Adam Smith in the ‘Wealth of
Nations’ (1776) declared “Individuals
always weigh their own interest more than the group”. He made this
statement at a time when tradesmen in Europe were organizing themselves into
groups to enhance their scale of business and leverage potential markets available for their goods
in exotic, far away colonies. This organized trade would later be christened as
a ‘joint stock company’ and lead to the birth of company law. However, with the
passage of time, it appears legislative draftsmen paid heed to what the Father
of Economics had contemplated then and the outcome is the legal acceptance of the concept of a ‘One
Person Company’- now part of the Companies Act, 2013 (2013 Act) in India.
under the 2013 Act
A One Person Company (OPC)
under the Act means a company that has only one person as the member [see end note1]. An OPC formed under
the 2013 Act has been accorded the status of a private company [see end note 2]
and shall be treated accordingly except for certain explicit exemptions or
restrictions. Such an OPC may be limited by shares or guarantee or may even be
an unlimited company.
OPC may be formed only by a
natural person who is a citizen and resident of India [see end note 3] by
subscribing to the Memorandum of Association (MOA) of the company. The single
member is required to nominate another natural person meeting the criteria as
his nominee who shall continue the business of the company in the event of the
member’s death or incapacity to contract [see end note 4]. The single shareholder is also required to take the written consent of the
nominee before including his name as the nominee in the MOA. The nominee may
further withdraw his consent or the member may change the nominee by informing
the Registrar of Companies (ROC) of the change and following the prescribed
procedure. As per the Draft Companies Rules, 2013 (Draft Rules) circulated by
the Ministry of Corporate Affairs, a single individual cannot incorporate or
become member in more than five OPCs [see end note 5].
The name of the OPC shall be
followed by the suffix ‘One Person Company’ [see end note 6]. The individual member of the OPC shall be deemed to be its first director until
the director or directors are duly appointed by the member [see end note 7]. Although not specifically provided, as per Section 5, the OPC may adopt all or
any of the regulations contained in the model articles provided under Table F
to J in Schedule I of 2013 Act.
Where the paid up share capital
of an OPC exceeds fifty lakh rupees or its average annual turnover during the
relevant period exceeds two crore rupees, it shall cease to be entitled to
continue as an OPC. An OPC which exceeds the said prescribed limits is mandated
to convert itself within six months to a private company with minimum two
members or a public company with seven members or more and appoint requisite
number of directors by following the procedure under Section 18 of the 2013
The definition of ‘Small Companies’ under the
2013 Act is also a new concept and it
provides for the same restrictions [see end note 8],
hence , an OPC will also come within its purview. The exemptions and
restrictions on OPCs and Small Companies is almost the same but this inclusion
of OPCs as Small Companies may impact OPCs with regard to any future
notifications regarding Small Companies.
Where an OPC limited by shares
or guarantee enters into a contract which is not in writing with the sole
member of the company who is also its director, the company shall, ensure that
the terms of the contract or offer are contained in the memorandum or are
recorded in the minutes of the first Board meeting held after entering into the
contract. The company shall inform the Registrar of Companies about every
contract (whether written or otherwise) entered into by the company and
recorded in the minutes [see end note 9].
An OPC is eligible for the
following procedural and compliance related relaxations:
- The Annual Returns of OPC
may be signed only by the director where there is no Company Secretary [see end note 10]
- Not required to hold
Annual General Meetings [see end note11]. Required to conduct only one board meeting every six months in a year with
gap between both meetings not less than ninety days (in cases where the
sole member is not the only director) and not required to hold Board
Meetings where the member is the only director of the OPC [see end note 12].
- Resolutions to be passed
at general meetings and board meetings (in case the sole member is also
the only director) is only required to be communicated to the company and
further signed, dated and entered into the minutes book of the company[see end note 13].
- Need not prepare a
detailed Board Report. Is only required to explain or comment on every
qualification, reservation or adverse remark or disclaimer made by the
auditor in his report[see end note 14].
- Need not include a cash
flow statement in its financial statement[see end note 15].
Due to acknowledgement of the
OPC as a body corporate under the 2013 Act, the definition of the term body
corporate under Section 2(11) now does not exclude a ‘Corporation Sole’ from
its scope. Although an OPC is now a body corporate, treating a ‘one member
enterprise’ as an artificial person separate from its member may have its own
problems. If the sole shareholder and/or the OPC becomes insolvent, its impact
on those who dealt with the business on
a corporate basis and those who dealt with the sole shareholder as an
individual, the liabilities will be different for both. The equities of the
former are no greater than those of the latter. The former will be limited to
the corporate assets; the latter, to the individual assets. Moreover, no
special provision has been made for winding up of OPCs and the creditors and
members shall be bound to follow the tedious winding up process prescribed for
all companies in general under the 2013 Act.
Also, as Lord Acton pointed
out: ‘Power corrupts, absolute power corrupts absolutely’. When the sole
shareholder is separate from the OPC, the sole shareholder may lend money to
the business and share as a corporate creditor upon the subsequent insolvency
of the venture. Indeed, the sole or principal shareholder may become a secured
corporate creditor and thus acquire priority over the unsecured corporate
creditors and history shall repeat itself as in the case of the famed House of
Lords decision of Solomon
[see end note 16].
However, all is not lost.
Generally, courts have allowed the concept of corporate personality to sustain
only so long as it is invoked and employed for legitimate purposes. Courts will
probably not sanction a perversion of the concept to improper uses and as a
device to perpetuate fraud, to evade the law, or to escape obligations and will
in rare circumstances lift the corporate veil.
Further, the OPC regime may
face practical difficulties in implementation. The 2013 Act categorizes an OPC
as a private company from the beginning. The Draft Rules further provide that
upon exceeding a limit of share capital or turnover, the OPC shall again have
to follow procedural requirements and convert to a private or public company.
The caps placed are also stringent considering the scale of businesses being
conducted presently. OPCs shall be forced to convert to private or public
companies upon exceeding the prescribed limits or receiving investment from
investors upon expansion of business. Hence, many entrepreneurs may prefer to
establish a private company from the start to avoid such compliance hassles.
No special provisions related
to amalgamation and restructuring of OPCs has been provided in the 2013 Act or
the Draft Rules circulated as of now. Hence, the transactions shall be governed
by the general procedure applicable to companies under the 2013 Act. Also,
since OPCs come within the definition of ‘Small Companies’, any merger or
amalgamation of OPCs with any other small company may be governed by the
simpler procedure prescribed under Section 233 of the 2013 Act.
Tax-wise, since the OPC is
taxed as a company, it shall be liable to pay income tax at 30.9% or Minimum
Alternate Tax (MAT) as may be applicable.
Any dividend paid may also be subject to dividend distribution tax. On
the other hand, sole proprietors have the advantage of the tax slabs prescribed
for individuals. Hence, whether individual entrepreneurs shall prefer stability
of form over income tax benefit is something which remains to be seen.
It must be acknowledged that
the legal sanctity given to OPC’s will allow
small sole proprietorship firms to shift to this new concept of
[ The author is an Associate, Corporate
Practice, Lakshmikumaran & Sridharan, Hyderabad
- Section 2(62)
- Section 3(1)(c)
- Para 2.1(1), Draft Companies Rules, 2013
- Section 3
- Para 2.1(2)
- Section 12(3)
- Section 152
- Section 2(85)
- Section 193
- Section 92
- Section 96(1)
- Section 173(5)
- Section 122(3) and (4)
- Section 134(4)
- Section 2(40)
-  AC 22