Wednesday, March 5, 2014

‘One Person Company’ and ‘Small Company’ under Companies Act, 2013

The Companies Act, 2013 (“Act”), which received the assent of the President of India last year, has introduced two important concepts in (Indian) Company Law Jurisprudence – Small Company and One Person Company (“OPC”). As can be understood from the reply of Sachin Pilot, Minister of State (I/C) Corporate Affairs, to Starred Question no. 507 (2nd May, 2013, Lok Sabha) and Unstarred Question no. 90 (5th Dec., 2013, Lok Sabha), the concept of ‘small company’, along with ‘one person company’, have been introduced to allow new entrepreneurs to take advantage of corporate form of business. In the Companies Act, 1956 (“1956 Act”), there were no such concept(s) and those, intending to incorporate a business entity under the 1956 Act, had the option to incorporate companies in other forms.

Both Small Company and OPC are special form of private companies. While existence of the former company is determined in accordance with the value of share capital or turnover, existence of the latter company is determined in accordance with the number of members. There can also be a possibility where both the forms of companies may overlap. For instance, consider a situation where an OPC also satisfies the definition of a Small Company. These companies are different from other companies because of the simplified procedure available for them, both in terms of administration and responsibilities.

The 21st Report [Companies Bill, 2009 (“2009 Bill”)] of the Standing Committee on Finance noticed that the 2009 Bill contained scattered provisions for providing exemptions to OPC and Small Companies [see: clause 421, 2009 Bill – it was later removed]. While Ministry of Corporate Affairs (“MCA”) was of the opinion that further exemptions, if any, could be provided vide notifications, the Standing Committee opined that such exemptions should be provided in the bill itself. In fact, Standing Committee recommended that such exemptions should be provided by way of a schedule or be appended to the main Act. Once again in its 57th Report [Companies Bill, 2011 (“2011 Bill”), the Standing Committee reiterated that exemptions available to different classes of companies should be clearly specified.

These developments were preceded by the report of Jamshed J. Irani (2005) on Company Law. In this report, the importance of both the concepts (Small Company and OPC) was highlighted. As a consequence to the submission of the report, both the concepts were included, first in 2009 Bill and later in 2011 Bill. Having highlighted the background which both the provisions were inserted in 2013 Act, I will now proceed to discuss both the concepts in brief.

One person Company

One of the most interesting features of 2013 Act is the introduction of ‘One Person Company’ (“OPC”). The concept, initially introduced in 2009 Bill, was on the basis of the report on ‘Company Law’ submitted by Jamshed J. Irani (2005) [“J.J. Irani’s Report”]. In this report, it was recommended that the concept of OPC may be introduced to incentivise entrepreneurial capabilities:

“.....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....”

According to section 2(62) of the 2013 Act, OPC can be defined as a company which has only one person as a member (In the 1956 Act, there was no similar concept). In terms of obligations and exemptions, OPC is similar to that of a Small Company. For instance, the financial statement of an OPC may not include the cash flow statement [section 2(40)].

As I mentioned earlier, OPC is a special form of private company incorporated with only one member. If the number of members exceeds one, it will no longer retain its special form and would fall under the general form of ‘private company’. Following are some important features of an OPC under 2013 Act:

(i)           The incorporation of OPC is in the form of a private company. [section 3(c)]

(ii)         The Memorandum of Association (“MOA”) should indicate the name of the person who shall, in the event of the subscriber’s death or his incapacity to contract, would become the member of the company [see: section proviso to section 3(c) and section 4(f)]:
a)   Written Consent of such person should be filed with the Registrar.
b)   The other person, whose name is included in MOA, may withdraw his consent.
c)    OPC may also change the name of the person by giving required notice.

(iii)       Wherever its name is printed, affixed or engraved, ‘One Person Company’ shall be mentioned in brackets below the name of such company. For example, seal, hundies, promissory notes etc. [section 12(3)(d)]

(iv)        The ‘Annual Return’ shall be signed by the company secretary, or in his absence, by the Director of the Company [section 92].

(v)          OPC is not required to hold Annual General Meeting and some other formalities related to meetings. [section 96]

(vi)        For a business which is usually required to be transacted in an Annual General Meeting or Other Meetings, it would sufficient if the concerned resolution is communicated by the member to the Company. [section 122]

(vii)      For transactions which are required to be conducted in Board Meetings, it would be sufficient, in case there is only one Director, if the Director sings the resolution along with date. The  date on which such resolution is signed would also be the date of Board Meeting.[section 122]

(viii)     The report of the Board of Directors, required to be attached to financial statement, means a report containing explanations or comments by the Board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report. [section 134(4)]

(ix)        In case there is more than one director, an OPC will be deemed to have complied with the provisions of Board Meetings if ‘at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days’ [section 173(5)].

(x)          The Financial statement to be signed by one Director. [section 134(1)]

(xi)        A copy of financial statement should be filed within one hundred eighty days from the closure of the financial year. [proviso to section 137]

(xii)      An OPC should have a minimum of one director. [section 149]

(xiii)     Where MOA does not provide procedure to appoint first director, individual member would be deemed to be first director until the director is appointed in accordance with section 152.

(xiv)     Where an OPC enters into a contract with the sole member of the company, it should ensure that terms of the contract or offer are contained in a memorandum or are recorded in the minutes of the first meeting of the Board of Directors of the company held next after entering into contract. [section 193]

The above points summarise the obligations and exemptions as regards an OPC under the 2013 Act. I will now discuss the concept of Small Company.

Small Company

In the 1956 Act, there was no provision which could define the term ‘Small Company’. However, in a notification (2006) issued [under 1956 Act] by MCA on ‘Accounting Standards’, definition of ‘Small and Medium Sized Company’ (“SMC”) had been provided. According to the notification, certain conditions were required to be satisfied for calling a company as SMC [equity or debt securities are not listed, turnover does not exceed rupees fifty crore etc.]. Please remember that SMC is not the same as a ‘Small Company’; both of them are different and should not be mistaken to be the same. I have, however, mentioned SMC because of its reference in 57th Report of the Standing Committee on Finance. In the report, while it was suggested that definition of SMC could be used to provide exemptions to a Small Companies, MCA categorically rejected this idea. In view of the Ministry, the purpose and objective behind SMC and Small Company are different; because of this, definition of SMC may not be utilised.

In J.J. Irani’s report, it was pointed that Small Companies should be enabled to function within simplified procedures:

“.....The small companies have to be enabled to take quick decisions, be adaptable and nimble in the changing economic environment, yet be encouraged to comply with the essential requirements of the law through low cost of compliance. The Government may prescribe special regime for such companies through a system of exemptions.”

As these companies would contribute economically, it was recommended that they should not be burdened with the same level of requirement(s) as that of larger corporations. It was thus pointed that procedures in relation to Annual General Meeting, appointment to key managerial positions etc. could be simplified for Small Companies.

Unlike 1956 Act, the concept of ‘small company’ has been defined under 2013 Act; according to section 2(85) of the 2013 Act, a ‘small company’ can be defined as a company, other than a public company, whose:

(i)            paid-up share capital does not exceed fifty lakh rupees

(ii)         turnover does not exceed two crore rupees [the limit can be raised; however, it cannot exceed twenty crore rupees]

In the proviso to section 2(85), it has been provided that the section is not applicable to a holding or a subsidiary company, company registered under section 8 and a company or a body corporate governed by any special Act. As a consequence, these forms of companies are excluded from being termed as a Small Company. Following are some of the important features of a Small Company under the 2013 Act:

(i)           The ‘financial statement’ of a small company may not include the cash flow statement [section 2(40)]

(ii)         The ‘Annual Return’ shall be signed by the company secretary, or in his absence, by the Director of the Company [section 92].

(iii)       A small company will be deemed to have complied with the provisions of Board Meetings if ‘at least one meeting of the Board of Directors has been conducted in each half of a calendar year and the gap between the two meetings is not less than ninety days’ [section 173(5)].

(iv)        ‘Fast Track Merger or Amalgamation [section 233] – This is one of the most important exemptions enjoyed by a Small Company. Under section 233 of the 2013 Act, comparatively simpler procedures are provided for merger or amalgamation between two or more Small Companies. For instance, application before NCLT is not required to be filed. However, the scheme should be approved by majority representing nine-tenths in value of the creditors.

The benefit to economy, after inclusion of these two forms of companies, can be determined with the passage of time.I will here conclude the brief discussion on both the concepts. The post only intended to provide basic idea about these two forms of companies. For further clarification of the concepts, readers may refer to 2013 Act. Before I conclude this post, I want to summarise the discussion in the following tabular format (for the purpose of convenience):


S.No.
One Person Company
Small Company
Basis of Classification
·         On the basis of number of members [s. 2(62)], i.e., there should be only one number.
On the basis of ‘paid-up share capital’ or ‘turnover’.
·         Turnover – does not exceed 2 crore rupees
·         Paid-up share capital- does not exceed fifty lakh rupees
·         Not covered- Public company, holding company or subsidiary company, Not-profit Company, company governed by a special Act.
Financial Statement
·         May not include ‘cash flow statement’
·         May not include ‘cash flow statement’
Annual Return
·         To be signed by Company Secretary or Director (where there is no Company Secretary)
·         To be signed by Company Secretary or Director (where there is no Company Secretary)
Meetings
·         Board Meeting should take place at least once in each half of a calendar year if there is more than one director.
·         Where there is only one director, signature of the director would be sufficient for transactions which are required to be conducted in Board Meetings
·         Board Meeting should take place at least once in each half of a calendar year.

Merger and Amalgamation
Depends on whether OPC is a Small Company. Under 2013 Act, definition of ‘Small Company’ does not exclude an OPC from its ambit. Alternatively, definition of OPC does not exclude ‘Small Company’ from its ambit.
·         Fast Track Merger or Amalgamation [s. 233] which requires consent of shareholders holding 90% in value
·         Approval of NCLT not required
·         A notice inviting objections and suggestions should be issued.
Memorandum of Association
·         To include the name of the person who, in the absence of single member, would be responsible for the functioning of the company
 No specific exemption/obligation

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