Triggering Unlimited Liability for Members

Recently introduced amendment bill to the Companies Act, 2013 propose to reintroduce unlimited liability for members in certain cases. Though, similar provision was there in earlier in the companies Act, 1956; I have no intention to go into history; but to examine this provision in light of justice and equity.

Proposed Section 3A reads:

3A. If at any time the number of members of a company is reduced, in the case of a public company, below seven, 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.

To trigger unlimited liability for members, following conditions are required:

1. Number of members reduced below statutory requirement;
2. Companies carries on business for more than six months
3. cognisant of the fact that it is carrying on business with less than seven members or two members
4. severally liable for the payment of the whole debts
5. contracted during that time, and may be severally sued therefor

This unlimited liability is not limited to unpaid amount of shares but extend to unlimited amount. There is relief that such amount should be contracted during that time which started from such reduction of membership below statutory minimum numbers.

To understand the implication on innocent investor, there may be following combinations of company management:

1. all remaining members are directors (family and friends companies)
2. None of remaining members are directors (Professionally managed companies) or
3. Few remaining members are directors.

Here, third one is dangerous combination and need legislative attention. In my blogging career, I have several queries, where namesake members have no knowledge of such position until next Annual Report and Annual Return came into their knowledge. Though, in these companies, filling of annual report and annual return be avoided until court summon was served. Recently, a company continue working two husband – wife namesake members (brother and sister- in – law of single command) died with same single nominee (single legal hair also), showing name of these deceased members in list of members.

I have simple query Ministry, legislature, company law committee and professional bodies;

1. Why should not such unlimited liability be first place upon directors of the companies?
2. Why should not there be an immediate duty to have members in the company within certain statutory time on management or the board?
3. Why should silent innocent investor be punished for just being a member of such company?
4. Is this ease of doing business in India if such innocent member is non – resident in India?

I request views of readers in comment section below this post.