Friday, October 19, 2007

Companies Act_practical problems_4

A public limited Company has only seven shareholders, all the shares being paid in full. All the shares of one such shareholder are sold by the court in an auction and purchased by another shareholder. The Company continues to carry on its business thereafter. Discuss the liabilities of the shareholders of the Company.

The problem in question relates to reduction of membership below the statutory minimum. Section 12 of the Companies Act requires a public Company to have a minimum of seven members. If at any time the membership of a public Company falls below seven and it continues’ for more than six months, then according to Section 45 of the Companies Act, 1956, every such member who was aware of this fact, would be individually (personally) liable for the debts contracted after six months.
Thus, in the above problem the remaining members shall incur personal liability for the debts contracted by the Company:
a. If they continued to carry on the business of the Company with that reduced membership (i.e., 6) beyond six months period.
b. Only those members who knew this fact of reduced membership shall be liable, for instance, one of the members who was abroad and thus not aware of these developments, shall not be liable.
c. The liability shall extend only to the debts contracted after six months from the date of auction of that member’s shares.

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