one person company
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This article has been written by Akul Khandelwal, a student of Symbiosis Law School, Pune.

Abstract

With the implementation, even a sole owner can incorporate his own company which would be known as “One Person Company”. One Person Company is a new milestone in the Indian corporate legal world which has its own pros and cons. This paper aims to deal with the basic idea behind the implementation of this concept and its genesis around the world. The introduction of the new Companies Act in 2013 has been the most significant reform in company law in India which allowed for various changes and a more progressive and liberal approach to do business in India. The revolutionary concept of One Person Company (OPC) was first introduced in India through the Companies Act, 2013 through Section 2(62). It was recommended for the first time in India by the expert committee headed by Dr. JJ Irani in 2005. The introduction of this form of business has provided a vital impetus to entrepreneurs who can now set up an OPC instead of a sole proprietorship to further limit their liabilities. This concept paves the way for a more dynamic legislation which would allow for greater growth in the economy and regulation of the corporate sector. Last, but not the least, future of OPCs in India seems to be bright and it is analysed how it will help the small entrepreneurs grow and contribute towards the economy of the country with lesser resources.

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Keywords: One Person Company, Business, Unlimited liability, limited liability, Companies Act.

Introduction

The concept etymologically does not owe its existence to India, it has been in existence for a while in other countries. Singapore allowed for the existence of an OPC thorough the Companies Amendment Act of 2004 while China introduced the same in 2005. In Turkey, a joint stock company, as well as a limited liability company, may be established by one or more shareholders, this was added via the Turkish Commercial Code[1]. This addition in the Companies was keeping in consonance with the global trends. 

This was also suggested by the Dr. JJ Irani Committee on May 31, 2005 keeping in mind the rapidly changing economy to allow the individual to operate and contribute to the economic domain to further boost efficiency. The reasoning behind allowing one person to start a company of his own is that it is not required for a person to join forces with other people to contribute to the economy as he could do this on his with fewer  On the heels of the dot com bubble with the increase in the usage of internet and computers along with emergence of the service sector, the entrepreneurial capabilities of the people needed to be provided an outlet[2]

The statutory definition of an OPC is also the literal definition which means a company that only has one person as its member. As per S. 2(68) an OPC comes under the meaning of a private company, hence, the provisions applicable to private companies are also applicable to one-person companies. Just as private companies must use ‘Pvt.’ in their name an OPC must also use ‘one person company’ with their names. 

Incorporation

The modes of incorporation for an OPC are given under Section 3 of the Companies Act, 2013. In order to get incorporated the OPC must follow the requirements under the section. The memorandum must also include the name of the nominee other than the sole promoter who, in case of some contingency shall run the company. The consent of such nominee has to be filed with the Registrar at the time of formation/incorporation of one person company along with its Memorandum and Articles. This consent may also be withdrawn in accordance with the prescribed manner.

Only a natural person can incorporate an OPC. He/she must be a citizen of India and a resident[3] in India. In such a case only may that person set up or be a nominee of an OPC. The person must also be a major since a minor is not allowed to be a member or nominee in an OPC. He/she shall also not be eligible to a nominee in or incorporate more than one OPC. The member of the OPC may also at any time change the nominee by giving notice to the company which in turn would intimate that to the Registrar. 

Privileges enjoyed by OPCs

One of the primary reasons for a person to incorporate this type of company would be the limited liability as compared to a sole proprietorship which in contrast does not differentiate between the business and the person. 

The provisions in relation to general meetings under Section 98 and S. 100 – 111 do not apply to an OPC. It must have a minimum of 1 director and a maximum of 15 which could also be increased by passing a special resolution. A business currently running under sole proprietorship could also easily get converted to an OPC if it meets the requirements such as a minimum paid-up share capital of Rs. 1,00,000.  An OPC is also not required mandatorily to have a Cash Flow Statement as a part of its financial statements.

Genesis and Worldwide Acceptance

England was the first country to accept the concept of a one person company through the decision in Saloman v. Saloman[4]. Soon after it was statutorily recognized in 1925. Other countries soon followed in its footsteps such as USA, China, Singapore, EU countries and Qatar. 

Soon after India followed by incorporating these changes into the 2013 law. Through the JJ Irani Committee in 2005, the recommendation was made to introduce this concept. This brings in the unorganized sector which can be governed in a better way which leads to fruitful paths for MSME[5] sectors and entrepreneurs. 

Threats imposed by OPC

The business scenario in 21st century is very dynamic. With new innovations being introduced every day and increasing competition, it is important to analyse any concept with all of its pros and cons and keep a check which would outweigh another and feasibility of the change. OPC is one concept which was recognised by the world long back but is very new to India. India is a developing nation and it is crucial to keep all the sectors in mind before applying any policy.  

Restriction to convert

The major visible set back of an OPC is that it cannot carry out non- banking financial activities and is unable to make investments in securities of any corporate body. As per the rules applicable to OPC, it cannot be converted. It can either convert itself into a private or public company once it has been in existence for a minimum period of 2 years or its paid up capital has increased beyond Rs. 50,00,000 or its average turnover has exceeded Rs. 2,00,00,000. These conditions and bars stifle an entrepreneur’s desire to expand and diversify his business. 

ESOPs[6] cannot be provided

Another set-back faced by OPCs is that they cannot provide sweat equity shares as an incentive to their employees as the owner is the sole proprietor of the OPC. If an OPC changes into a private or public limited company, then the ESOP can be implemented.

Too much of FDI

Another possible set back of an OPC can be it might attract a lot of foreign direct investment as the owner of the OPC would like to merge with a foreign investor in order to diversify and expand his business which will attract certain problems such as inflation, disappearance of small cottage industries etc. Investment in an OPC would be a quicker and better option for any foreign investor while investing in India and formation of too many OPCs will attract lot of FDI. 

Lack of accountability

One of the primary features of a company is the democratic decision making as in any decision undertaken there is more than one member involved. However, in an OPC, it is a departure from this concept by virtue of Section 96(1) and 122. There are no voting powers involved in this type of decision making depriving it of all accountability.

Critical appraisal

It is crucial to analyse the set-backs and possible loopholes in the existence of One Person Company at this stage where frauds have become a thing in the commercial strata. One question to be pondered upon is “Whether the sole shareholder of the OPC be permitted to be a creditor of the same company”. It can be apprehended after a deep analysis of the status of OPC and keeping the concept of separate legal entity aside that allowing the sole owner of the OPC to be the sole creditor might result in certain loopholes in the estimated plan of progression. This is because as a corporate editor of the company the sole shareholder may misuse his status and gain the assets of a company that is being wound up and thereby dismiss better claims of other unsecured creditors[7].  On a close analysis of the judgment given in the Saloman’s case, it can be observed that the result was an event of celebration for Mr. Saloman who was given 1000 pounds out of the proceeds of liquidation as the “beneficial owner of the debentures”. This might be the intentional move of the sole owners of OPC to side-line the justice process and in this way creditors might not be reluctant to provide loans to OPCs. In Wheeler v. Smith[8], the dictum of the court narrated the same story as:

While the claim of a sole stockholder against a bankrupt corporation should be scrutinised with care, it is not the law that such a claim should be rejected merely because the claimant is such sole stockholder.” [9]

Therefore, it is crucial if for no other reason, it has been discussed that this advantage must not be afforded to the sole director at the cost of putting the assets of the company under liquidation beyond the reach of prospective creditors of the company[10].  Therefore, it is submitted that certain regulations shall be made in this regard or this whole process of obtaining such assets must be made more cumbersome for the sole shareholder. 

It is pertinent to note that there exist two concepts: –

  • Lifting of the corporate veil
  • Piercing of the corporate veil

Though both the concepts have been used interchangeably time and again but there’s a difference between the two. Lifting of corporate veil means peeping behind the veil and identifying the managing authority behind the working of a company on the other hand piercing of corporate veil leads to a complete dissolution of the separate personality and is to be used sparingly in limited cases involving corporate sham or impropriety[11].  There have been numerous reports which suggest that the common law countries are more inclined towards applying the principle of piercing of corporate veil in case of OPCs. It is prudent and reasonable also as a private company or public company with multiple shareholders and managers playing different roles have lesser propensity to defy statutory regulations. On the other hand, in case of OPCs, the sole owner in the position of the creditor can take of claims of other creditors under immunity as was in the case Saloman.

Conclusion

OPC being more technical and newer concept has not been accepted with open arms as of now in India. OPCs provide legal protection to the small entrepreneurs by allowing them to move towards the organized sector from unorganized sector. This concept opens up the path for small traders who wished to open their own company but could not do so because of the lack of the other director or shareholder to open up a company with. This is believed to be a revolutionary step in the unorganized sector.

While it is a remarkable step forward for the ease of doing business in India OPCs also has certain limitations. Firstly, a person is not eligible to incorporate or be a nominee in more than one OPC; Secondly, Non Banking Financial activities cannot be carried out by an OPC which includes investment in securities; Thirdly, there has been criticism against this type of company as it may lead evasion of tax by the individual. 

Furthermore, it is essential for the courts to strike a balance between lifting of corporate veil and piercing of corporate veil while dealing with OPCs. Although no such cases have been registered till date, the onus is on the courts to ensure that the sole purpose of establishing OPCs does not fail. 

After analysing all the pros and cons of the abovementioned concept, it can be said that though there are certain grey areas related to OPCs but the overall legislation is efficient and free of ambiguities. Therefore, if implemented properly, this concept would be a boon for the Indian economy.

Bibliography

Books

Singh, Avtar (2015) Company Law 16th Edition. India: Eastern Book Company

Ramaiya. A. (2015) A Ramaiya’s Guide to the Companies Act 18th Edition. India: LexisNexis

Kapoor, G.K. (2016) Company Law- A Comprehensive Text Book on Companies Act, 2013 19th Edition. India: Taxmann

Cases

Saloman v. Saloman (1897) AC 22 

Wheeler v. Smith 30 F 2d 59, 61 (9th Cir 1929)

Trustor AB v. Smallbone (No. 2), (2001) 1 WLR 1177.

Dollar Cleaners & Dyers, Inc. v. MacGregor, 163 Md. 105, 109, 161 at 159, 161 (1932).

Journal Articles

Chen Jianlin, Clash of Corporate Personality Theories: A Comparative Study of One-member Companies in Singapore and China; Hong Kong LJ 38, 425 (2008).

Dr. K.B, One Person Company (OPC) under the Companies Act, 2013: A New Business Concept in India, Bhatner Socio-Legal Journal, Vol. 2, 80, 2015.

Websites

Abhaynkar, Meenal (2015) Company Formation/Registration/Incorporation in India Procedure of OPC Formation in India [Online]. Available from: http://blog.abhyankarcs.com/company-formation-in-india/procedure-of-opc-one-person-company-formation-in-india/ [Accessed 19th July, 2016]

Gupta, Sagar (2015) How to Incorporate One Person Company? [Online]. Available from: http://taxguru.in/company-law/incorporate-person-company.html [Accessed 19th July, 2016]

Endnotes

[1] Chen Jianlin, Clash of Corporate Personality Theories: A Comparative Study of One-member Companies in Singapore and China; Hong Kong LJ 38, 425 (2008).

[2] Dr. K.B, One Person Company (OPC) under the Companies Act, 2013: A New Business Concept in India, Bhatner Socio-Legal Journal, Vol. 2, 80, 2015.

[3] Resident here means someone who has resided in India for atleast 182 days in the foregoing calendar year.

[4] (1897) AC 22

[5] Micro, Small and Medium Enterprises.

[6] Employee Stock Ownership Plan is an employee benefit plan which offers ownership interest in the organization to the employees.

[7] Parth Dixit and Ramya Katti, Disrobing OPC’s: The Battle with the Cloak of Limited Liability, (2017) 3 HNLU SBJ 22.

[8] 30 F 2d 59, 61 (9th Cir 1929)

[9] Ibid.

[10] Dollar Cleaners & Dyers, Inc. v. MacGregor, 163 Md. 105, 109, 161 at 159, 161 (1932).

[11] Trustor AB v. Smallbone (No. 2), (2001) 1 WLR 1177.

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