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One Person Company - A new concept and its formation
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Dr. S Chandrasekaran
CS, PHD
Guest Profile
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Dr S Chandrasekaran is a senior practicing company and has more than 25 years of experience. He hold Ph.D on Investor Protection with special reference to SEBI and is a Former member of Secretarial Standards Board of ICSI. He is also Co-Chairman of Corporate Affairs Committee of PHD Chamber of Commerce and Industry. He is a regular contributor in Chartered Secretary, Business Line, Business Advisor on line journal and other journals


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Untitled Document
Posted on 16th January, 2014

The Companies Act, 1956 (1956 Act) all these years have recognised the concept of at least two persons to form a company. “Person” includes a company and on behalf of a company, any other person, who is duly authorised to act and sign. But a “firm” as such cannot sign, since the firm is not a legal person, even if the firm is a registered firm. If the partners of a “firm” subscribe, they become joint holders of the share or shares subscribed for. The Registrar of Companies (ROC) will not accept the signature of the firm as a subscriber but can accept only if the partners individually sign as joint subscribers. It is not necessary that the subscribers should have any personal beneficial interest in the shares subscribed for by them. All of them may be nominees of a single person and subscribing of their names may be a mere formality. This position is well established by the decision in Salomon vs Saloman & Co, one of the interesting decisions in English Courts. The practice of nominee shareholdings is also statutorily recognised in section 49(3) of the 1956 Act. Companies more particularly, Foreign Companies, in order to incorporate wholly owned subsidiary company, hold shares through their nominees where such nominees are not the beneficial holders of shares. Similarly, Central and State Government also holds the shares in companies but the same is held in the name of President of India or the Governor of State. They further appoint officials of the respective departments/ministries to act on their behalf as representatives in general meetings. Partnership firm cannot be member and the Ministry of Corporate Affairs, vide its circular No 4/72 dated 9.3.1972 advised to take steps to rectify, if the shares are held in the name of partnership firms.

Concept of One Person Company
One Person Company is a new concept introduced by the Companies Act, 2013 (2013 Act). As the name suggests, one person company is formed with only one person as its member. Though this concept may be new to India, this type of entity is prevalent in other parts of the world like US, UK, Mauritius, Singapore etc.

One Person Company (OPC) Concept has been first recommended by the Expert Committee (Dr. J.J.Irani) in 2005. Expert Committee has examined that 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.

It was felt that it is possible for individuals to operate in the economic domain and contribute effectively. To facilitate this, the Committee recommended that the law should recognize the formation of a single person economic entity in the form of ‘One Person Company’ (OPC). Such an entity may be provided with the lesser hardship / compliances and simpler regime through exemptions so that the single entrepreneur is not compelled to fritter away his precious time, energy and resources on procedural matters.

Scenario in Other Countries
The term “One Person Company” has been defined which means a company has only one person as a member. It is a private limited company and the intended person forms such OPC by subscribing his name in the memorandum of association at the time of registration.
In the US, several states permit registration of One Person Company as a limited liability company (LLC). Singapore introduced the concept in 2004, followed by China in 2005. The concept of OPC also exists in other countries such as the UK, Mauritius, Ireland, Qatar and Bahrain. Pakistan too amended its Companies Act by introducing the concept of OPC. In most of the countries, the law provides that one person company can have more than one director and exempts from holding annual general meeting, though documents and records are to be maintained.
UK
UK recognises the concept of single member companies. The Companies (Single Member Private Limited Companies) Regulations 1992 states the provisions applicable to single member companies
Australia
The concept of a company with a single director/single shareholder is recognized in Australia. The Corporations Act, 2001 provides for the relevant provisions dealing with sole director companies. A proprietary company with a single shareholder who is the director need not have a formal set of rules as applicable to other companies.
China
The Company Law of People"s Republic of China (PRC) was amended to meet the economic changes and the concept of Limited Liability Company (LLC) was introduced. It provides that the incorporation of LLC with minimum membership of one person, with a minimum capital of 1,00,000 Yuan is permitted. The amended law of china further provides that such single member should pay the investment at one go and also restricts him from forming another company of same kind.
Singapore
The Singapore Company law approves the formation and existence of a company run by one person in Singapore. However, the legal framework mandates that the sole director shall be a resident of Singapore. Also the director and company secretary shall be different individuals. In case there is no director left to manage such a company, the shareholders will be liable for the debts incurred by the company at any time within 6 months of vacancy in the director"s office.
Introduction in India:
The concept of incorporating One Person Company (OPC) as recommended by Irani Committee has been introduced in the 2013 Act. It is defined that -“One Person Company” means a company which has only one person as a member. It is a private limited company and the definition of private limited company in the 2013 Act further strengthens that OPC is a private company.
Nomination of shares:
The concept of nomination of shares was first introduced by the Companies (Amendment) Act, 1999. An opportunity was given to shareholder to nominate someone that in the event of his death, the shares will vest to the nominee. Before the said amendment, holders of shares in a company did not enjoy the nomination facility for shares which caused hardship to them for transfer to the legal heir after his death or otherwise. The entitled persons were required to obtain a letter of succession from the competent authority. The facility of nomination is intended to simplify and accordingly, every shareholder in a company may at any time, nominate, a person to whom his shares in the company shall vest in the event of his death. Joint holders may together nominate, a person to whom all rights in the shares of the company shall vest in the event of death of all the joint holders. The nominee shall on the death of the shareholder or all the joint holders become entitled to all the rights in the shares of the company to the exclusion of all other persons unless the nomination is varied or cancelled. It clearly shows that once a nomination is made unless it is cancelled or varied, only the nominee has the right in the shares and no one else can has such right. A shareholder may also nominate a minor, in that case the shareholder is also entitled to appoint any other person as a guardian to that nominated minor, so that if the shareholder dies during his minority, the shares will be held by that guardian as a trustee to that minor.

The nature, manner and extent of nomination is briefed in Rule 5D of the Companies (Central Government’s) General Rules and Forms 1956. These rules have prescribed a separate Form 2B for the purpose of nomination. Nomination is optional and can be made only by individual/joint shareholder and such facility cannot be exercised by society, trust, body corporate, firm, Karta of HUF and any holder of power of attorney. A shareholder has a right to nominate one person at one point of time and such nominee can also be a non-resident Indian on repatriable basis subject to compliance of FEMA provisions. However, any transfer of shares rescinds the nomination automatically.

The nominee of shares on production of satisfactory evidence including production of death certificate may either get the shares transferred in his name or transfer such shares to any other person as the deceased shareholder could have made.

Formation of One Person Company (OPC):
The term “One Person Company” has been defined which means a company has only one person as a member. It is a private limited company and the intended person forms such OPC by subscribing his name in the memorandum of association at the time of registration. The 1956 Act recognises the concept of joint holders and a shareholder can add not more than two more persons as joint holders in his holding. It is a matter for debate whether OPC can be registered by single person along with two other persons as joint holders since the phrase in clause (c ) of sub section 1 to section 3 of the 2013 Act, which reads as “by subscribing their names or his name”.

The term “person” has not been defined in the 2013 Act. The draft rules to the 2013 Act provides that the person who intends to incorporate OPC has to be an Indian citizen and resident in India. Singapore also place such restriction by providing that the sole member must be a resident of Singapore. An individual can at best incorporate or be a member of five OPCs.

Nomination facility in the 1956 Act is optional however the same has been made mandatory for OPC in 2013 Act. The fact that nominee becomes the member in the event of the subscriber’s death or his incapacity makes it clear that OPC can only be registered by natural persons and by no one else. The memorandum of OPC shall indicate the name of the other person who shall, in the event of subscriber’s death or his incapacity to contract become the member of the company. The prior written consent of the nominee is necessary and such written consent shall also be filed with the Registrar of Companies (ROC) at the time of incorporation along with its memorandum and articles. The member of OPC may at any time change the name of nominee by giving notice and consent of the new person to the Company which in turn will file the same with the Registrar of Companies (ROC). The nominee also has the right to withdraw his consent at any time.

The words “One Person Company” shall be mentioned in brackets below the name of such company, wherever it is printed, affixed or engraved and it has been made clear that it cannot be in short form such as “OPC”.

One Person Company restricts only the membership. The directors in such company may be more than one. The articles of association at the time of registration of OPC has to identify a person who will be the director of the company and in case no provision is made in the articles of OPC, the subscriber to the memorandum shall be its first director until the director or directors are duly appointed by the member.

OPC can also be a guarantee company. On the death of the member, nominee becomes the member of OPC. If the liability is more than the assets, will the nominee required to set off the liability? Can the nominee refuse to become a member after the death of the original member?

Conclusion:
The concept is to encourage individuals to set up their own shop to show their entrepreneurial capabilities and to participate in economic activities. The single person has to mandatorily nominate a person who will become member in the event of his death or incapacity. The objective of introducing OPC is to encourage individual’s talent but there are ample chances that OPCs may be incorporated for the purpose of just holding investments like LLPs. The draft rules provide that the paid up share capital of OPC shall not be more than fifty lacs rupees or its average annual turnover shall not exceed two crore rupees during the relevant period. If it exceeds above limit then it has to mandatorily convert itself into either a private company or a public company. This will not induce individuals to venture into OPC and the concept to encourage individual’s talent will be defeated.

Disclaimer: The views expressed in this article are solely the opinion of the author.

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