I am starting a new company along with my friends. What is the effect in a situation where the members are below the minimum requirement according to law?
Section 3 of the Companies Act, 2013 specifies that the minimum number of members to form a public company is seven, 2 members for the private limited company and one person, where the company to be formed is to be One Person Company , for lawful purpose, may subscribe their names to its Memorandum of Association, and complying the requirements of the Act for formation and incorporation of company whether with or without limited liability. In the new Act, 2013, no provision has been given if the minimum number mandated under Section 3 to form such companies, is reduced.
The legal effects of reduction of members below statutory number:
In the Companies Act, 1956, it is stated under Section 433 if the minimum number of members required under Act for a company is reduced, the Court has the power to wind up such company. It is one of the circumstances/ground given under Section 433 for which company may be wound up by Court.
The Companies Act, 2013
The Companies (Amendment) Act, 2015
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Also, Section 45 of the Companies Act, 1956, it is stated specifically that existing members who are continuing their business even after such fall of numbers fewer than 7 in case of public company, or 2 members in case of private company after six months from the date of such reduction in number, every such member is severally liable for the payment of the whole debts of the company made at that time, and may be severally sued. In this case, the burden is on the member who claims that he had no knowledge of such reduction in the number of members below minimum. The purpose behind this section is to withdraw the benefits given to the company by the way of incorporation in the event of default of the condition with respect to the minimum number of members which has laid down at the time of the incorporation
Adv. Anitha Gutti
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