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What if No of Members reduced in Private OR Public Company

With the starting of striking off of all the defunct companies and shell companies, Govt. is not in the mood to give the relaxation to irregularities. Day by day, Govt is taking various required steps to stop the irregularities in the companies with the initiative of having more transparency in the companies. 

Now, Govt has taken one more step towards the removing of irregularities by inserting a section 3A into Companies Act, 2013 which deals with the "Members severally liable in certain cases" under Chapter-II (Incorporation of Companies and Matters incidental there to) of Companies Act, 2013. This Section was notified on Feb 9th, 2018.

Now, lets find out what the section talks.With the newly inserted section 3A of the Companies Amendment Act, 2017, if at any time the number of members of a company is reduced below the minimum required as follows:

1.    in the case of a public company, below seven,

2.    in the case of a private company, below two,

and the company carries on business for more than six months while the number of members is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefor.

Now we have following answers for the questions arise in your mind.-.9+

Q1. When will the liability arise?

A1. If the company carries on business for more than six months while the number of members is so reduced.

Q2. Which member will be liable?

A2. Every person who is a member of the company during the time that it so carries on business after those six months and is cognisant of the fact that it is carrying on business with less than seven members or two members, as the case may be, shall be severally liable.

Q3. What will be the quantum of liability?

A3. Liability will be for the payment of the whole debts of the company contracted during that time, and members may be severally sued therefor.

One point to be noted here is that the section gives 6 months’ time to meet the membership limit so reduced by transfer, transmission or by what so ever method.

One ambiguity is still there i.e. will the members be liable if the membership of the company is reduced below minimum required and company is not carrying on any business. My opinion is that the members will not be liable in that case.


Regards

CS Payal Singh (writer is a Company Secretary in Practice for last 1 year and having vast knowledge about corporate laws, SEBI laws, RBI Matters, etc)