Some leeway for Small Company and One Person Company

Yogina , Last updated: 08 February 2016  
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The Ministry of Corporate Affairs had, on 4th June, 2015, constituted a Companies Law Committee (CLC) to make recommendations on issues arising from the implementation of the Companies Act, 2013 (the Act). The CLC has submitted its Report to the Government on 1st February, 2016 which has been placed on the website of the Ministry of Corporate Affairs (MCA).

The concept of both small company and one person company (OPC) was new and introduced for the first time in the Companies Act, 2013. Around 83% of the companies in India fall under these two categories and hence recommendations of CLC pertaining to these companies have wider impact and far reaching effect. The CLC recommendations are for providing leeway by more than one means and can be summarised as follows:-

Definition:- Originally section 2(85) of the Act defines ‘‘small company’’ means a company, other than a public company,—(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be prescribed which shall not be more than five crore rupees; or (ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher amount as may be prescribed which shall not be more than twenty crore rupees:

Provided that nothing in this clause shall apply to—

(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;

However, MCA via Removal of Difficulty order no S.O 504(E) dated 13/02/2015, substituted word “or” between (i) and (ii) with word “and” . The impact of this change is welcomed by stakeholders as now both paid-up capital and turnover limit should be fulfilled to qualify for a small company, resting all the confusion in this regard.

Now, CLC recommended the replacement of the words “last profit and loss account” with the words “last audited profit and loss account”, to take care of what seemed to be an inadvertent drafting error. It also recommended the Removal of Difficulty order to be given effect to through an amendment to the Act itself. Further, it was noted that a review of the thresholds for small companies would be done by MCA, at an appropriate time.

Formation of OPC (Section 3(1) of the Act read with Rule 3(2) of Companies (Incorporation) Rules, 2014) :- It was pointed out that the wordings in Rule 3(2) gives an impression that a natural person can incorporate only one OPC or be a nominee of one OPC in his lifetime while the spirit of the provision is that a person can be a member of only one OPC at any point of time and that the person can also be a nominee of another OPC. The CLC recommended to suitably rephrasing Rule 3(2), especially in view of Rule 3(3) which entails an obligation on a member holding membership in one OPC and a nominee-ship in another OPC, to opt for one of the OPCs in case he becomes a member of another OPC due to operation of the law

Annual Return:- Section 92 of the Act requires every company to prepare and file annual return in the prescribed form, and the prescribed form is MGT 7 having 14 pages, covering elaborate 14 points, most of which are banal for small companies and OPCs. The CLC therefore recommended prescriptive powers for separate Annual Return format for small companies and OPCs, with lesser details be included.

Board’s Report:- In the same line of Annual Return, the format of Board’s Report is also too lengthy and irrelevant for small companies. A small company has to cover at least 22 different points in its Board’s Report along with the Form MGT 9. The CLC recommended that for small companies, separate format for the Board’s Report may be prescribed and Form MGT-9 to be omitted all together.

Liberal Regime and Less Punishment:- The CLC observed that small businesses need to be encouraged by laying down a more liberal regime and wherever disproportionate punishments are proposed these need to be reduced. Further, the CLC felt that the procedural and technical non-compliances should attract less stringent punishments as compared with violations for substantive requirements. The CLC noted that the Act provides duration of up to 300 days for companies to comply without the fear of prosecution in as many as six major compliance requirements. The CLC has given its recommendations on the suggestions received keeping these principles in mind but also keeping in mind the requirement for improving the low compliance levels, especially amongst private companies.

Filing Fees and Fines:- The CLC is of the view that a more liberal regime for fees/ additional fees be laid down for OPCs and small companies. It is recommended that the fees prescribed in Table A pursuant to Rule 12 of the Companies (Registration of Offices and Fees) Rules, 2014 should be halved for such companies. Similarly, halved fine recommendations are there for section 92(5)- non filing of Annual Return, section 137(3)- non filing of financial statement and for section 117- non filing of resolution and agreement by inserting new provision.

Fine for Auditors Resignation:- Section 140(3) prescribes a minimum fine of Rupees fifty thousand in case the auditor does not file the statement with regard to his resignation. This fine was considered as onerous for auditors of small companies. The CLC recommended that the minimum fine may be reduced to Rupees fifty thousand or the audit fees, whichever is lesser.

No Exemption for Consolidation of Accounts:- The CLC also deliberated on providing exemption from consolidation of accounts by OPCs, small companies and private companies. The CLC recommended that there is no justification in giving exemption, whatever the size of a company, wherever it has one or more subsidiaries etc.

It seems that CLC has given emphasis only on the routine compliances ignoring specific event based activities altogether. Whatever reliefs are recommended will surely have a constructive impact on OPCs and small companies. As more than eight lakhs thirty thousand companies falls in this section, governing mind behind these companies can seize ease of doing business, easily.

Disclaimer: The views expressed in this article is only for academic purpose for the discussed topic and shall not be construed as any professional advice in any manner. This article is the property of the writer CS Yogina Kochar and no part of it can be copied, reproduced or distributed in any manner.

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Yogina
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Category Corporate Law   Report

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