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
|
No comments :
Post a Comment