CORPORATE LEGAL FORM AS A VEHICLE FOR SMALL COMPANIES

INTRODUCTION
The concept of “Small Company” has been introduced for the first time by the Companies
Act, 2013. The Act identifies some companies as small companies based on their capital and
turnover position for the purpose of providing certain relief/exemptions to these companies.
Most of the exemptions provided to a small company are same as that provided to a one
person company. The Act also provides for a simplified scheme of arrangement between two
small companies, without requiring the approval of Tribunal, i.e. with the approval of Central
Government. Section 2(85)1 defines a Small Company. For qualifying as a small company, it
is enough if either the capital is less than rupees fifty lakhs or turnover is less than rupees
twenty crores. It is sufficient if either one of the requirement is met without meeting the other
requirement. However, these limits may be raised but not exceeding rupees five crores in case
of capital and rupees twenty crores in case of turnover. The requirement of consolidation of
financial statements will not arise for small companies. But, explanation provided under subSection 3 of Section 129 contains that for the purpose of consolidation, the word “subsidiary”
shall include associate company and joint venture. Thus, a small company which has any
associate company or joint venture will still be required to prepare consolidated financial
statements. This meaning of “subsidiary” is only for the limited purpose of Section 129(3)
and not for the purpose of determining whether a company is a small company or not.
Salient features:
• Only a private company can be classified as a small company.
• Holding company, subsidiary company, charitable company and company governed by any
Special Act cannot be classified as a small company.

1 See Companies Act 2013, ‘‘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 Section 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;

the logic seems to point to amendments to corporate law. STATEMENT OF PROBLEM It is widely held that our companies’ legislation is of a length and complexity which is to some extent inappropriate to the small.• For a small company. The most important question which remains unanswered here is regarding the benefits which are accorded to a small company. along with the change in status. The fashion for deregulation emphasises the facilitative role of company law. • The status of a company as “Small Company” may change from year to year. in a form in which incorporation is often associated with entrepreneurship. which leads to proposals for simplification and removal of burdens from small firms. Blanket application of new corporate governance provisions. On the other. It is widely argued that corporate law is burdensome for small companies. either the paid up capital should not exceed Rupees fifty lakhs or the turnover as per last statement of profit & loss should not exceed rupees two crores. 2013 (‘the Act’). 2015 to remove the difficulties faced in giving effect to the provisions of clause (85) of section 2 (definition of small company) and clause (b) of sub-section (11) of section 186 of the Companies Act. investor protection rules and accounting standards increases the unsuitability of the applicable rules for small companies. either generally or in relation to small firms only. These benefits have been given in order to ensure that the interests of such companies are protected from the consequences of regulations designed to balance the interests of the stakeholders of large corporate blocks. private company. but removal of too much third party protection will not only . The alternative would be the simplification of the Companies Act: either by amending and dropping some of the existing requirements and if appropriate drawing the remaining provisions together in a self-contained statute. The provisions of the Companies Acts are said to be too detailed and complex for small firms. If the company is no longer a small company. Relaxing regulatory provisions could bring real benefits to companies if consistent with investor and creditor protection. The Ministry of Corporate Affairs (‘MCA’) has released the Companies (Removal of Difficulties) Order. Therefore. the benefits which are accorded to a small company are also withdrawn. Thus the benefits which are available during a particular year may stand withdrawn in the next year and become available again in the subsequent year. 2015 dated 13 February.

simplicity may not be an attainable or even a desirable objective for structures governing small firms.be undesirable for reasons of public interest but will also destroy the credibility of the small company sector which is very important to those choosing incorporation. As soon as a firm ceases to be a one person concern. the precise balance desired within the structure can be left to those engaged in the venture and need not be the concern of outsiders. Protective provisions may be more necessary for some small firms than for quoted public companies where the market exerts some control. where the underlying situation is complex. For these reasons. provided there are default provisions for cases where the internal relationship breaks down and no provision has been made by the parties. Flexibility seems a more appropriate objective than simplicity. the situation is a simple one. Small companies can give rise to difficult disputes. However. some minority protection may become necessary. . more so because they are frequently associated with breakdown of personal relationships in the family or between friends. An apparently simple legislative solution. could create ambiguity and uncertainty and have the ultimate effect of increasing costs. It is a mistake to imagine that because the financial assets of the company are low.