In this article, Dileep Krishnan N, pursuing Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata discusses the relaxations available to an OPC under Companies Act.
Law relating to the companies in India has shown an unprecedented development in the past decade. In the year 2013, the new piece of legislation arrived and the Companies Act 1956 was replaced by a more contemporary, simplified and rationalized Companies Act, 2013. The primary objective of this legislation was to bring our company law at par with recognized global practices. Thus the new legislation in 2013 introduced a number of new concepts and one of the most important amongst them was the concept of the ‘One Person Companies’.
Evolution of One Person Company
Historically, United Kingdom is the first country to pave way for the concept of One Person Company through the precedent set in the landmark judgment of Saloman v. Saloman & Co. In India, the concept was introduced for the first time in the report of Dr. J.J Irani Committee. The committee suggested multiple classifications of companies and expressed an opinion that the law should acknowledge the potential for diversity in the forms of companies. As an aftermath of this report, the Companies Bill, 2009 included the concept of One Person Company. However, it remained dormant until the new Companies Act was introduced in 2013.
What is a One Person Company?
The Companies Act, 1956 mandated that there must be at least two members in order for a Company to be constituted. One of the reasons for this was to clearly distinguish between the corporate structures of a ‘Sole Proprietorship’ from that of a ‘Company’ and it categorically excluded ‘Sole Proprietorship’ from the ambit of the Act. However, the inherent irrationality of the provision became evident when people resorted to the practice of forming companies by adding nominal members/ directors, allotting them single shares and retaining the rest with themselves.
Thus the concept of One Person Company was introduced to remove this blatant irrationality and to give more clarity and logic by leaving an option whereby a person can form a company as a single person entity.
According to Section 2(62) of the Companies Act, 2013, a One Person Company is a company with only one person as its member. It is a type of private company with only one member. For a broader understanding, one can term it to be a mixture of sole proprietorship and a private company in the sense that it enjoys the complete ownership like that of a sole proprietorship but with a limited liability like that of a private company.
A one-person company may be either a company limited by shares or a company limited by guarantee or an unlimited company. The memorandum of the ‘one person company’ has to indicate the name of some other person, with his prior written consent in the prescribed form. Such person is to become the member of the company in the event of the subscriber’s death or his incapacity to contract. Such person’s written consent must be filed with the Registrar at the time of incorporation of ‘one person company’ along with the memorandum and articles. Such person may withdraw his consent in the prescribed manner. The member of such company can also change the name of such person by following the procedure prescribed under the Act. It is the duty of the member of one person company to inform the company of the change of the other person nominated by him. The company has to then inform the Registrar of any such change in the prescribed time and manner. Any such change will not amount to an alteration of the memorandum.
Relaxations Available to a One Person Company
A One Person Company has been provided with significantly relaxed requirements under the Act.
As per Section 149(1)(a), only one director is required for a One Person Company. This relaxation is available only to One Person Company since every other type of companies requires a minimum number of two directors.
Filing of Annual Returns
Usually, the annual returns of the company has to be signed by the Director and the Company Secretary whereas for a One Person Company, it shall be signed by the Company Secretary and if there is no Company Secretary, then by the Director alone.
Holding of Meetings
By virtue of Section 96(1), a One Person Company is exempted from holding the Annual General Meeting of the company. Section 122 of the Companies Act, 2013 is very important with respect to One Person Company. According to Section 122, the provisions of Section 98 and Sections 100 to 111 which talks about the procedural aspects of General Meeting and voting at the General Meeting are not applicable to One Person Companies.
Further in respect of businesses which can be transacted only through general meetings of the company by means of an ordinary or special resolution, for a One Person Company, such a meeting will be deemed to have done if the member of the company has communicated the resolution to the company and entered it in the minutes book with sign and date. As there is only one director for a One Person Company, compliance with the provisions of conducting the board meetings are impossible and is therefore granted an exemption. Therefore any business which can only be transacted at a Board of Directors meeting of the company, for a One Person Company, it is sufficient that the resolution by the director is entered in the minutes book as per the Act.
Reports and Disclosures
Section 134 of the Companies Act, 2013 mandates every company to place financial statements along with the Director’s and Auditor’s reports before the members in the general meeting of the Company. The Director’s report so prescribed must have all the necessities mentioned under Section 134(3) of the Act. However, for a One Person Company, this report shall include only the explanations on qualification, reservation, disclaimers or adverse remarks of the auditors if any.
A One Person Company is granted relaxations in preparing Cash Flow Statements of the company. Further by virtue of Section 137(1) of the Companies Act, 2013, a time limit of 180 days from the closure of financial statement has been granted to One Person Company to file the financial statement with Registrar.
Number of Board Meetings
The minimum number of Board Meetings which needs to be conducted in a particular year and the quorum of such meetings as prescribed in Sections 173 and 174 respectively are not applicable to One Person Companies having only one director. Further, if such a company have more than one directors, then a Board of Directors meeting must be conducted in each half of the calendar year and the time gap between two consecutive meetings must be at least 90 days.
Regulating One Person Companies
Rule 3 of Companies (Incorporation) Rules, 2014 is very significant in regulating the incorporation of the One Person Company. As per the rules, only a natural person who is a citizen and a resident of India (a person who had stayed in India for not less than 182 days during the immediately preceding financial year) is eligible for incorporating or becoming a nominee of a One Person Company. A person cannot incorporate or become a nominee of more than one ‘One Person Company’. A minor is barred from becoming a member or nominee, nor can he hold shares with beneficial interest in a One Person Company. One Person Company cannot be incorporated or converted as a ‘non-profit company’ under section 8 of the Act. Further, it cannot carry out non-banking financial investment activities.
The most important feature of One Person Company is that while the characteristics regarding the ownership and control predominately resemble that of a proprietorship, the risks are limited to the value of shares held by such person in the company. The Company has a separate legal identity and existence from its shareholders. This would encourage entrepreneurial persons to take the challenge of doing business without bothering about liabilities getting to the personal assets.
The introduction of the concept of One Person Company to the corporate sphere itself was a move to promote and encourage the corporatization of small businesses with simpler legal compliances. Undoubtedly the concept opened up new horizons of business opportunities and created spectacular possibilities particularly to sole proprietors and entrepreneurs who can now enjoy the privilege of limited liability and the advantages of a separate legal entity which was earlier available only to the companies.
It is a fact that the concept of One Person Company is still in its inceptive stage in India and it will get accepted amongst the business community only with the passage of time. But there can be little doubt that with the passage of time, the One Person Company will be the most preferred mode of business structuring especially for micro-businesses and small entrepreneurs.