Introduction

The Insolvency and Bankruptcy Code 2016 (IBC) has been a game-changer in the Indian corporate landscape, providing a structured process for the revival and resolution of companies facing financial distress. However, its applicability to non-profit organizations or charitable trusts registered under Section 8 of the Companies Act 2013 has been a matter of debate. This article delves into the legal provisions and judicial interpretations to shed light on this issue

 

The Legal Framework

Section 8 of the Companies Act 2013 provides for the incorporation of companies with charitable objectives, such as the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment, or any such other object. These companies are expected to apply their profits, if any, or other income in promoting their objects and are prohibited from paying any dividend to their members¹.

The IBC defines a “corporate person” under Section 3(7) to include a company as defined in clause (20) of section 2 of the Companies Act, 2013². Therefore, a literal interpretation of the provisions does not bar IBC’s application to Section 8 companies. Further, Section 8 companies are not covered under the exclusionary clause of Section 3(7) of the IBC.

Judicial Interpretations

Case 1: Phoenix ARC Private ltd vs Kerala Chamber of Commerce and Industries

The NCLT Kochi Bench held that the Corporate Debtor, a Section 8 charitable company, had defaulted in the payment of the loan, which was classified as a Non-Performing Asset (NPA). The Tribunal observed that the Memorandum of Association (MOA) of the Corporate Debtor contained provisions to borrow money for the purposes of construction of building, which in this case, the corporate debtor had availed to build Kerala Trade Centre³. 

Case 2: M/s. Educomp Infrastructure & School Management ltd vs Millenium Education Foundation

The NCLT Delhi Bench held that the chairman of the monitoring committee had proper authority to represent the corporate Debtor in the present application and further held that the Corporate Debtor is in default of payment of the outstanding operational debt owed to the applicant⁴.

Conclusion

From the above provisions and judgments, it is clear that Section 8 companies fall within the ambit of the IBC. However, the complex structure of Section 8 companies, which may not have share capital, reserves, or even assets, can make the revival of such companies more complex and time-consuming. The Government should consider making separate provisions or providing some exemption or relaxation under the code by way of amendment for the smooth resolution and revival of such charitable companies⁵.

References

1. Companies Act 2013, Section 8. 
2. Insolvency and Bankruptcy Code 2016, Section 3(7).
3. Phoenix ARC Private Limited vs Kerala Chamber of Commerce and Industries, Hon’ble NCLT Kochi Bench.
4. M/s. Educomp Infrastructure & School Management Ltd. vs. M/s. Millenium Education Foundation, Hon’ble NCLT Delhi Bench.
5. Insolvency and Bankruptcy Code 2016, Section 10.

Author: Parthvi Patel, United World School of Law