One Person Company and its limited liability

Introduction.

The ˜One Person Company™ is a very new concept introduced by the Companies Act 2013. Section 2(62) of the Companies Act 2013 defines ˜One Person Company™. Though the meaning of the term can be determine by the name itself that it consists of one member only. OPC provides a whole new bracket of opportunities for those who look forward to start their own ventures with a structure of organized business. Earlier the company meant association of persons, where the liability was limited. This project focuses on the liability of the members of the member of the One Person Company, as unlike other companies here the member is one and also deals with the situation when there will be lifting of corporate veil.

Though the concept of OPC is new in India but it is very successful in U.K and several European Countries since a very long time now. Limited liability is considered as the most significant feature of Corporate Enterprise.[1] The shareholders of a company have limited liability to the amount of shares held by them. In case the company incurs large losses then the shareholders can be required to pay only the unpaid amount on their shares. In case unlimited companies, the whole liabilities are required to be meet by only one person. This was mostly in the case of Sole proprietorship. The ˜One Person Company™ is newly introduced. So, it is pertinent to know the liabilities in case of these types of companies where the member is only one.  Company or a body corporate is a legal entity with perpetual succession. It is a voluntary association of persons formed to carry out the same purpose. Its existence is independent of the life of its members. But the ˜One Person Company™ as described by the Section 2(62) of the Companies Act 2013 means a company which has only one person as a member.

A company is considered as separate legal entity, the liabilities are of the company and not of its members consequently question may arise what it will be with the company having one member?

 Chapter-I deals with Concept of One Person Company and its evolution, it also focuses on its salient features. Chapter-II deals with Limited Liability of One Person Company, it also states when it is needed to lift the Corporate Veil in Case of One Person Company and Lastly Chapter-III deals with Impact of One Person Company in India.

Statement of the problem

This project deals with the newly introduced concept ˜One Person Company™ and the legal and financial liability of the member of the ˜One Person Company™. Earlier the company meant voluntary association of persons who came together for a common cause. The liability of its shareholders is limited to the value of shares they have purchased. In case the company incurs huge liabilities, the shareholders can only be called upon to pay the unpaid balance of their shares. In this new concept ˜One Person Company™, the member is only one, so it is pertinent to know the liability of the member in the ˜OPC™. The meaning of ˜OPC, it™s salient features, meaning of limited liability and the legal and financial liability of the ˜OPC™ is mainly focused.

Literature Review.

The project is about ˜One Person Company™ and the limited liability of its members. The meaning of ˜One Person Company™, limited liability is explained. The circumstances in which the member of the One Person Company is held liable and when the Corporate Veil is lifted is also discussed. For this the researcher has referred to some online Articles because of the lack of availability of books as this Concept is very new in India. An Article by Bernard F.Cataldo on Limited Liability with One man Company and subsidiary Corporations is referred as it gives description about the limited liability of the member of One Man Company.  Another online Article by Vatsala Singh on One Person Company is referred to get the core meaning of the concept. A book by R.K.Sharma on Joint Stock Company is referred to have the knowledge about the evolution of Joint Stock Company. The Concept of lifting of Corporate veil is adopted from an Article of Facta Universitaties on ˜Single Member Company™. Thus this project states that limited liability is one of the key feature of ˜One Person Company™.

Scope and Objectives

The researcher is focusing on the concept of OPC which is newly introduced in India by the Companies Act 2013. The liability in case of Contractual obligations, tort etc. are also focused.  After that formation of OPC, exemptions of OPC and its impact in India is mentioned. It is pertinent to know how the new concept OPC may work in India. It™s a very new concept in India but it has worked successfully in other countries. The researcher is working in this paper because some may confuse it with sole proprietorship, but this is not so. As according to earlier definition of Company we all know it meant ˜association of persons with common purpose™, but in this case that is OPC it is not ˜ association of persons™ but the liability is limited unlike sole proprietorship. This paper explains the reason of it being a company, its liability, corporate personality and the situations when the Corporate Veil can be lifted.

Research Questions

This research topic is concerned with

˜What will be the limited liability protection in case on ˜One Person Company™ when all the shares are held by only one member?™

                                                      And

The ˜piercing of corporate veil™ has raised many questions

˜Who shall be liable to the creditors the sole member or somebody else? 

Chapterization

Chapter-I

Concept of One Person Company and its evolution.

One Person Company

Section 2(62) of the Companies Act,2013 defines as the name suggests, company which has only one person as a member and where legal and financial liability is limited to the company only and not to that person.(i.e. liability is limited). This paradigm shifts from the Companies Act 1956, where minimum two members are required float private as well as public company[2].

The evolution of one Person Company with the new Companies Act 2013 has facilitated small entrepreneurs to set up companies to directly access target markets rather sharing their profits with any middlemen. The ˜One Person Company™ is for the first time introduced in India which will allow a firm to be registered with just one member, limited regulatory costs, limited liability and other requirements. The ˜One Person Company™ is a revolutionary which will give the entrepreneur all the benefits of a company, which means they will get credit, bank loans, and access to market, limited liability and legal protection available to the companies.

OPC would provide tremendous opportunities for millions of people, including those who are working in areas like handloom, handicrafts and pottery[3].

 Background

The limitations of sole proprietorship and partnership forms of organization led to the growth of corporate form of organization. The limited resources in the hands of individual persons and their unlimited liability in the business discouraged them from expanding business and avoid risky decisions. Joint stock company organization was first started in Italy in thirteenth century. During seventeenth and eighteenth centuries, Joint Stock Company was formed in England under Royal Charter or Acts of Parliament. In India first Companies Act was passed in 1850 and the principle of limited liability was introduced in 1857. A comprehensive Companies Act was passed in 1956. The Parliament and state legislations can also pass legislations for the incorporation of companies, generally called ˜Corporations™.[4]

Now, the new Companies Act 2013 is introduced which has replaced the old Act 1956. The CA2013 makes all comprehensive provisions to govern all listed and unlisted companies in the countries. The CA2013 is made effective w.e.f 12th September 2013, by way of implementing 98sections.

This Act introduced the new concept of ˜One Person Company™ unlike sole proprietorship with limited liability. This concept was first recommended by the expert committee of Dr.JJ.Irani in the year 2005. Though it is new in India but it existed successfully in some other countries.[5]

Salient features of One Person Company

1. One Person Company is defined in Sub- Section 62 of Section 2 of The Companies Act, 2013, which reads as follows:

˜One Person Company means a company which has only one member™

The first and foremost salient feature of One Person Company is that there shall be only one member.[6]

 2. Section 3 classifies OPC as a Private Company for all the legal purposes with only one member. The one person company can be incorporated as a private company only.[7]

 3. The only exception provided by the Act to an OPC is that according to the rules only NATURALLY-BORN Indian who is also a resident of India is eligible to incorporate an OPC. Meaning thereby, the advantages of an OPC can only be obtained by those INDIANs who are naturally born and also a resident of India. [8]

4. It shall also be worth mentioning that a person cannot form more than 5 OPC™s.[9]

Chapter-II

Limited Liability of One Person Company.

Limited Liability

The term ˜Limited liability™ means the liability of the shareholders are limited to the amount of shares held by them. In case the company incurs huge losses then the shareholders can be required to pay the unpaid value of the shares. The liability of members in a company form of organization is limited to the nominal value of the shares they have acquired. If a person has purchased a share of Rs. 100, his liability is limited to Rs.100 only[10].

Company as it is an association of persons who contribute money or money™s worth to a common stock and employs it in some other trade or business and who share the profit and loss arising there from.  Mainly the privilege of limited liability led to the evolution of Company.[11]

Now days the evolution of One Person Company is found in the desire to combine limited liability with complete dominion of sole proprietorship[12]. A sole proprietor, operating a moderate sized business, organizes a corporation to which he surrenders the business and assets. In return he takes all the shares excepting the few necessary to comply with the statutory provisions respecting incorporators and directors. The few shares he does not take are allotted to his relatives or employees, in order to qualify them as incorporators or directors in accordance with the requirements of the corporation statute. Thus, a corporation is created “in legal form” the sole or principal shareholder retains in effect the exclusive control and full dominion he enjoyed as a sole proprietor, and in addition he achieves the desired privilege of limited liability[13].

A.Contractual Obligations

In case of One Person Company the property and all the shares are owned by only one person, but it doesn™t mean that Corporate Personality will be disregarded. The same principles apply in case of Contractual obligations. There is difference between corporate obligations and Personal obligations of the sole shareholders. A company in law is a separate legal entity from its members. In other words it has an independent corporate existence. Any of its member can enter into contracts with it in the same manner as any other individual and he can™t be held liable for the acts of the company even if holds virtually the entire share capital. Same in the case the case of One Person Company even if the member holds the entire share capital he can™t be held liable[14]. The company™s money and property belong to the company and not to the shareholder. The distinction between the corporate property and the individual property of the member of the one person company is kept carefully preserved for legal purposes[15]. Once a company is incorporated it must be treated like any other independent person. The same principle goes for the corporate obligations and personal Obligations of the sole shareholder. Corporate creditors cannot obtain same satisfaction from the sole shareholder and the sole shareholder and his individual property, Creditors of the sole shareholder cannot obtain satisfaction from the corporation and corporate assets[16]. The distinctions between corporate and individual obligations and ensuing limited liability may support on extra legal and purely pragmatic grounds. Here oblige of a contractual obligation has an opportunity to chose his obligor and whether he wants to be legally bound or not. He should know with whom he is dealing and is bound by his own choice[17].

B.Tort Liability

In ordinary case, the victim of tort does not rely on, deal with tortfeasor or choose his tortfeasor. It is therefore natural that courts might distinguish in this connection between contractual obligations and tort liability. If a tort is committed defence for limited liability will not be provided. The sole or principal shareholder in the one-person company has been held not to be liable for a negligent act of a corporate employee[18]. But if the sole shareholder himself commits the tort during the course of his business he will be denied limited liability[19]. Court will uphold the limited liability for the Tort liability for negligence[20].

In case of contractual obligations individuals can choose it™s oblige but in case of tort liability the individual can™t choose its tortfeasor. Therefore the above reasoning is not applicable to tort liability. It is conceivable that courts might make difference between contractual obligation and tort liability. Court might refuse to hold limited liability in case of individuals affected by the tort committed by the sole shareholder of the ˜One Man Company™ in execution of the corporate business. There might be limited liability in case of contractual obligations but not in case of tort liability[21].

 

C.The Sole shareholder as a corporate creditor.

It is natural that 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 shareholder may become a secured corporate creditor and thus secures priority over the unsecured corporate creditor.  This is because the member of the One Person Company is the only shareholder; only corporate creditor in case if he gives loan to the company and thus the assets belonging to the company becomes his security in case the company dissolves. In case of one Person Company he gets the priority over the unsecured creditors as he becomes the secured creditor. But when the creditor will be someone else in that what will be the limited liability of member of one person company, question arises?. Limited liability is one of the important characteristics that differs the One Person Company from sole proprietorship. As a joint stock company, the liability of the member of One Person Company must also be limited to the extent of shares he has contributed. Only then the Entrepreneurship among the small traders will increase, but also there must be lifting of corporate veil, in case it is found that the company™s intention were fraudulent. Otherwise creditors will try to avoid giving loans to the member of One Person Company[22].

 

C.    Disregard of Corporate personaility.

 The concept of corporate personality will exist till it is used for legitimate purposes. The court will not invoke the corporate personality if any unfair means is used. It will not sanction corporate personality in case there are any dishonest ends. Perversion is perceived when the corporate personality is used to fraud, to evade the law or to escape any obligations.[23] The privilege of limited liability is conditioned on compliance with two requirements. First he must conduct the business on corporate footing and thereby maintain and preserve the separate identity of the venture. Second he must establish the corporate venture on an adequate financial basis.[24] For instance if the business is carried on as if it were the individual business of the sole shareholder, who makes contract of the business in his own name , keeps no bank account and without separate accounting places individual funds and income in the business and draws money from the business for personal needs at his pleasure. Under such circumstances the sole shareholder will be held personally liable[25].

Contracts by One Person Company Section 193 of the Act. The new Companies Act, 2013 gives special attention to the contracts which will be entered by One Person Company. If the company fails to comply with the provisions as to providing the information to the RoC then it shall be liable for punishment of fine which will be not less than twenty thousand rupees and extend to one lakh rupees and the imprisonment for a term which may extend up to 6 month.

Piercing the Lifting of Corporate Veil

The legal institute named ‘piercing the corporate veil’ is important for single-member Companies and member state no matter if they allow or not groups of single-member Companies. But, the first conclusion could be that despite the necessity of piercing the corporate veil, there is diversity among the member states regarding the status of ownership of single-Member companies by a natural person and the protection of the subsidiary’s creditors.[26]

After many years of applying the Directive in practice, this situation defeats the aims

Of harmonization and the freedom of establishing the companies. The main problem is

that the Directive allows to member states to prescribe special provisions or sanctions for

the situation where a natural person is the sole member of several companies, or where a

single-member company as a legal person is the sole member of a company. One meaning

is that harmonization has led to the greatest chaos. In fact, the Directive limits its own

harmonization by giving too many alternatives.[27]

Piercing the corporate veil has produced a lot of questions and different solutions.

Should the sole member be responsible in any case or should the law define the situations

of liability? Who will be responsible to creditors the sole member or somebody else?

Definitely, piercing the veil is a concept made in order to protect all creditors. But, the

veil should be pierced only if there is some notion of abuse. Also, depending on the company,

not only the owner should be responsible to his creditors[28].

Chapter-III

Impact of OPC in India

As the concept of OPC is very new in India, it will take time for OPC to work with efficiency. But when the time will pass OPC will come up with a sparkling future and it will be the most successful business concept. The reason behind this is that one person can form a company without any shareholder if the member is willing to add shareholders; all he needs to do is to modify the Memorandum of Association and file it before Roc. Small entrepreneurs will grow in Indian entrepreneurship, be it weaver, traders, artisans, small to mid level entrepreneurs, OPC is a bright future for them to grow and to get recognition globally. Foreign Investors will be dealing with one member to establish a corporate relationship and not with a score of shareholders/directors where there are more chances for disparity in Ideas, concepts etc for a business to grow[29]. Any foreign company who wishes to establish in India through an Investment, through a merger or through a Joint venture will have to just lock the deal with the member of an OPC, and the venture will be expected to start sooner with more effective results. In upcoming years the impact of an OPC will be remarkable and it is a promising future for Indian Entrepreneurship. Expectedly, there will be good Foreign Investments, Joint Ventures, and Mergers etc. An OPC is doing well in European Countries, In United States, and Australia the same is resulting in strengthening the economy of the countries. In India when the expert committee of Dr. JJ Irani proposed the concept of an OPC, it was solely aimed for the structured organized business, with a different legal entity altogether and to organize the private sector of the entrepreneurship, which indeed is expected to be done, along with a significant growth in Indian Economy benefiting the country on the Global Level.[30]

Conclusion

One of the most important features that have given ˜One Person Company™ preferential status over sole proprietorship is Limited Liability. The unlimited liability of the Sole proprietorship often discourage people in business and this what led to the concept of Joint stock Company. This new concept of ˜One Person Company™ will encourage many entrepreneurs to establish their own company.  The reason behind this is limited liability just as Joint Stock Company. Many small traders will now come up with their new business concepts in India as a company. This concept is very successful in other countries and hopefully it will be successful as in other countries.

Thus, I would like to conclude by saying that limited liability of OPC shall encourage many traders or sole proprietor to come up with new companies. There will be less chance of frauds and misrepresentation as there will be one member only. It will be helpful economically also for India as it many weavers, traders will come up with Company as they will be able to work as entrepreneur.

[1]Vatsala Singh, One Person Company- A Concept for New Age Business Ownership,modaq:connecting knowledge and people(28 November 2013) http://www.mondaq.com

[2] Section 2(62) , Companies Act, 2013

[3] Bernand F. Cataldo, Limited liability with One Man Companies and Subsidiary Corporations, Law and Contemporary Problems,http://www.scholarships.law.duke.edu.

[4] R.K.Sharma and Shashi K.Gupta, Structure of Commerce,12(2005).

[5] Vatsala Singh, One Person Company- A Concept for New Age Business Ownership,modaq:connecting knowledge and people(28 November 2013) http://www.mondaq.com

[6] Abhishek Malpani, One Person Company, caclubIndia(10 September 2013), http://www.caclubindia.com

[7] Id

[8]Vatsala Singh, One Person Company- A Concept for New Age Business Ownership,modaq:connecting knowledge and people(28 November 2013) http://www.mondaq.com

 

[9] Id

[10] R.K.Sharma and Shashi K.Gupta, Structure of Commerce,12(2005).

[11] Id

[12] Occasionally there have other motives for the formation One-Man Companies. Some of these other motives have been: a married man™s wish to avoid the incidents of dower with respect to certain realty, a person™s desire to avoid the operation of a usury statute which applies to individuals but not to corporation, the desire to facilitate the management and sale of property.Fuller.

[13] Bernard F. Cataldo, Limited liability with One Man Companies and Subsidiary Corporations, Law and Contemporary Problems,http://www.scholarships.law.duke.edu.

[14] Bernard F.Cataldo, Limited liability with One Man Company and Subsidiary Corporations, Law and Contemporary problems,http://www.scholarship.law.duke.edu.

[15] The leading American decisions are Button V. Hoffmen, 61 Wis.20,20 N.W.667(1884), and Parker V. Bethel Hotel Co.,96 Tenn.252,34 S.W. 209 (1896). In the Button Case the sole shareholder was unsuccessful in an action of replevin brought in his individual name to recover corporate assets from wrongfully possession in them. See also Moroney V. Moroney, 286,S.W.167(Tex Comm.App1926)In the Parker Case the Court held inoperative the sole shareholders attempt to alienate Corporate personality in his individual name. Accord: Corley V. Cozart, 115 F 2d 119 (5th Cir.1940).

[16] In re John Koke Co.38 F.2d 232(9th Cir. 1930)  Geary V. Cain, 79 Utah 268, 9P. 2d. 396 (1932). See Star Brewing Co. V. Flynn 237 Mass. 213,129 N.E. 438(1921); Tinnin V. Wilkinson, 583W. 2d 69(Tex, Comm.App 1933)

[17] Id

[18] Sayers V. Navillus Oil Co., 41 S.W, 2d 506(Tex. Civ. App.1931); Hayhurst V. Boyd, 50 Idaho 752, 300 Pac.895(1931).

[19] A decision which seems to sustain this position, without any explanation or discussion of the matter is found in the case of Jackson V. Kirchman, 175 So 105 (La App. 1937).

[20] In Geary V. Cain, 79 Utah 268, 9P.2d 396(1932), the plaintiff was assaulted by C. Family Corporation of which C is actually a sole shareholder, but did not succeed. The case is so ominous and its significance seems to be primarily procedural. In this way the plaintiff will reach C™s net worth in the corporate venture, without injury to the corporate creditors. The equities of the corporate creditors, who have priority in the corporate assets and of the plaintiff who has claim against sole shareholder as an individual are kept in balance.

[21] Bernard F. Cataldo, Limited liability with One Man Company with Subsidiary Corporations, Law and Contemporary problems, http://www.scholarships.law.duke.edu.

[22] Diana Fitzpatrick, Piercing the Corporate Veil when LLCs and Corporations may be at risk,Nolo law for all,www.nolo.com

[23] Bernard F. Cataldo, Limited liability with One Man Companies and Subsidiary Corporations, Law and Contemporary Problems,http://www.scholarships.law.duke.edu.

[24] Id

[25] Wittman V. Wittingham, 85 Cal. App.140,259 Pac.63 (1927)

Fuller, The Incorporated Individual: A study of the One Man Company, 51 HARV. L. Review, 1373,1381(1938), argues that the sole shareholder should not be held liable merely because he failed to observe a nice distinction between his dual capacities He then says that in the decided cases in which the claimant succeeded the sole shareholder was held personally liable only because of the additional features, such as showing of inadequate corporate capital.

[26] Dragana Radenkovic Jocić,A SINGLE MEMBER COMPANYCONVENIENTOR NOT FOR THE FOUNDERS,Economics and Organisation,Vol.2, Facta Universitatis

[27] Id

[28]Id.

[29] Vatsala Singh, One Person Company: A concept for new age Business Ownership, Singh& Associates(28th November 2013), http://www.ateaugue.lexology.com

[30] Id

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About Sabarnee Chatterjee

Sabarnee Chatterjee | LL.M Student

Corporate Law Referencer

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