Introduction and Development of Legal Framework
Revolution of corporate laws in India has been facilitated by introduction and incorporation of new corporate concepts which were not part of the then corporate laws in India and the same were added though enactment of Companies Act, 2013. This Act replaced Companies Act, 1965 and the same was stimulated as a result of the need to enact laws which would help Indian companies to adapt to the current national and international environment and to amend the lacunas of the existing laws so as to safeguard transparency in governance of the companies. One of such game changer concepts brought by the 2013 Act was introduction of ‘One Person Company.’
Prior to the enactment of the 1965 Act, there was no provision which enabled one single person to enter into venture with limited liability and the only recourse that was available was to establish sole proprietorship with unlimited liability. To attract the benefit of limited liability, one had to establish start a private company, which necessarily requires minimum of two shareholders. To overcome the drawback of sole proprietorship which does not recognize itself as a separate legal entity, One Person Company was introduced. Thus, one person company is a perfect blend of characteristics of a sole proprietorship and a company form of business, as it enables one single person to incorporate a business with limited liability.
Recommendations of J.J. Irani Committee Report[1]
J.J. Irani Committee recommended to the Government in its advisory report to revise the existing Company Act so as to provide for larger participation of the people in the economic activities of the country. To give entrepreneurial capabilities of people an outlet for maximum participation, it was opined by the committee to provide for creation of an economic person in form of a company and the same is considered as one person company. It suggested that such companies may be registered as a private company with one shareholder, have at least one director and provide for a Nominee Director in case of any contingency due to death or disability of the sole shareholder.
Provisions under Companies Act, 2013 governing One Person Company
The statute defines OPC as a company that has only one person as its member. Thus, the number of subscribers to the memorandum of association or shareholders of the company is restricted to one person.[2] This form of company is a development to the concept of sole proprietorship which facilitates entrepreneurs who are at an early stage of business to start their business with limited liability and without any other person. A one person company can be formed for a lawful purpose as a private company with a minimum paid up capital of rupees one lakh with its inability to transfer shares or make invitations to the public.[3] The sole member forming such I deemed as its first director, till the time he does not appoint any other person as its director. The restriction on the number of directors is between 1 and 15 directors, however the same can go beyond 15 by a special resolution to be passed by the OPC.[4] When the paid up share capital is more than fifty lakh rupees or when its average annual turnover for the last three years exceed two crore rupees, then there exists a mandatory condition to convert itself into a private or public company.
Eligibility for the sole member to incorporate a one person company includes the said person should be a natural person, a citizen of India, an Indian resident who has clocked 182 days in India in the preceding calendar year.[5]
Limitation Imposed on OPCs to be incorporated by a Natural Person only
Due to the Companies (Incorporation) Rules, 2014 one of the limitations that has been imposed on incorporation of a company is that the member should only be a natural person and not by artificial juridical person. Thus a company cannot be a one person of the one person company. Natural person means a human being who is different from a corporation. The Companies Act define company as a company incorporated under the 2013 Act or under any of the previous corporate laws. Therefore a company is created by law and thus an artificial person. Since it is a juridical person, it can enter into contracts with others in the name of the company, can sue, and can be sued, purchase property in the name of the company, incur debt. As per the Jurisprudence laid down by Salmond, a company has an artificial existence with its legal mind acting through its agents. Even the Supreme Court of India had identified that the term ‘incorporation of a company’ means creating a legal company as a juristic company.[6] The affairs of such incorporations are handled by natural persons who act as agents of such companies. Thus, such incorporations have the scope of acting as a natural person, but only through the designated member who are appointed under the Act. Thus the company enjoys the status and rights of a legal person, but the same are exercised by a natural person. Since a company has a perpetual existence, the company survives beyond the lives of its members.[7] Thus, it can be summed up by analysing the intention of the relevant statutes and rules is to put a limitation on one person company by a natural person only i.e. human beings can only be the sole members. Although the company gets the status of corporate personality, but this does not accord them status equivalent to natural person. Since a company does not fall within the ambit of being a natural person, it cannot be the one person of one person company.
Although the system of one person company is novel to India, such setup has been well established un England, U.S.A, Singapore and many European countries for a long time. England was the first country that contributed to development of the concept of one person company[8] and it was in 1925 when England finally accorded statutory status to one person company.
Here are some of the key aspects in which the concept of one person company differentiates among various countries are:
- Requirement of capital: Countries like U.K and U.S.A have flexible policies with respect to the minimum capital required while incorporating a company. They have developed a test where they check if the capital can meet the expectable strain of a business of its nature and size. However, countries India, China in order to ensure clarity have provided for minimum capital requirement.
- Disclosures and Demonstrations: In order to secure the interests of the creditors and to maintain the credibility of this concept, Germany, U.S.A and France provides for a strong disclosures and demonstration regime. However, in India excessive importance has been given to procedural requirements for incorporation of OPC, filling of its financial statements etc.
- Status of legal and natural person: Except only a few countries, none of the countries put a restriction of incorporation of OPC by a legal person. India has put such and attract drawback of putting such bar as no company can become the one person of the one person company.
- Transferred One Person Company: English law provides for a contingency wherein if the member of an existing legal entity comes down to one, it may continue to exist as long as it does contradict the articles of association of such legal entity. However, Indian laws do not cater to such contingency and thus failure to maintain the minimum members lead to dissolution of company and wastage of resources.
Since the concept of OPC in India is at a very nascent stage in India and other countries have comparatively developed the jurisprudence pertaining to the same, there are certain changes that would further the goal of OPCs in India to promote entrepreneurships and includes:
- The restriction imposed on the status of one person company to be a natural person should be removed as it restricts investment of a company to act as a one person.
- The restriction regarding the citizenship and resident of India should also be done away with as it bars the investment by non-residents of India and multi-national companies.
- Recognition to the concept of ‘transferred one person company’ which means that if a private company does not meet its minimum member requirements it should not be dissolved due to this reason and should continue its operation even with one single member.
- Relaxed taxation policies should be brought for one person company and separate provisions should be provided for in the Income Tax Act, 1961 to recognize one person company.
- Relaxed procedural requirements for incorporation of one person company should be introduced so as to not discourage entrepreneurs to not opt for this option because of the stringent formalities attached to it.
According to World Bank’s global ranking of Doing Business 2018 Report, India has escalated in its ranking by thirty spots as compared to its last years rank and one of the main reasons to this escalation can be attributed to the business-friendly changes that has been brought in corporate law regime. One of such contributions include incorporating the concept of one person company in the Indian legal setup through Companies Act, 2013.[9] This concept has given an impetus to small and medium sized company to operate in organized sector by presenting a more relaxed setup that facilitates the interests of such entrepreneurs by bringing a perfect mixture of a sole proprietorship and a company form of business.
This concept has proved to be advantageous to both the regulators and the entrepreneurs. For the regulators, this setup has brought the unorganized sector under its regulations, and for the entrepreneurs, it allows them to start a private company without achieving the minimum member requirement of two members. The concept carries its own drawbacks with it which includes excessive importance to the procedural formalities and no taxation benefits. Due to no taxation benefits, it becomes less appealing to the proprietor because the base tax rate of a company is quite high, resulting in payment of higher taxation for smaller businesses.
After comparison of legal framework of India with other countries in relation to one person company, it can be concluded that efforts has been put by Legislature to bring a sound system for such setup by regulating the freedom through procedural requirements. This concept can be put best to use if it is implemented properly as it can boost the economy by giving incentives to small entrepreneurs. To check if one person companies are serving its function of promoting economic development of the country, the Government should take of its reform in form of a cost-benefit analysis.
[1]Jamshed J. Irani et al., Report of the Expert Committee on Company Law, http://www.primedirectors.com/pdf/JJ%20Irani%20Report-MCA.pdf (Retrieved Sept. 2, 2019).
[2] Section 2(62), Companies Act, 2013, No. 13, Acts of Parliament, 2013 (India).
[3] Section 3, Companies Act, 2013, No. 13, Acts of Parliament, 2013 (India).
[4] Section 152, Companies Act, 2013, No. 13, Acts of Parliament, 2013 (India).
[5] Rule 2.1 (1), Draft Rules under Companies Act, 2013, available at https://www.taxmann.com/datafolder/News/CHAPTER%20XI.pdf, (Retrieved Sept. 2, 2019)
[6] M/s. Electronics Corporation of India Ltd. v. Secretary, Revenue Department, AIR 1999 SC 1734.
[7] Gopalpur Tea Co. Ltd. v. Penhok Tea Co, Ltd., (1982) 52 CompCas 238.
[8] Saloman v Saloman & Co. Ltd., (1887) AC 22.
[9] World Bank Group, Report on Doing Business 2018, Reforming to Create Jobs, available at: https://www.doingbusiness.org/content/dam/doingBusiness/media/Annual-Reports/English/DB2018-Full-Report.pdf, (Retrieved Sept. 2, 2019)
This article is written by Garima Darda.
Disclaimer: This article is an original submission of the Author. Lex Insight does not hold any liability arising out of this article. Kindly refer to our Terms of use or write to us in case of any concerns. This article is a part of the 1st National Essay Competition, 2019.
Featured image credit: iPleaders