Membership in a Company: Modes and Cessation

Members: A company is composed of members, though it has its own separate legal entity. The members of a company are the persons who, for the time being, constitute the company, as a corporate entity. In the case of a company limited by shares, the shareholders are the members.

According to Section 2(55) “member” in relation to a company means:

1. 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, is to be entered as member in the register of members;
2. Every other person who agrees in writing to become a member of the company and whose name is entered in register of members;
3. Every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

In reference to the subscribers of the memorandum, the section ordains that they shall be entered as members in the register of members or registration of the company and in reference to others the section prescribes that there should be an application in writing and the name should be there in the register of members. The words “agreed in writing” were brought in by amendment of 1960 so as to prevent in circumstances of our country a person being surprised by the presence of his name in the register and then facing the burden of a prima facie evidence and leading evidence to show that he never agreed to be a member.

Leading Case Law :

In Herdilia Unimers Ltd. Vs. Renu Jain [1995] :  It was held that the moment the shares were allotted and share certificate signed and the name entered in the register of members , the allotted become the shareholder , irrespective of whether the allottee received shares or not.

Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) : The person desirous of becoming a member of a company must have the legal capacity of entering into an agreement in accordance with the provisions of the Indian Contract Act,

1972. Section 11 of the Indian Contract Act lays down that every person is competent to contract who: –

1. is of the age of majority according to the law to which he is subject.
2. is of sound mind.
3. is not disqualified from contracting by any law to which he is subject.

MODES OF ACQUIRING MEMBERSHIP: As per Section 2(55) of the Companies Act, 2013, a person may acquire the membership of a company:

1. Subscribers to the Memorandum: In the case of a subscriber, no application or allotment is necessary to become a member. By virtue of his subscribing to the memorandum, he is deemed to have agreed to become a member and he becomes ipso facto member on the incorporation of the company and is liable for the shares he has subscribed.

Accordingly it was held in Official Liquidator vs. Suleman Bhai Kachhi 1955  that: The subscriber of the memorandum is to be treated as having become a member by the very fact of subscription. Neither application form, nor allotment of, shares is necessary. Even an absence of entry in the register of members cannot deprive him of his status. He acquires, as soon as the company is registered, the full status of a member with all the rights and liabilities. The facts were that one S had subscribed the memorandum of a company for 200 shares. The company was duly registered, but he ultimately took only 20 shares. He was held liable in the winding up of the company to pay for all the 200 shares although they were, in fact, never allotted to him.”

1. Agreement in Writing:
2. By an application and allotment: A person who applies for shares becomes a member when shares are allotted to him, a notice of allotment is issued to him and his name is entered on the register of members. The general law of contract applies to this transaction.
3. By transfer of shares: Every shareholder of a company is known as a member, every member may not be known as a shareholder: Shares in a company are movable property as provided in Section 44 of the Companies Act, 2013 and are transferable in the manner as provided in the articles of the company and as provided in Section 56 of the Companies Act, 2013.
4. By transmission of shares: A person may become a member of a company by operation of law i.e. if he succeeds to the estate of a deceased member. Membership by this method is a legal consequence. On the death of a member, his executor or the person who is entitled under the law to succeed to his estate, gets the right to have the shares transmitted and registered in his name in the company’s register of members. No formalities like transfer deed , execution , attestation and stamp duty are needed. Provisions relating to formalities of transmission are generally found in the company’s articles. Clauses 23 to 27 of Schedule I contain such provisions. If the company unduly refuses to accept a transmission, the same remedies are available as in the case of a transfer, namely, an appeal to the Tribunal under Section 58.

• By acquiescence or estoppels: A person is deemed to be a member of a company if he allows his name, without sufficient cause, to be on the register of members of the company or otherwise holds himself out or allows himself to be held out as a member. In such a case, he is estopped from denying his membership.
• Holding Shares as Beneficial Owner in the Records of Depository: Every person holding shares of the company and whose name is entered as a beneficial owner in the records of the depository shall be deemed to be a member of the concerned company.

PERSON WHO CAN BECOME A MEMBER: Subject to the Memorandum and Articles, any sui juris (a person who is competent to contract) except the company itself, can become a member of a company.

However, it is important to note the following points in relation to certain organizations and persons:

1. Company as a member of another company: A company is a legal person and so is competent to contract. Therefore, it can become a member of any other company. However, it must be authorised by its Memorandum of Association to invest in the shares of that company or any other company.

1. where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company; or
2. where the subsidiary company holds such shares as a trustee; or
3. where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.

• Partnership firm as a member – A partnership firm, not being a person, cannot buy shares in its own name. It may buy shares as a part of the assets of the firm, though they will have to be held in the name of individual partners. A firm may be a member of any association or company licensed under Section 8 as a charitable institution, but it shall cease to be a member on its dissolution. [S. 8(3)]

• Limited Liability Partnership, being an incorporated body under the statute, can become a member of a company.
• Section 8 company: A non-profit making company licensed under Section 8 of the Companies Act, 2013 can become a member of another company if it is authorised by its Memorandum of Association to invest into shares of the other company.
• Foreigners as members: A foreigner may take shares in an Indian company and become a member subject to the provisions of the Foreign Exchange Management Act, 1999, but in the event of war with his country, he becomes an alien enemy and his power of voting and his rights to receive notices are suspended.
• Minor as member: A member who is not sui juris e.g., a minor, is wholly incompetent to enter into a contract and as such cannot become a member of a company. Consequently, an agreement by a minor to take shares is void ab-initio. It has been held by the Company Law Board (replaced by the Tribunal under the Companies Act, 2013) that an agreement in writing for a minor to become a member may be signed on behalf of the minor by his lawful guardian and the registration of transfer of shares in the name of the minor, acting through his or her guardian.

 A minor may be allotted shares. His name may remain on a company’s register of members, but during minority he incurs no liability.

In Palaniappa Mudaliar v Official Liquidator 1942.

Shares were allotted to a minor on an application signed on her behalf by her guardian. In the winding up of the company neither the minor nor her guardian were held liable as contributories.

On attaining majority and becoming aware of the presence of his name in the register of members, the minor has the option to repudiate his shares within a reasonable time. Where he does not do so he may safely be taken to have accepted his position. His liability as a shareholder commences. This was laid down by the Bombay High Court in Fazulbhoy Jaffar v Credit Bank of India Ltd.1914.

CESSATION OF MEMBERSHIP:

A person ceases to be a member of a company when his name is removed from its register of members, which may occur in any of the following situations:

1. He transfers his shares to another person, the transfer is registered by the company and his name is removed from the register of members;
2. His shares are forfeited;
3. His shares are sold by the company to enforce a lien;
4. He dies; (his estate, however, remains liable for calls);
5. He is adjudged insolvent and the Official Assignee disclaims his shares;
6. His redeemable preference shares are redeemed;
7. He rescinds the contract of membership on the ground of fraud or misrepresentation or a genuine mistake;
8. His shares are purchased either by another member or by the company itself under an order of the Tribunal under Section 242 of the Companies Act, 2013;

­­­­­­_______________________________________________________________