## Special Rule: Private Subsidiary of a Public Company
A private company which is a subsidiary of a public company shall be deemed to be a public company for the purposes of this Act - even if its articles continue to contain the three private-company restrictions.
This prevents companies from using private subsidiaries to dodge public-company obligations.
## Section 3A - Liability When Members Fall Below Minimum
(Inserted by notification dated 3rd January, 2018)
If the number of members of a company is reduced:
Type
Below Minimum
Public Company
Below 7
Private Company
Below 2
AND the company carries on business for more than 6 months while the membership is so reduced...
### Consequence
Every person who:
Is a member during the time business is carried on after the 6-month grace period
Is cognisant (i.e., aware) that membership is below the minimum
...shall be severally liable for the WHOLE debts of the company contracted during that time, and may be severally sued for them.
## Visual Map of Section 3A
```
Members drop below 7 (public) / 2 (private)
|
v
6-month grace period
|
v
Business continues > 6 months?
| Yes
v
Member is AWARE of low membership?
| Yes
v
--> SEVERALLY liable for ALL company debts contracted thereafter
```
## Minimum Requirements - Public Company
Requirement
Number
Minimum members
7
Maximum members
No limit
Minimum directors
3
Name ends with
'Limited'
Worked example
### Example 1
Q: A public company has 5 members for 8 months. Mr. X, a member, knows the company is functioning with only 5 members. During this period, the company takes a Rs.10 lakh loan. What is X's liability?
A: Since:
Membership (5) is below the minimum (7)
Business continued for more than 6 months
X is cognisant of the fact
Under Section 3A, X is severally liable for the entire Rs.10 lakh debt (contracted after the 6-month grace) and may be sued for it. His shield of limited liability is gone.
### Example 2
Q: ABC Pvt Ltd is a subsidiary of XYZ Ltd (a public company). Its articles contain all three private-company restrictions. Is ABC treated as a private or public company under the Act?
A: It is deemed to be a public company for purposes of the Act, even though its articles classify it as private. The 'subsidiary-of-public' rule overrides the articles.
⚠️ Common exam mistakes
Forgetting that a private subsidiary of a public company is deemed public - this catches many students.
Triggering Section 3A liability without checking BOTH conditions: (a) carrying on business beyond 6 months AND (b) cognisance (awareness) of the member.
Saying liability under Section 3A is 'jointly and severally' - the Act specifically uses 'severally', meaning each member can be sued individually for the whole debt.
Bare-Act text Sections 2(71) and 3A · Companies Act, 2013 · click to expand
Section 2(71): 'public company' means a company which (a) is not a private company; and (b) has a minimum paid-up share capital as may be prescribed: Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to be public company for the purposes of this Act even where such subsidiary company continues to be a private company in its articles. | Section 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.