In this Article, Swasti Gupta, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses on whether a company be a one-person in the One Person Company

Introduction

As per the World Bank’s global rankings of Doing Business 2018 report, India moved up thirty spots from last year by ranking at 100 among 190 nations. This climb was attributed to business-friendly reforms introduced by the government over the years One such welcome reform is the debut of the provision of One Person Company (‘OPC’ hereinafter) in the Indian legal system through the Companies Act, 2013 (‘The Act’ hereinafter).  An amalgamation of a sole proprietorship and a company form of business, an OPC is a breakthrough for entrepreneurs looking to establish their own ventures with the structure of an organized business.

The J.J. Irani Committee first mooted the concept in 2005 to the Government, in its advisory report on the revision of the existing Company Law, to provide an avenue for increased participation of entrepreneurs in economic activities. The Committee recognized that

“it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the marketplace should do it through an association of persons… [and recommended] that the law should recognize the formation of a single person economic entity in the form of ‘One Person Company’. Such an entity may be provided with a simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural matters.”

The position of OPC under the Indian Company Law

• Member of an OPC

The definition of a One Person Company finds a place in Section 2(62) of the Companies Act 2013, which reads as – ‘One Person Company means a company which has only one member, thereby limiting the minimum and the maximum number of members in an OPC to one.‘ Further, the Companies (Incorporation) Rules, 2014 (‘The Rules’ hereinafter) require that such a member has to be a natural person who is an Indian citizen and a resident of India who has clocked 182 days of stay in India in the immediately preceding one calendar year. A person cannot incorporate more than one OPC.

• Classification of an OPC

Section 3(1)(c) of the Act classifies an OPC as a private company formed for lawful purposes by one person unless expressly excluded in the Act or the Rules. As per Section 3(2), an OPC can be formed as a company limited by shares or guarantee or an unlimited liability company. Since an OPC is classified as a private company, an OPC limited by shares will require a minimum paid up capital of one lakh rupees and will have restricted rights to transfer its shares along with the inability to make invitations to the public for subscriptions.

• Directors

As per Section 152(1) of the Act, the single member forming the OPC is deemed to be its First Director, until the single member duly appoints the director(s). Further, the minimum and the maximum number of such directors can be 1 and 15 respectively, beyond which a special resolution will be required to be passed by the OPC.

• Incorporation of an OPC

An OPC cannot be incorporated for or converted into a not for profit company with a charitable object. It also cannot carry out Non-Banking Financial Investment activities including investment in securities of any corporate body. In order to distinguish an OPC from other types of Companies, the words ‘One Person Company’ must be placed in a bracket below the name of the Company, wherever the company name appears. Further, in the event that the paid-up share capital of an OPC exceeds fifty lakh rupees or its average annual turnover of immediately preceding three consecutive financial years exceeds two crore rupees, then the OPC has to mandatorily convert itself into a private or public company.

Further, the memorandum of an OPC requires the single member of an OPC to nominate another person along with his/her written consent for such nomination and the nominee will be entitled to the single member’s shares in the OPC, in the event of his death or incapacity. The name of the nominee can be changed by the member at any time after providing due intimation to the Registrar of Companies in the prescribed manner. Such nominee has to be a natural person who is an Indian citizen and a resident of India who has clocked 182 days of stay in India in the immediately preceding one calendar year. Such person cannot become a nominee in more than one OPC.

Can a Company be the one person in a One Person Company?

From the provisions of Companies Act, 2013 and the Companies (Incorporation) Rules, 2014 it can be deciphered that in order to be eligible to incorporate a one-person company, the single member so forming an OPC must be –

1. A natural person
2. An Indian Citizen
3. A resident of India who has stayed in India for a period of 182 days in the preceding one calendar year.

A natural person is defined as ‘a human being as distinguished from a person (as a corporation) created by operation of law’. Under the Indian Law, a Company means a ‘company incorporated under the Companies Act, 2013 or under any previous company law’. It is a creation of law and is therefore classified as an artificial juridical person. A company, in its capacity as an artificial person, can enter into contracts, possess properties in its own name, open a bank account, incur debts, sue and can be sued by others.  Even from a jurisprudential perspective, according to Salmond, a Company enjoys a fictitious existence of an artificial person, through legal imagination, which is distinct from a natural person. The Supreme Court has also reiterated the same view where it held that the very act of incorporation of a company refers to forming a legal corporation as a juristic person. The said legal corporation can act like a natural person but only through a designated person, whose acts are processed within the ambit of law. Therefore, a Company enjoys the status of a legal person that is clothed with many rights, obligations, powers and duties conferred on it by law through its Memorandum of Association and are exercised through a natural person i.e. human beings.

Moreover, as per common law precedents, a company is a ‘legal person’ or a ‘legal entity’ that is separate from and capable of surviving beyond the lives of its members. Further, in Daimler Co Ltd v. Continental Tyre & Rubber Co Ltd, the House of Lords held ‘that a company incorporated in the UK is a legal entity created by law… it is not a natural person with a mind or a conscious.’

Additionally, in deciding that a corporation is not a citizen of India, the Supreme Court has held that ‘neither the provisions of the Constitution nor of the Citizenship Act, confer the right of citizenship on, or recognize as a citizen, any person other than a natural person’.

Therefore, in the light of the above-mentioned discourse, case laws and provisions of the Companies Law, it can be concluded that the intention of the Companies Act and the Rules is to limit the formation of an OPC by a natural person i.e. human beings as single members. A company gains the status of a corporate personality that is classified as a juristic or an artificial legal person, but such corporate personality does not accord it a status equivalent to that of a natural person or an Indian Citizen. Therefore, a Company, not falling within the ambit of a natural person or an Indian Citizen, cannot be the one person in a one-person company.

One Person Company: A Global Perspective

Although OPC is a recent concept in India, it has been prevalent in the United Kingdom for years through a precedent set by Lord Herschel in the renowned case of Saloman v. Saloman & Co. Ltd where he acknowledged the idea of a one-man company as lawful. Further, under Section 7 of the UK Companies Act, 2006, a one-person public and a private company can be formed by complying with the registration and Memorandum of Association requirements, as laid down in the UK Act. Similarly, in the United States, almost all states permit single member limited liability companies with varied state-specific laws for the same. Amongst Asian countries, Pakistan, Singapore and China adopted OPC in their legal systems in 2003, 2004 and 2005 respectively.

Conclusion

The concept of One Person Company carries the potential to serve as crutches for the era of Start-up India by bringing the small and medium-sized businesses that earlier operated in the unorganized sector within the purview of organized sector and by offering a simple legal framework that advances the interests of entrepreneurs. This impact will be in alignment with the intention of the J. J. Irani Committee to recognize and uplift entities that are created by single entrepreneurs, rather than an association of persons, through the introduction of OPC in the Indian Legal System. Furthermore, an OPC enjoys several privileges and exemptions under the Companies Laws in the form of exemption from conducting general and board meetings, provision of taxation of the entity separate from its owner’s income and separate legal entity of the company ensuring limited liability of the sole shareholder. However, these benefits are not without their own limitations as the setting up and maintenance of an OPC is cumbersome, time-consuming and heavy on the pocket.

It is worthwhile to note that it has been five years since the concept of OPC was brought to life in India. Perhaps the Government should undertake a concrete five-year assessment of its reform in the form of a cost-benefit analysis to assess whether the concept of OPC has lived to its expectations and added to the economic development of the country or whether it has proven to be yet another paper reform.