Section 3A of Companies Act, 2013 - Members Severally Liable in Certain Cases
Section 3A of the Companies Act, 2013 creates an exception to the ordinary principle that a company has a legal personality separate from its members. In the specific circumstances stated in this section, a member who knowingly permits the company to continue business below the statutory minimum membership for more than six months can become personally and severally liable for qualifying company debts.
In brief: Section 3A applies where a public company has fewer than seven members, or a private company has fewer than two members, and continues business for more than six months. A member who remains a member during the relevant period and knows of the deficiency may be severally liable for debts contracted after the six-month period while the deficiency continues.
What does Section 3A provide?
Section 3A provides that if the number of members of a public company falls below seven, or the number of members of a private company falls below two, and the company carries on business for more than six months while the number remains below that minimum, a person who is a member during the period after those six months and who knows that the company is carrying on business with the reduced membership is severally liable for the whole of the debts contracted by the company during that time and may be sued severally for those debts.
The official text of the Companies Act, 2013 is available from the Ministry of Corporate Affairs - Companies Act, 2013.
Meaning of "severally liable"
"Severally liable" means that the liability contemplated by Section 3A can be enforced against the individual member who satisfies the statutory conditions. The section expressly states that such a member may be severally sued for the whole debts of the company contracted during the relevant period.
Conditions for liability under Section 3A
- Membership falls below the statutory minimum: fewer than seven members in a public company or fewer than two members in a private company.
- The company continues to carry on business: the reduced membership by itself is not enough; the company must continue business.
- The situation continues for more than six months: the personal liability described in Section 3A concerns the period after the six-month threshold.
- The person is a member during the relevant period: liability attaches only to a person who is a member while the company carries on business after the six-month period with insufficient membership.
- The member has knowledge: the member must be cognisant of the fact that the company is carrying on business with fewer than the required number of members.
- The debt is contracted during the relevant time: Section 3A concerns company debts contracted during the period for which the statutory conditions for personal liability are satisfied.
Minimum number of members and Section 3
Section 3 of the Companies Act, 2013 deals with formation of a company. In general, it requires seven or more persons for formation of a public company, two or more persons for formation of a private company, and one person for formation of a One Person Company. Section 3A addresses the consequences where the membership of a public or private company later falls below the applicable minimum and the company nevertheless continues business in the circumstances specified by the section.
| Company type | Membership level relevant to Section 3A | Further requirement |
|---|---|---|
| Public company | Below 7 members | Business continues for more than 6 months while membership remains below 7 |
| Private company | Below 2 members | Business continues for more than 6 months while membership remains below 2 |
When does personal liability begin?
The provision does not impose the stated personal liability merely because membership falls below the statutory minimum. The company must carry on business for more than six months while the number remains reduced. The relevant personal liability is tied to debts contracted during the period after those six months when the person remains a member and has the knowledge required by Section 3A.
Why knowledge of the member matters
Knowledge is an express statutory condition. A person must be "cognisant" of the fact that the company is carrying on business with fewer than seven members in the case of a public company, or fewer than two members in the case of a private company. Accordingly, membership alone does not reproduce all the conditions stated in Section 3A.
Legislative history of Section 3A
Section 3A was inserted into the Companies Act, 2013 by Section 3 of the Companies (Amendment) Act, 2017 (Act 1 of 2018) and came into force on 9 February 2018. The current official consolidated text records this insertion and effective date.
Practical compliance point
Where the membership of a public or private company falls below the statutory minimum, the position should be addressed promptly rather than allowing the company to continue business beyond the six-month period. The register of members, corporate records, board records and steps taken to restore the required membership should be maintained carefully.
Related provisions
For the formation requirements and types of companies, see Section 3 - Formation of Company. For the memorandum requirements, see Section 4 - Memorandum. You may also refer to Sections 3 to 20 of the Companies Act, 2013.
This article is a general explanation of Section 3A and should be read with the current text of the Companies Act, 2013 and applicable notifications. The facts of an individual case may require professional legal advice.