeevani Healthcare Foundation, a Section 8 company, was incorporated in 2020. In 2026, it wants to change its name to 'Sanjeevani Medicare Foundation'. The company has not filed its annual returns for the last two years. Can the ROC reject the name change application on this ground?

Sanjeevani Healthcare Foundation, a Section 8 company, was incorporated in 2020. In 2026, it wants to change its name to 'Sanjeevani Medicare Foundation'. The company has not filed its annual returns for the last two years. Can the ROC reject the name change application on this ground?

1. No, the ROC cannot consider past defaults while approving a name change.
2. No, the ROC must approve the name change and separately initiate penalty proceedings for non-filing.
3. Yes, the ROC can reject the application because the company has defaulted in filing annual returns, and such default is a bar under Section 13(2). (correct answer)
4. Yes, but only if the default continues for more than three years.

Answer: C — Yes, the ROC can reject the application because the company has defaulted in filing annual returns, and such default is a bar under Section 13(2).

Explanation. The proviso to Section 13(2) states that a company which has defaulted in filing its annual returns or financial statements shall not be allowed to change its name. The ROC is empowered to reject the application until the default is rectified. This is a statutory bar designed to ensure compliance.

Where it goes wrong. Students may focus only on the name change procedure and overlook the condition precedent of being compliant with annual filings.

Authority. Section 13(2) of the Companies Act, 2013

Question 20 · 2 marks · Chapter 2: Incorporation of Company and Matters Incidental Thereto · hard

Scenario. A Section 8 company wants to convert into a company limited by shares. It has accumulated assets of ₹5 crore from donations. Upon conversion, what is the legal position regarding these assets?

A Section 8 company wants to convert into a company limited by shares. It has accumulated assets of ₹5 crore from donations. Upon conversion, what is the legal position regarding these assets?

1. The assets can be distributed among the members as they are the ultimate owners.
2. The assets can be retained by the converted company for its new commercial objects.
3. The assets automatically vest in the Central Government.
4. The assets must be transferred to another Section 8 company with similar objects, or sold and the proceeds credited to the Insolvency and Bankruptcy Fund. (correct answer)

Answer: D — The assets must be transferred to another Section 8 company with similar objects, or sold and the proceeds credited to the Insolvency and Bankruptcy Fund.

Explanation. Section 8(9) mandates that upon winding up or dissolution of a Section 8 company, if there are surplus assets after satisfying debts and liabilities, they must be transferred to another Section 8 company with similar objects, or sold and the proceeds credited to the Insolvency and Bankruptcy Fund. This prevents private appropriation of charitable assets. This principle applies upon conversion as well, as the company ceases to be a Section 8 entity.

Where it goes wrong. Students may think that members can distribute the assets upon conversion, which is contrary to the non-profit nature of Section 8.

Authority. Section 8(9) of the Companies Act, 2013