Limited Liability is one of the most important features of the corporate form of business organization. In a company, the members’ liability is limited only to the amount unpaid on their shares. Once the shares are fully paid up, the members have no further liability for any of the outstanding debts of the company.
However, this privilege may not hold good at all times. Member of a limited company shall be held personally liable in certain circumstances which can be understood as follows:
Companies Act 2013 (“the Act”) provides for a minimum of two members in case of a private limited company, seven members in case of public limited company and one person in case of one person company (OPC) as per the provisions of Section 3.
“Section 3A was inserted through Companies (Amendment) Act, 2017 which provides that in case the minimum number of members fall below the required number as provided under section 3 and the company carries on business for more than six months while the number 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 cognizant 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 maybe severally sued therefor”
Analysis of the Section
Applicability
♦ Number of members to be reduced below the statutory requirement;
♦ Companies shall carry on business for more than six months
♦ Remaining members to be Cognizant of the fact that the business is carried on with less than two/seven members
Liability
♦ Members shall be Severally liable for the payment of the whole debts contracted during that time
♦ To be severally sued therefor
It is pertinent to note that the act does not expressly provide for any penalty or liability on the part of the board of directors in case the minimum number of members falling below the required number.
Therefore, companies operating with the minimum number of members shall always ensure compliance with the provisions of section 3 at all times and in case the minimum number falls below the required limit, necessary steps shall be taken to bring it back to the required number to avoid unlimited liability.
******
Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.
Author Bio
