The Ministry of Corporate Affairs (“MCA”) vide Circular F.No.17/178/2011-CL-V and Circular F.No.17/178/2011-CL-V is inviting comments on the Proposed Guidelines for Conversion of Section 25 Company (Non-Profit Company) to an Ordinary Company under Companies Act, 1956 (“Guidelines”) and on the Proposed Guidelines for Strike off Names under section 560 of the Act of section 25 companies respectively.
Section 25 companies are non profit organizations/companies which receive contributions from all sections of the society in the form of donations, contributions, etc. for the furtherance of the charitable, philanthropic activities or for such other useful objects. Such non profit companies sometimes also enjoy special status and benefit from various authorities such as Income Tax, Commissioner of Charity, etc.
Presently, there is no provision in the Companies Act, 1956 which provides for the conversion of Section 25 companies to an ordinary company. Section 25(7) of the Act empowers the Central Government to revoke licenses granted under sections 25 (1) or 25(3).
Further, section 560 of the Act provides for striking off the name of the company by the Registrar of Companies (“ROC”). However, presently no action is taken by the ROC either suo moto or at the request of the party for striking off the name of the company. The MCA has also not permitted for exit of section 25 companies under various exit schemes under section 560 of the Act announced by it from time to time. There are a number of section 25 companies which have either not commenced activities after obtaining the license or have stopped their activities and now wish to convert themselves to an ordinary company. Thus various stakeholders have made representations to the MCA to develop a procedure:
1) For the conversion of a section 25 company to an ordinary company
2) To strike off the name under section 560 of the Act.
The circulars lay down the detailed conditions which need to be satisfied by the companies at the time of making an application to the ROC which inter alia, include the following:
1) The company should have passed a resolution in general meeting to convert itself into a non-section 25 company which should have been approved by all members/shareholders of the company by adopting revised Memorandum and Articles of Association.
2) The company has not commenced any activity or operation:
a) In case of conversion of company- since its incorporation
b) In case of strike off name- since its incorporation or stopped activities for more than last 3 years
3) The company has not received any donation, grants or contribution etc., other than its members.