MEMBERSHIP Flashcards
INTRODUCTION
Section 2(55) of the Companies Act, 2013 defines a member in the following words:
1. The subscribers to the Memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members.
2. Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company.
In Herdilia Unimers Ltd. v. Renu Jain [1995] 4 Comp. LJ. 45 (Raj.), it was held that the moment the shares were allotted and share certificate signed and the name entered in the Register of members, the allottee became the share- holder, irrespective of the allottee receiving the shares or not.
A person whose name is not entered into register of members of company cannot be treated as member or deemed member - Sant Chemicals (P.) Ltd. v. Aviat Chemicals (P.) Ltd. [2000] 25 SCL 473 (Bom.).
3. Every person holding shares of the company and whose name is entered as beneficial owner in the records of a depository.
Member v. Shareholder
X’ is a member of a company limited by shares. His name is placed on the Register of members and he is holding shares in his own right and, therefore, whether we call him a member or a shareholder, it is immaterial. In such a situation, the terms ‘member’ and ‘shareholder’ may be used interchange- ably. Now, in the following three situations he will cease to be a shareholder, though he continues to be the member of the company :
On sale - X sells the shares to Y. He fills in a share transfer form and hands it over to Y. He also gives the share certificate representing the shares to Y. In return for sale of shares, he receives consideration from Y. X is no longer a shareholder as he has sold the shares and property in the shares has passed to Y. But the name of X continues to be on the Register of members till the transfer of shares is registered by the company in favour of Y.
On death - X dies and his property, including shares, is inherited by Y, his legal representative. X is no longer the shareholder. He is not in existence to hold the shares. Y is holding the shares in his own right and, therefore, can rightly be called the shareholder. But X continues to be the member as his name still appears on the Register of members. However, as soon as Y gets his own name registered in the Register of members, then X will cease to be a member.
On becoming insolvent - X becomes insolvent and his property, includ- ing shares, vests in the Official Receiver or Official Assignee. The Official Receiver or Assignee is holding the shares in his own right. Therefore, X is no longer the shareholder, though he continues to be the member of the company.
A person who subscribes to the memorandum of association immediately becomes the member, even though no shares are allotted to him. Till shares are allotted to the subscriber, he is a member but not the shareholder of the company.
(3) In the case of a company limited by guarantee having no share capital or an unlimited company having no share capital, there will be only ‘members’ but no ‘shareholders’.
By agreement and registration
Registration of the name of a person as a member of a company may arise :
(a) upon application and allotment.
(b) by transfer - the member may acquire shares from an existing member by sale, gift or some other transaction.
(c) by transmission - here a person becomes a shareholder by transmission of shares through death, lunacy or insolvency.
(d) by estoppel/holding out - This arises when a person holds himself out as a member or knowingly allows his name to remain on the register when he has actually parted with his shares. In the event of winding-up, he will be liable, like other genuine members as a contributory (Hans Raj v. Asthana). However, he may escape liability by applying to Tribunal for rectification of register of members under section 59 for removal of his name from the Register.
Minor
As a minor is wholly incompetent to enter into a contract - Mohri Bibi v. Dharmadas Ghose [1903] 30 ILR Cal. 539 (PC), an agreement by a minor in India to take shares is void and hence, he cannot be a member of a company.
(ii) If shares are allotted to a minor in response to his application, and his name entered on the Register of members, in ignorance of the fact of minority, the company can repudiate the allotment and remove his name from the Register on coming to know of the minority of the member. The company must repay all moneys received from him in respect of the allotted shares.
(iii) The minor also can repudiate the allotment during his minority and he shall be returned the amount he paid towards the allotment of shares.
(iv) If the name of the minor continues on the Register of members and neither party repudiates the allotment, the minor does not incur any liability on the shares during minority - Fazulbhoy Jaffar v. The Credit Bank of India AIR 1914 Bom. 128.
(v) If an application for shares is made by a father as guardian of his minor child and the company registers the shares in the name of the child describing him as a minor, neither the minor nor the guardian can be placed on the list of contributories at the time of winding-up - Palaniappa v. Official Liquidator, Pasupati Bank Ltd. AIR 1942 Mad. 470.
(vi) If somehow the name of a minor appears on the Register of members and in the meantime he attains majority, and if he does not want to continue to be a member, then he must repudiate his liability on the shares on the ground of minority. The company cannot take defence on the principle of estoppel that the minor had fraudulently mis-represented his age or had received dividends and other privileges as a member. However, if he had received dividends and exercised his rights as a member of the company after attaining majority, then he cannot repudiate his liability on shares—Fazulbhoy Zafar v. Credit Bank of India Ltd. (supra).
(vii) In case of transfer of partly-paid shares to a minor, the company may refuse to register him as a member. In case the company, in ignorance of the minority, has permitted the transfer, then the company may remove the name of the minor and replace it by that of transferor, even though the latter may have been ignorant of the minority.
Company
A company, being a juristic person and a separate legal entity may become a member of another company, if it is so authorised by its memorandum to purchase or invest in shares. This is, however, subject to the provisions of section 19 and section 186. Under section 19, a subsidiary company cannot be a member of its holding company, and any allotment or transfer of shares in a holding company to its subsidiary, or even to a nominee for such subsidiary, is void, except that a subsidiary company may :
(i) hold shares in the holding company in the capacity of a personal represen- tative of a deceased shareholder; or
(ii) hold such shares as a trustee; or
(iii) where the subsidiary company is a shareholder even before it became a
subsidiary of the holding company.
Impersonation as a shareholder
If any person deceitfully personates an owner of any share or interest in a company or any share warrant* or coupon issued in pursuance of the provisions of the Companies Act, and thereby obtains or attempts to obtain any such share or interest or any such share warrant or coupon or receives or attempts to receive any money due to any such owner, he shall be punishable with imprisonment for a term which shall not be less than one year but which may extend to three years and with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees (Section 57).
Rights of a member/shareholder
A shareholder of a company has two kinds of rights, namely, (i) individual rights and (ii) corporate rights. Every shareholder can enforce his individual rights singly but corporate rights have to be enforced by the majority— Suresh Chandra Marwaha v. Lauls (P.) Ltd. [1978] 48 Comp. Cas. 110 (Punj. & Har.).
However, individual and corporate membership rights may not be mutually exclusive. Where the same transaction infringes both individual and corporate membership rights, one composite action can be brought.
The dividing line between personal and corporate right is very thin and the court will probably be inclined to treat a right as a ‘personal right’ only if he has a ‘special interest’ distinct from the general interest which other members have in the company complying with the terms and conditions of the Act, the Memorandum and the Articles of association.
In case of infringement of a personal right, a member may sue a wrongdoer and the company in his own name. But for infringement of his corporate right, the action should be brought in the name of the company. The company should be the plaintiff and the wrongdoers should be made the defendants.
The various rights of a member could be grouped under the following two categories:
(a) Contractual or otherwise; and
(b) Statutory.
Contractual and other Rights
A member by virtue of the contract with the company and any other members via the Memorandum and Articles is entitled to have his name on the Register of members, to vote at the meeting of members, to receive dividends when declared, to exercise the right of pre-emption, return of capital on winding-up or on reduction of share capital of the company.
As a member he also has certain other rights which may or may not arise out of contract. In exercise of such rights he is entitled to bring action to restrain the company from doing an ultra vires act, to attend and take part in the proceedings of meetings of the company and to move amendments.
Statutory Rights
The right to vote at all meetings [Sec. 47];
(ii) The right to requisition an extraordinary general meeting of the company
[Sec. 100];
(iii) The right to receive notice of a general meeting [Sec. 101];
(iv) The right to appoint proxy and inspect proxy register [Sec. 105];
(v) In the case of a body corporate which is a member, the right to appoint a representative to attend a general meeting on its behalf [Sec. 113]; and
(vi) The right to require the company to circulate resolution [Sec. 111].
(vii) To have the certificate of shares held ready for delivery to him within two
months from the date of allotment [Sec. 56].
(viii) To transfer shares subject to the provisions of the Act and the Articles of Association [Sec. 44].
(ix) To inspect the Register of members and Register of debenture-holders and get extracts therefrom [Sec. 94].
(x) To obtain, on request, minutes of proceedings at general meetings as also to inspect the minutes [Sec. 119].
(xi) To apply to the Tribunal to have any variation of shareholders’ rights set aside [Sec. 48].
(xii) To participate in the removal of directors by passing an ordinary resolution [Sec. 169].
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
(i) Right to participate in, and to be sufficiently informed of, decisions concern- ing fundamental corporate changes.
(ii) Opportunity to participate effectively and vote in general shareholder meetings.
(iii) Being informed of the rules, including voting procedures that govern general shareholder meetings.
(iv) Opportunity to ask questions to the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reason- able limitations.
(v) Effective shareholder participation in key corporate governance decisions, such as the nomination and election of members of board of directors.
(vi) Exercise of ownership rights by all shareholders, including institutional investors.
(vii) Adequate mechanism to address the grievances of the shareholders.
(viii) Protection of minority shareholders from abusive actions by, or in the interest of, controlling shareholders acting either directly or indirectly, and effective means of redress.
Expulsion of a member
It cannot be denied that there are some members who, by creating various kinds of troubles for the management, try to wrest undue advantage for themselves. Can such members be expelled? The Department of Company Affairs following the judgment in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 338 has expressed the view that the company cannot by amending the Articles of associa- tion give itself a power to expel a member. Such an amendment of Articles of association is opposed to the fundamental principles of the Companies’ jurispru- dence and is ultra vires the company. Such a provision is repugnant to the various provisions in the Act pertaining to the rights of a member in a public limited company and cuts across the scheme of the Act as it has the effect of rendering nugatory the very powers of the Central Government (now Tribunal) under section 111 [Now section 58] of the Act and the powers of the courts (Now Tribunal) under section 107 [Now section 48] and section 395 [Now section 235] of the Act and is, therefore, void by the operation of the provisions of section 9 [Now section 6] of the Act.
A person can agree to take shares of a company either as the subscriber to the memorandum at the initial stage of its formation or in any of the following manner :
(a) by subscribing to its further or new shares;
(b) on transfer of its shares from an existing member;
(c) on acquisition or purchase of its shares (for example, take-over bid, renun-
ciation of rights shares by an existing member);
(d) on acquisition of its shares by devolution (for example, transmission of shares to legal heirs of a deceased member, on insolvency, upon merger/ amalgamation through Tribunal’s order); and
(e) on conversion of convertible debentures or loans pursuant to the terms of issue of such debenture or loan agreement respectively.
The fundamental difference between the subscribers who agree to take shares at the time of formation of the company and persons who agree to take shares later is that the former become members immediately on incorporation of the company, that is, they automatically become members. The latter, though having agreed to take shares, become members only after their names are entered in the register of members of the company.
Joint membership
It is possible for two or more than two persons to hold shares jointly in a company. In that case all of them are not the individual members of the company. Instead, they are said to hold the shares jointly. There is no direct provision for joint membership, but there are a few indirect references.
Therefore, Articles of Association of a company provide for joint membership and sometimes the maximum number of persons who can be joint-holders of shares is given in the Articles as not more than three (Since Standard Listing Agreement provides for maximum three joint-holders).
Some provisions relating to joint membership, worth noting are: Only one share certificate is issued to them :
(i) All the joint members are jointly and severally liable to make payment of calls (Reg. 15, Table F and section 43 of the Indian Contract Act).
(ii) In the case of joint-holders, the vote of the senior who tenders a vote, whether in person or by proxy, shall be accepted to the exclusion of the votes of the other joint holders. (Reg. 52, Table F).
(iii) The names of the joint-holders may be entered in the Register of members in the order in which they appear in the application form or in the share transfer form.
(iv) For purposes of ensuring that the number of members of a private company does not exceed 200 as required by section 2(68), joint-holders of shares are counted as one member.
(v) Transfer of shares held by joint-holders shall be effective only if it is made by all the joint-holders.
Certain other rights of a member spelt out by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] are:
(i) To elect directors and thus to participate in the management through them;
(ii) To enjoy the profits of the company in the shape of dividends;
(iii) To apply to the court (now Tribunal) for relief in case of oppression;
(iv) To apply to the court (now Tribunal) for relief in case of mismanagement;
(v) To apply to the court (now Tribunal) for winding-up of the company; and
(vi) To share in the surplus on winding-up.
The aforesaid rights are in no way exhaustive but are only illustrative.
Member v. Contributory
In the event of winding up of a company, members may be called upon to contribute towards the assets of the company. Accordingly, they are called ‘contributories’. However, the expression ‘contributory’, as per section 2(26), includes the holder of fully paid up shares. The question, therefore, may arise as to whether a member ceases to be a member on the commencement of winding-up of a company. The question has been examined by various courts resulting in conflicting judgments. In Raja Surrindar Singh v. P.B. & A Products Company Ltd. [1956] 26 Comp. Cas. 41, it was observed that the series of sections which are headed “Winding-up by Court”, “Official Liquidator” and “Ordinary powers of Court”, leave no doubt that the word ‘contributory’ is really used synonymously with the word “member”. But in National Steel and General Mills v. Official Liquidator [1989] 2 Comp. L.J. 207; [1990] 69 Comp. Cas. 416, Delhi High Court held that a member does not cease to be a member merely because winding-up of the company has commenced. He continues to be a member of the company so long as the requirements of section 41 [Now section 2(55) read with section 150] [Now section 88] are complied with. In other words, it can be interpreted to mean that till a person’s name continues to remain on the Register of members, he shall be a member of the company entitled to the rights of a member and subject to the obligations of a member.
Again, in Rajdhani Grains & Jaggery Exchange Limited, In re [1983] 54 Comp. Cas. 166 (Delhi), it was observed that the terms ‘contributory’ and ‘member’ are not inter- changeable, since under section 428 [Now section 2(26)] while every member would become a contributory, the converse would not be true, unless the name of the contributory is entered in the Register of members.
