Contract by One person Company

One Person Company is a form of Company which carrying only one person as a Director, which helps to improve your business standards at your staring stage. Here, we are going to explain the contract for One Person Company according To the Companies (Amendment) Act, 2013. Section 193 of the 2013 Act is a new provision. And also in Older Companies Act, 1956 no provisions mentioned. Where a One person Company enters into contract with the sole member of the company and such sole member of the company is also assigned as the director of the company, such contract or arrangement, shall be recorded in the minutes at the nest meetings of the Board which is held immediately after entering into contract. If the terms are not recorded in writing then the company shall ensure that the terms of the contract or offer are recorded in a memorandum of the company. Nothing shall apply to contracts, which are entered in the ordinary course of business. The company shall inform the Registrar of the company about every contract entered into by the company and recorded in minutes of the Board meeting of the company within 15 days of approval by Board of Directors. The reason for such kind of controls or reporting mechanism in case of One Person Company especially if it does not have borrowings from banks or financial institutions are not known. This may increase cost of compliance for One Person Companies who have resorted to such corporate structure to reduce operating cost and avail benefits over the limed liability partnership company.

Analysis of section 193 of Companies Act, 2013

contract

Section 193 of the 2013 Act relates to related party transactions by a One Person Company and requires intimation to be given to the ROC within 15 days of the date of approval by the Central Board of the company. However if the transactions are in the ordinary course of business then filing such transactions with the ROC is not necessary for the One Person Company Registration.  While Section 188 of the 2013 act refers to both transactions in ordinary course of business and transactions on arm’s length basis, it is interesting to note that section 193 of the 2013 Act only refers to transactions in ordinary course of business. On a plain reading of section 193(1) of the 2013 Act it appears that recording of contracts or memorandum containing the terms of the contract in the minutes is not required in all cases. This appears to be a drafting lacuna as filing of all such contracts is mandated under section 193(2) of the Companies (Amendment) Act, 2013.

Restriction on non-cash transactions involving directors

No transaction of purchase of asserts by a company for consideration other than cash can be entered into with the director of the One Person Company or any person connected with the director of a company unless approved previously by the shareholders in a general meeting. Approval of the holding company will also be required if the director or person connected is a director of a holding company. If the assets of the company are proposed to be acquired by a director of a company or a director of a holding, subsidiary or associate company or any person connected with the director then prior approval of the shareholders shall be necessary. Section 185 of the 2013 Act defines the term “any other person in whom director is interested” which definition is specific to the said section but there is no similar definition for the “person connected with him” as used in section 192(1) of the 2013 Act. While section 188 of the 2013 Act pertaining to related party transactions exempts transactions which are in the ordinary course of business, there is no similar exemption under section 192 of the 2013 act and hence approval of the shareholders will be required in all cases where the transaction is for consideration other than cash. Hence section 192 of the 2013 Act is a statutory example of transactions which are deemed to be ‘not in the ordinary course of business”. In case of a One Person Company, section 193 of the 2013 Act is the only section applicable to both cash and non-cash transactions and hence section 193 of the 2013 Act will apply to one person companies instead of sections 188 and 192 of the 2013 Act. Section 192 of the 2013 Act does not call for a special resolution nor does it require approval of the majority of the minority shareholders stipulated in the first provision to section 188(1) of the 2013 Act. It however requires a valuation of the assets to be done by a registered valuer. Assets will cover both movable and immovable assets as well as tangible and intangible property. “Acquisition” may be temporary or permanent and hence will cover transactions of licensing and leasing too. For instance, allotment of shares for consideration other than cash, assignment of trademarks etc. will fall under section 192 of the 2013 Act. A combined reading of sections 188 and 192 of the 2013 Act brings out a fine distinction that if a transaction entered into or proposed to be entered into with a person covered under section 188(1)(b) and 188(1)(c) of the 2013 Act but if it is a non-cash consideration will fall under section 192 of the 2013 Act. Section 192 of the 2013 Act does not have any threshold limits and hence all transactions which are for consideration other than cash, irrespective of the value, will need approval of the shareholders.

Consequence of contravention of section

A transaction in contravention of section 192 of the 2013 Act shall be voidable by the company. The transaction will not be so voidable if restitution of consideration or money is not possible and the company has been indemnified by any other person for loss caused to it or where any third party interests are created by virtue of a bona fide purchase by a third party for value without notice of defect in title.

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