Membership :

Section 2(55) of the Companies Act, 2013 defines “ Member”. “member”, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become member of the company, and on its registration, shall be entered as member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company;

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;

Thus the Act enables you to become a member of a company by subscribing to the memorandum. The subscriber to the memorandum is deemed to have agreed to become a member of the company, and on its registration, is entered as member in its register of members. The subscriber to the memorandum becomes a member, on registration of the company, even without the shares having been allotted to him and is liable as a contributory when the company is wound up [Universal Transport Co. vs. Jagjit Singh (1956) Comp. Case. 36 Babulal vs. Naraina Sugar Mill (1958) Comp. Case. 155].

Membership can also be had by any other person who agrees in writing to become a member of the company and whose name is entered in its register of members, since in such a case, he is deemed to be a member. Since his agreement needs to be in writing, one cannot be deemed to be a member on ground of estoppel, simply because his name appears in the register of members. Where, however, a person’s name is there in the register and he has, in fact, accepted the position and acted as a member, the agreement will be presumed to be in writing until the presumption is rebutted by proof to the contrary.

Apart from subscribers to memorandum and every other person who agrees in writing to become a member of a company, every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository; shall also be deemed to be a member of the concerned company”.

A person can also become a member through transfer of shares under Section 56 or by transmission [We shall discuss transfer and transmission in Chapter 3].

(a) Can a minor become a member?

Now a question may arise in your mind, whether a minor or a company can become a member. It is true that the Act prescribes no qualification for membership. Membership entails an agreement and this agreement can be enforced in the Court. Therefore, the contractual capacity as envisaged by the Indian Contract Act, 1872 should be taken into consideration. It has been held in Mohri Bibi vs. Dharmadas Ghose (1930) 30 Cal 531 (P.C.) that since a minor has no contractual capacity, the agreement with a minor is void. Therefore, a minor or a lunatic cannot enter into an agreement to become a member.

For example, a father applied for shares in a company as guardian of his minor daughter. The company issued shares and registered them in the name of the minor describing her as minor. The transaction was void and the father who signed the application on the minor’s behalf could not be treated as having contracted for the shares; as such he could not be placed on the list of contributories when the company was wound up [Palaniappa vs. Official Liquidator AIR 1942 Mad. 470]. But what will happen if the directors allot share to a minor in response to his application, without knowing that he was a minor and enter his name in the register of members? As soon as the company comes to known of this fact, it can avoid the allotment and strike the name of the minor off the register of members. But the company must refund theentire money to the minor, which it obtained in relation to the shares allotted. Can the minor be likewise compelled to restore to the company the benefits (if any) received by him from the allotment of shares? It is a matter for the Court to decide, regard being had to the facts and circumstances of each case.

But as regards the rescission of the contract, in point of time, the minor and the company are on a little different footing. Even after attaining majority, the minor can deny his liability on the
shares on the ground of minority. But the company cannot successfully impeach the action of the minor’s repudiation by setting up the plea that he received the dividend during his minority or that he had made a fraudulent representation of his age in the application [Sadiq Ali vs. Jay Kishore, 30 Bomb. L.R. 1346 (1); P.C. Balangowada vs. Godigeppa 3 Bomb. L.R. 350]. If, in this illustration, the minor received dividends after he had attained majority, could be legally allowed to evade his liability on the shares? The answer is ‘no’. This is because he would be deemed to have intentionally led the company to believe him to be a share holder and on the faith of such belief to pay him the dividends, therefore, he would be estopped by this conduct, while being a person sui juris (of his own right), from denying as between himself and the company that he is a shareholder [Fazalbhoy vs. The Credit Bank of India Ltd. 39 Bomb. 331].

However, notice that in some later decisions, a minor has been permitted to be a shareholder. The Company Law Board has laid down in Nandita Jain v. Bennet Coleman & Co. Ltd. that a minor can become a member provided four conditions are fulfilled:

(a) Company must be a Co. Ltd. by shares.

(b) Shares are fully paid up.

(c) Application for transfer is made on behalf of minor by lawful guardian.

(d) The transfer is manifestly for the benefit of the minor.

This was also confirmed in S.L. Bagree v. Britannia Industries.

In also Diwan Singh v. Minerva Films Ltd. [(3958) 28 Comp. Cases 191 (Punj.), (1959) 29 Comp. Cases 263 (Punj.)], the Punjab High Court held that there is no legal bar to minor becoming a member of a company by acquiring shares (by way of transfer) provided the shares are fully paid and no further obligation or liability is attached to them.

Minor can become member by transfer or transmission, but a company may not allow a minor to be a member by allotment.

(b) Can a company become a member?

Section 19 of the Companies Act, 2013 provides that no company shall hold any shares in its holding company and no holding company shall allot or transfer its shares to any of its subsidiary companies and any such allotment or transfer of shares of a company to its subsidiary company shall be void.

Exception: This provision shall not apply to a case—

(a) where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or

(b) where the subsidiary company holds such shares as a trustee; or

(c) where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company:

However, provision further states that the subsidiary company shall have a right to vote at a meeting of the holding company only in respect of the shares held by it as a legal representative or as a trustee, as referred above in clause (a) or clause (b).

The reference in this section ‘to the shares of a holding company’ which is a company limited by guarantee or an unlimited company, not having a share capital, shall be taken as a reference to the interest of its members, whatever be the form of interest.

(c) Termination of membership: Membership is terminated when a person’s name is removed from the register of members for some proper reason. This may occur when: (a) he transfers all of his shares; (b) his shares are forfeited, surrendered or sold to enforce a lien;

(c) he holds redeemable preference shares and they are redeemed; (d) he dies and his legal representative transfers the shares or secures their registration in his own name; (e) his contract to take the shares is rescinded or repudiated; (f) he becomes insolvent and the Official Assignee or Receiver disclaims the shares or transfers them; and (g) the shares are held by a company in the course of liquidation, and the liquidator disclaims the shares or transfers them.

The Register of members, however, is only, prima facie evidence as to whether a person is a member or not and if a person’s name is improperly removed, all his rights and obligations as a member continue to remain the same.

On a member’s death, his name remains on the register and his estate continues to be member until his legal representative takes either of the steps mentioned in clause (d) above i.e., he transfer the shares or secures their registration in his own name. He can receive dividends and other advantages to which he would be entitled as if he were the registered holder of the share except that he shall not be entitled in respect of it to exercise any right given by membership in relation to meetings of the company. However, the Board may at any time by notice can compel him to make an election under clause (d) above. [See Regulation 26, Proviso, Schedule I of the Companies Act, 2013].

(d) Members and shareholders: At this stage of your study, you know the different ways in which you can become a member of a company. Here, we would draw your attention to the fact that in the parlance of Company Law, the two words “member” and “shareholder”, are loosely used by common people, thereby giving an impression that they are absolutely synonymous. Such an impression needs to be qualified. You will perhaps recollect that a member and a shareholder can be differentiated on the following grounds:

1. A registered member may not be a shareholder, since a company limited by guarantee and not having a share capital, does have members, but not shareholders. But a registered shareholder is a member, since his name appears in the Register of members maintained by the company.

2. A person who owns a share warrant (shares) is not a member since his name does not appear in the Register of members maintained by the company. He is a share- holder only.

3. A legal representative of a deceased member is a shareholder, but not a member, till he applies for registration and his name is entered in the Registrar of members.

(e) Rights of a member: These are as follows:

(i) To have the certificate of shares held or the certificate of stock issued to him within the prescribed time [Section 56].

(ii) To have his name borne on the register of members.

(iii) To transfer shares subject to any restrictions imposed by the articles [Section 44].

(iv) To attend meetings of shareholders, receive proper notice and to vote at the meetings.

(v) To associate in the declaration of dividends and to apply to the Court for an injunction restraining the directors from paying dividends on an ultra vires declaration or out of capital.

(vi) To inspect the registers, indexes, returns and copies of certificates, etc. kept by the company and to obtain extracts or copy thereof [Section 13].

(vii) To obtain copies of Memorandum and Articles on request on payment of the prescribed fees [Section 17].

(viii) To have the first option in case of issue of shares or a further issue of shares (i.e., the right of pre-emption) by the company [Section 62].

(ix) To apply to the Court to have any variation or abrogation to his rights set aside by the Court [Section 48].

(x) To have notice of any resolution requiring special notice [Section 115].

(xii) To obtain on request minutes of proceedings at general meeting [Section 119].

(xiii) To remove directors by joining with others [Section 169].

(xiv) To obtain a copy of the profit and loss account and the balance sheet with the auditor’s report [Sections 129 and 136].

(xv) To apply for the appointment of one or more competent inspectors by the Government to investigate into the affairs of the company as well as for reporting thereon [Sections 235 and 237].

(xvi) To participate in the appointment of an auditor or auditors at the Annual General Meeting [Section 213].

(xvii) To inspect the auditor’s report at the Annual General Meeting of the company [Section 145].

(xviii)To receive a share in the capital of the company and in the surplus assets, if any, on the company’s liquidation.

(xix) To participate in passing of the special resolution that the company may be wound up by the Court or voluntarily [Sections 271 and 304].

(xx) To participate in appointment and in fixation of remuneration of one or more liquidators in the case of a Member’s Voluntary Winding up and to fill any vacancy in the office of a liquidators so appointed by him [Sections 310 and 311].

(f) Liabilities and duties of a member

(i) To take shares, when they are allotted in due time and in compliance with the provisions of the Act, unless the refusal to accept the shares has been sent on the ground of non-compliance with the provisions of the Act as regards the issue of the prospectus or as regards allotment.

(ii) To pay for the shares allotted to him when the allotment is made and when calls have been made validly and in conformity with the provisions of the articles.

(iii) To abide by the doing of the majority of members unless the majority acts vindictively, oppressively, mala fide or fraudulently.

(iv) to contribute to the assets of the company in the case of winding up when the shares held are partly paid-up.

Example: X purchased 100 equity shares of ABC ltd. from Y. Though the amount of transaction was paid to the seller, the transferee name is not appearing in the list of members. Subsequently, the company declared dividend. Referring to the provisions of the Companies Act, 1956 state to whom the company will be paying the dividend.

According to section 123 of the Companies Act, 2013 dividend shall be paid only to the registered holder of shares or to his order or to his bankers or to the bearer of a share warrant. Where shares have been sold but not yet registered, the dividend shall be paid to the transferee only in case the transferor gives a mandate in writing to that effect. Otherwise, the dividend in respect of such shares shall be transferred to the ‘unpaid dividend account’.