Triggering Unlimited Liability for Members

The Companies Amendment Act, 2017 read with notification S. O. 630(E) dated 9^th February 2018 reintroduced unlimited liability for members in certain cases. A  similar provision was there earlier in the companies Act, 1956.we have no intention to go into history, but to examine this provision in light of justice and equity.

(This is amended version of my post dated 22-03-2016 with the same heading)

Newly introduced 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. The number of members reduced below statutory requirement;
2. The company carries on business for more than six months;
3. Remaining member cognizant 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; and
5. contracted during that time, and may be severally sued therefor.

This unlimited liability is not limited to the unpaid amount of shares but extends to an 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. A liability contracted before such reduction of membership below statutory minimum shall remain unlimited.

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

• all remaining members are directors (family and friends companies)
• None of remaining members is a director (Professionally managed companies) or
• Few remaining members are namesake members.

Here, the third one is a dangerous combination and need legislative attention. In my blogging career, I have several queries, where namesake members (or directors) have no knowledge of such position until next Annual Report and Annual Return came to their knowledge. In these companies, filling of the annual report and annual return is avoided until court summon was served. This scenario may not be changed unless strike off of such companies and disqualification of such directors become the regular regulatory feature. 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 the name of these deceased members in the list of members.

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

• Why should not such unlimited liability be first place upon directors of the companies?
• Why should a silent innocent investor be punished for just being a member of such company?
• Is this ease of doing business in India if such innocent member is non – resident in India?

Yes, I know this provision only target member cognizant of the fact, but who shall have the burden of proof and be subject to undue litigation.

This is just a food for thought for continuous deliberation.