ONE PERSON COMPANY

ONE PERSON COMPANY Origin To understand a “One Person Company”, henceforth referred to as OPC, it becomes essential to first analyse what a company is. The word has no strict technical or legal meaning Buckley J. in Stanley, Re, [1906] 1 Ch 131. In terms of the Companies Act, 2013, A “company” means a company incorporated under this Act or under any other company law. The Companies Act, 2013 - S.2(20) The growth of the concept of incorporation and company law arose from England’s need to set up a mercantile empire. The first and the best known example of these efforts is the establishment of the East India Company, as early as in the 1600’s. However their growth was initially slow and did face a number of obstacles, primarily because of the expenses accompanied by the process of forming a company A body corporate in the 17th and 18th century could be brought into existence either by a Royal Charter or by a Special Act of the Parliament, both of which were too expensive.. But this period was also a corner stone that marked the age of growing commercial needs, rise of unincorporated partnership, trading, sales etc. To begin with, the English Parliament completely prohibited these individual private concerns The Bubbles Act, 1720 completely prohibited rise and promotion of companies. But the persistent need for commercial growth forced the Parliament a century later to repeal the Bubbles Act and put forward the Joint Stock Companies Act of 1844 and then again in 1856, which finally enabled incorporation of both private and public companies. With this new trend, governments all over the world started supporting the existence and growth of Private and Public Companies either limited by shares or by guarantee or unlimited in nature. However the need for statutory provisions to facilitate a single individual to incorporate a company according to his own objectives was equally felt. This, like most other concepts, was also first recognised in Britain. It is often said that Common Law in England developed out of the recognition of personal rights and it is these rights themselves that have been given the ultimate respect. When the concept of personal right was read in consonance with the provisions for forming a company, the question which popped up in every mind was whether a single person could in fact, in exercise of his personal rights, form a company. I.e. whether a person’s individual right to form a trade, business or commerce would be curtailed by the provisions of Company Law which required at least two members to start a company? To answer this it is important to turn back the pages of history and refer to the landmark case of Salomon v. Salomon & Co Ltd [1897] AC 22. More than 115 years ago the House of Lords in this very judgment confirmed the doctrine of separate legal entity; that a company is distinct from its shareholders and is not the shareholders’ agent. This doctrine is now adopted as the law of most countries. However, what makes Salomon a landmark case is not only the doctrine of separate legal entity, which was already there for more than 200 years before Salomon was decided See, for example, Salmon v. The Hamborough Co (1671) 1 CH CAS 204, but it is also because of the recognition of “one-man company”. In arriving at such decision, Lord MacNaghten Salomon v. Salomon & Co Ltd.at p. 53 noted that “it does not matter whether the power to control the company is within only the hands of one person as long as the shares are fully paid up”. His Lordship further observed that the conclusion was not “contrary to the true intention of the Companies Act, or against public policy, or detrimental to the interests of creditors.” Thus the idea of a single person controlling a company has been in existence in Britain for a long time. Indian scenario In India, the Companies Act, 1956 was the first comprehensive attempt at creating a statute for companies and related matters. It was a piece of legislation based on the English Act. Though comprehensive, it was a bulky legislation which had to be periodically amended. Presently, we have the Companies Act, 2013 which has brought in a wave of new changes that are expected to take the industries to a new level, in tune with those of the international fora. The most controversial of these provisions is the one relating to the concept of One Person Companies or OPC’s. This concept of OPC was first recommended by the expert committee of Dr. JJ Irani in 2005. In its report the committee had observed, “With increasing use of information technology and computers, emergence of the service sector, it is time that the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Yet it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the market place should do it through an association of persons. We feel that it is possible for individuals to operate in the economic domain and contribute effectively. To facilitate this, the Committee recommends 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.” OPC are expected to provide a whole new bracket of opportunities for those who look forward to start their own ventures with a structure of organized business. OPC will give the young businessman all the benefits of a private limited company, which categorically means they will have access to credits, bank loans, limited liability, legal protection for business, access to market etc. all in the name of a separate legal entity. Reasons for formation Under the ‘old’ Companies Act, 1956 a minimum of two members were required for formation of a Private Limited Company. This was a hindrance to the entrepreneurs who wanted to go ‘solo’. According to the old Act The Companies Act,1956 - S.12, the only options were either to form a private company with a minimum of two members or a public company with a minimum of seven members, which was either limited by shares or by guarantee or was unlimited. The reason provided by the parliamentarians for having at least two members for a private company was so as to differentiate it from a sole proprietorship concern which could be started by any individual. But people started forming companies by adding a nominal member/Director and allotting them a single share, which was a pre-requisite to be a Director, and retaining the rest with themselves. This was a way of bending the law, in order to satisfy the legal provisions while at the same time exercise dominance. This was seen by the legislatures as a fraudulent activity. Though it was formed in compliance with the statutory provisions, it seeks to violate the very reason for which such a restriction was imposed. I.e. the mischief sought to be remedied by section 12 of the Companies Act, 1956 was to ensure that a company would not be left to the sole control of an individual but would rather be shared by at least two individuals. But this intention of the legislature was defeated by incorporating private companies with a nominal member. Later, it was established that there is nothing wrong in permitting one person to form a company with proper checks and balances, upholding the Constitutional right of an individual to start a business, trade or commerce on his own, ensuring that it is not for the purpose of defrauding the public. It was in order to achieve this situation that the 2009 Company Law Bill first considered the concept of OPC as proposed by the J.J. Irani Committee. It however did not materialise. The 2012 Bill however succeeded in this venture and it gave rise to the Companies Act, 2013 which includes provisions for OPC’s as well. In addition to this, it was also realised that incorporating this idea into the 2013 Act would give the unorganised proprietorships an opportunity to incorporate themselves and thereby gain the advantages of incorporation. An OPC would thus provide a unique blend of functioning a sole proprietorship with the advantages of an incorporated company. OPC provides a legitimate way to form a company with only one member. It can work like proprietorship but it holds the status of company and of course enjoys the benefits that come with it (limited liability, trust factor etc.) Distinct features of an OPC One person The most prominent and striking feature of an OPC is the fact that it has only: One Director One shareholder - both rolled into one. This is the most distinctive feature of an OPC. Since it has only one Director, he exercises complete control over the functioning of the enterprise. He is also the only single shareholder. It can however have a maximum of 15 Directors. The 2013 Act at S. 149(1) of Member/Shareholder of the One Person Company acts as first Director, until the Company appoints Director(s) Minimum paid up capital It shall have a minimum paid up capital of Rs.1lakh Nominee The Act clearly prescribes that the Director of the company shall appoint a nominee to take charge of the company when the sole Director/member is disabled or diseased. The nominee shall be a natural person, Indian citizen and resident Resident in India will mean a person who has stayed in India for a period of not less than 182 days during the immediately preceding one financial year. in India. The name of the person has to be provided in the memorandum S.3(1) of the 2013 Act. The naming can however only be done with the prior consent of the nominee in writing. The reason being that he is accepting to take on the company with all its liabilities as well; the registrar has to make sure that the nominee has voluntarily consented to it. The written consent has to be filed with the registrar at the time of incorporation along with the Articles and the Memorandum. Provisions are provided for the nominee/ other person to withdraw his consent at any time. The 2013 Act at S.3 Further, the member/Shareholder of OPC may change the nominee/other person at any time, by giving notice to the other person and intimate the same to Company. Then the Company should intimate the same to the Registrar Meetings With respect to Board Meetings ( Section 149 (1) (a) ) At least one meeting of Board in each half of a calendar year and the gap between 2 meetings should not be less than 90 days. However, no Board Meeting is required, if there is only one Director. If there is any business which is required to be transacted in a Board meeting and OPC has only 1 Director, then it will be sufficient if the resolution by such Director is entered in the minutes-book and is signed and dated by such Director and such date shall be taken as the date of Board meeting. With respect to Annual General Meetings ( Section 96 (1)) There is no requirement of holding AGM, however any business which is required to be transacted at an AGM or other general meeting, by means of an ordinary or special resolution, shall be taken as passed by OPC, if the resolution is communicated by the member to the company and entered in the minutes-book and signed and dated by the member and such date shall be deemed to be the date of the meeting. Financial Statements Financial statements of OPC may not include the Cash Flow Statement (Section 40). It may only include Balance Sheet, Profit & Loss and any explanatory note, as a part of the same. Unlike other companies, here it is to be signed by only one Director. A copy of the financial statements is to be filed with the Registrar of Companies, within 180 days from the closure of the financial year. Style of writing Name of Company ‘‘(One Person Company)’’ is required to be mentioned in brackets below the name of such name of the company, wherever its name is printed, affixed or engraved. Companies Act 2013 - Section 12 (3) (d) Annual Return Annual return is required to be prepared by OPC and be signed by the Company Secretary (CS) of Company and when there is no CS, by any Director of Company. However, it is not clear, whether the same is required to be filed with ROC, as the time limit of filing return is connected to the date of holding AGM, however, we know that OPC is not required to hold AGM. Hence, it is an open question. Non-applicable Clauses As far as an OPC is concerned, in Chapter VII, it is provided that the following sections prescribing certain formalities and procedures are not applicable. This is to ensure less technicalities and efficient functioning of an OPC. This can be treated as an exception or an exemption as suggested by Mr. J.J. Irani Provisions which are not applicable to an OPC as per the Companies Act, 2013 are scheduled below: Clause 98: Power of Tribunal to call meetings of members, Clause 100: Calling of extraordinary general meeting, Clause 101: Notice of Meeting, Clause 102: Statement to be annexed to notice, Clause 103: Quorum for meetings, Clause 104: Chairman of meetings, Clause 105: Proxies, Clause 106: Restriction on voting rights, Clause 107: Voting by show of hands, Clause 108: Voting through Electronic means, Clause 109: Demand for poll, Clause 110: Postal Ballot, Clause 111: Circulation of members’ resolution. The OPC has been exempted from the above provisions in view of the opinion of the Irani Committee and also in view of its special nature. Most of the powers are exercised by the sole Director himself; as a result many of the above provisions lose their relevance with respect to an OPC. Contract by One Person Company If an OPC limited by shares or by guarantee enters into a contract with the sole member, who is also the Director of the company, then it should be ensured that the terms of contract are contained in a memorandum or are recorded in the minutes of the first meeting of Board, held next after entering into contract. However, it should not apply to contracts entered into, in the ordinary course of its business. The company shall inform the ROC of such a contract and shall record the approval of the Board in the minutes, within a period of 15 days of the Board meeting. Why prefer a company over a proprietorship? One Person Company is defined in Sub- Section 62 of Section 2 of The Companies Act, 2013, which reads as follows: 'One Person Company means a company which has only one member' One of the primary reasons for introducing OPC is to provide individuals the benefits of incorporation while functioning a like a sole proprietorship. The question thus is, what are the advantages that make the title of a company more coveted than that of a proprietorship? The advantages of incorporating into an OPC are similar to those of any other company, but these have not been afforded to proprietorship concerns. The following should give a brief idea as to why OPC is much better option than a proprietorship concern. Independent corporate existence Like any other company, an OPC will have its own existence, which is separate from that of its Director/shareholder. The principle was first emphasised in Salomon v. Salomon & Co Ltd Infra ft. nt. 5. A company is in law a person, having perpetual succession and a common seal. It forms a distinct legal persona independent of its member. Thus an OPC becomes a body corporate capable forthwith of exercising all the functions of an incorporated individual. It becomes impersonalised. In the words of Palmer, “The benefits following from incorporation can hardly be exaggerated. It is because of incorporation that the owner of the business ceases to trade in his own person. The company carries on the business, the liabilities are the company’s liabilities and the owner is under no liability for anything the company does, although as principal shareholder, he is allowed to take full advantage of the profits which the company makes.” Palmer’s Private Companies, 13 (42nd Edn.. 1961) Further in T.R. Pratt v. E.D. Sasoon & Co. Ltd AIR 1965 Bom 62the Bombay High Court has held that, “Under the law, an incorporated company is a different entity, and although the entire share maybe practically controlled by one person, in law a company is a distinct entity…” Ibid This is in contradistinction to a proprietorship where there is no separation of identity between the individual and his business. They function as one and share the same identity. Limited liability As already stated, an OPC shall function as a private company The 2013 Act at S.3 . It does not talk about limited liability per se. it is however implied that the liability of its shareholder is limited to the value of his shares invested. In the case of an OPC, since one person holds all the shares, his liability will be complete with respect to his investments in the company. I.e. all his shares in the company will be liable to be attached in case an issue crops up. His personal assets will however be protected. In a proprietorship, all the assets of the individual will be attached and there is no limitation on the liability. Liability extends to his personal belongings as well. Perpetual succession The Director of the company must mandatorily nominate a successor to be the sole member in case of his death or disability. The qualifications have already been discussed to be a nominee. He shall act as the new Director and take over the business. Thus essentially the business is handed over to another person but it still continues ti survive. “Members may come and go but the company can go on forever” Gower, Principles of Modern Company Law, 76 (3rd Edn., 1969). It is to be noted that the liabilities and all assets will also shift hands in this process. A proprietorship on the other hand ceases to exist when the true owner dies. As it shifts hands, its identity changes; and hence the former proprietorship ceases, and a new one may rise. Separate property Here again, since a company has a separate legal entity, any property acquired by it will be its own. It is capable of owning, enjoying and disposing of the property in its own name. It becomes the owner of its own assets. The member does not have an insurable interest in the property of the company. The shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein. Macaura v. Northern Assurance Co. Ltd, 1925 AC 619 at p. 625Thus incorporation helps the property of the company to be clearly distinguished from that of the member. In a proprietorship there is distinction of identity. The owner is the proprietor and any property owner by the proprietorship is his and vice versa. As a result any creditor of the proprietorship will have a valid claim on all the assets of the owner. Transferability of shares In an ordinary company, shares are treated as movable property The 2013 Act at S.44. Thus any individual can sell his shares in the open market and get back his investment without having to withdraw money from the company. But in an OPC, there is only a single member. The question of transferring a portion of the shares does not arise because then it ceases to become a “one” person company. He cannot transfer all the shares as well as this will lead to major alterations, including changes in the Memorandum of Association as the single owner is changing. Variations will also have to be made with respect to the nominee. This issue has not yet been dealt with by the parliamentarians and the above is a personal view on logical interpretations. It would thus appear that in the case of an OPC, transferability of shares is restricted. Such a question need not arise in the case of a sole proprietorship. Capacity to sue and be sued An OPC has the capacity to sue and be sued on its own behalf. In fact this is one of the primary advantages that follow from being a separate legal entity. Criminal complaints can be filed by or against an OPC, but it has to be represented by a natural person, which in this case would ideally be the single Director or any Director if there more than one. Being a separate entity, it has always been bestowed with the power to protect its fair name. Any act which affects its reputation or is likely to cause damage to its business can raise a reasonable cause of action. Such a question need not arise in the case of a sole proprietorship. The owner sues on his own behalf and on behalf of the proprietorship. Conversion What are the circumstances in which OPC automatically ceases to be an OPC? An OPC shall cease to be an OPC when either the paid up share capital exceeds Rs. 50 lakhs or its average annual turnover during the relevant period Relevant Period means period of immediately preceding three consecutive financial years. exceeds Rs. 2 crores and within 6 months of such date, it shall either convert the OPC into a Private Company with 2 members and 2 Directors or Public Company with 3 Directors and 7 members. How can an OPC willingly convert into Private of Public Company? It can do so by increasing its Directors and members and paid-up capital to that of Private/Public Company and by following the procedure of conversion in section 18 of the Act 2013 Act. Flaws – the other side of the coin A brief reading of the above pages will reveal that an OPC is indeed a harbinger of progress and industrial growth. It has its fair share of advantages. It provides a perfect mixture of the unique characteristics of a company while performing with the independence and freedom of a sole proprietorship. The following are some useful tips to note before going into an OPC. Tax obligation Since the end result is the formation of a company, it is unfortunate to note that it will be subject to the same tax obligations. Tax usually falls under the following heads for a company: Corporate tax – 30% Minimum alternate tax – 8.5% Dividend distribution tax – 15% An OPC may be exempt from some or all of these, but it will still be seen as a company and hence taxed more heavily than a sole proprietorship. The issue arises primarily because many of the sole proprietors who want to incorporate may not be able to afford such heavy levy of taxes. As a result there are chances of winding up soon after its inception. In a sole proprietorship on the other hand as there is not any difference from between the concern and the owner, the only tax he is obligated to pay is the income tax in association with the profits he makes at the concern. This will not be burdensome as there are specific limits set up in the Income Tax Act for different income groups. The person will therefore only have to pay the reasonable amount set up by the government. Fraud OPC’s may also be abused to conduct fraudulent business. This is partly reflected in England by the fact that private companies registered with a capital of less than £5000 rose from 20% to 33% from 1897 to 1901 P L Cottrell, Industrial Finance 1830-1914: The Finance and Organisation of English Manufacturing Industry (Methuen, London 1980), 163. It seems that fraud committed through one-man companies has been a problem for ages. While most frauds OPC’s commit can also be committed by genuine companies, the lack of balance in powers and interests within a one-man company makes it easier for the one-man to commit fraud for his personal benefit. For instance, according to the new Act a person can form as many as five OPC’s. Under such circumstances, the one-man may avoid liability by setting up numerous one-man companies, and transfer the property belonging to a problematic company to another company quickly as the companies are under the control of a single person. Per Lord Jenkins in Pepper v. Litton, 308 US 295 (1939) Creditor’s psychology It is also relevant to note that most of the creditors of the company will be sentient of the danger posed by this new concept. Usually a company which has at least two members is a welcome investment. Banks are willing to give loans and there are creditors available. But when it comes to a single individual the chances of him manipulating or using the company name for fraud are always present and the chances of being duped are greater since unlike an ordinary company, the only decision that counts is that of the sole member’s and the only person actively involved in the decision making process is he himself. Even if there are more Directors, it still does give the sole member a kind of veto power over all the rest. Thus there are chances of these companies facing a hard time when it comes to getting financial aid. Liability for the Director It is no secret that a Director of a company may become liable for his actions under certain circumstances. The one-directing-mind nature may make one-man companies easier to be criminally liable Secretary For Justice v. Lee Chau Ping , [1999] 2 HKC 103. Even in cases where the Director is not to be personally liable, the liability maybe directed at the Director as he is the person in control of the functioning of the business. It is often seen that the principle of “lifting the corporate veil” has been resorted to in instances where it is pertinent to find the person who is responsible for the acts of the company. But here the courts are even discharged from that duty as there is just one primary share holder and one principal Director. Fingers maybe easily pointed at him even in cases where he may be innocent. Suggestions & Conclusion Now that both sides of the coin have been analysed, it is time to determine which outweighs the other. These ventures do provide benefits in comparison to a sole proprietorship, but then again is it the safer alternative? Trust still lies in the traditional private and public companies. But a one-man company is by itself not a bad thing as it can encourage business venture and makes better use of market resources. Many jurisdictions have already recognised private one-man companies. For example, it is recognised by the European Economic Community,one-man private company is also now recognised in Hong Kong under the Companies Ordinance Section 153A(1). Similar provisions are visible in Pakistan, UAE and Singapore. There can however be improvements to the legislation. Learning from the experience of other countries it is safe to say that “where there is a will, there is a way, and this way need not always be the right one”. Minor improvements here and there can go a long way in improving the present set up. For one, there should be a regulatory body to ensure that the activities of the company are within the legal framework and that there is no misappropriation of funds. Further, allowing a person to pioneer as many as five OPC’s is another lacunae which can be used by the person to avoid liability by shifting the burden; the number has to be restricted to a maximum of two or three. He may however be allowed to be a member of board of Directors of other companies. This new concept may lead to people forming companies to generate profits themselves leaving the liability to the company and washing their hands of any liability. This is still a pilot attempt in a country like India. Thus as far as an individual is concerned, it is suggested that a sole proprietorship is still the better alternative. There are still areas which are shady and can lead to a lot of ambiguity and may cause loss to the person. It might take years to prove that the system works flawlessly, but in the meantime, it is impossible to reverse the development of one-man companies. Instead, it is more important to think of measures to prevent it being used as a sham. One may expect more restrictions to be imposed on one-man companies by the legislature and the judiciary to ensure that the protection is individual right will not be used as a forum to commit fraud on general public.