MEMBER OF A COMPANY

[Mr. M. GOVINDARAJAN]

MEMBER OF A COMPANY

Sec. 41 of the Companies Act, 1956 (‘Act’ for short) defines the term ‘member’. There are three categories of members according to this section which are-

(1) The subscribers of 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;

(3) Every person holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the company.

For the type of members no application or allotment is necessary to become a member.  By his virtue of subscribing to the memorandum, he becomes a member.  Such members are not made liable unless allotment of shares is made to them.  Whether such membership is necessary?  This type of automatic membership is considered necessary to create confidence in the investing public as held in ‘Collector of Moradabad V. Equity Insurance Co.,’ – AIR 1948 Oudh 197.  They are deemed to be first members.  

Under the second category to become a member, two conditions must be fulfilled as held by the Supreme Court in Balkrishan Gupta V. Swedeshi Polytex Limited’ – AIR 1985 SC 520-

• There are an agreement to become a member; and
• His name is entered into the register of members.

No one can become a member unless he as agreed in writing to become a member.  The words ‘in writing’ indicate by necessary implication that an application for allotment of shares should be in writing. An agreement to become a member can no longer be inferred or implied from conduct.  A person must give his consent in unequivocal terms by applying in writing for allotment of shares.  In ‘Ram Kishan V. Kanwar Papers Private Limited’ – (1990) 69 Com cases 209 (HP) it was held that the entering of a person’s name in the register of members without there being any agreement on his part ‘in writing’ is contrary to Sec. 41(2) and his name cannot be permitted to remain on the register. This requirement is based on public policy and cannot be waived by the investors.  Such agreements should be with the company after its incorporation. An agreement with promoters will not serve the purpose.   The agreement has to be for some consideration; otherwise the allotment would be void. No oral application will be sufficient to become a member under Section 41(2). The requirement under Section 41(2) that a person must give his consent in writing for allotment of shares applies only when a person becomes a member for the first time.   This provision does not apply to the persons who are already shareholders.   Showing a person’s name in a company’s register of members without his agreement in writing to become a member is a wrongful entry and such entries are liable to be rectified by removing such a name. 

In the case of a person purchasing shares, registration of the transfer with the company is necessary to enable him to become a shareholder or member.  In the case of transmission of shares by operation of law, the company will not register the name of a heir or other legal representative as a member unless intimation of the transmission is received by the company, such information, which must be necessarily in writing, will constitute an agreement in writing to become a member. 

Depositories Act, 1996 provides the third type of members. This Act provides a legal framework for establishment of depositories to record ownership details in book entry form.  Sec.41(3) therefore says that a person holding equity share capital of a company with an entry in the records of a depository as a beneficial owner shall be deemed to be a member of the company.  Thus an entry in the records of a depository is deemed to be an entry in the register of members. 

The Articles of Association of a company is to deal with the procedure for admission to membership.  The definition of the word ‘member’ in Section  41(2) will not control of the meaning of the word ‘member’ in the context of other provisions such as Sec. 397 and Sec. 398.   Whether a member satisfies the requirement of Section 397 and 398 of the Act would be Section 2(27) and not Sec. 41(2).  Sec. 2(27) of the Act defines the term ‘member’ as in relation to a company, does not include a bearer of share warrant of the company issued in pursuance of Section 114.

The following categories can become member of the company:

• A company;
• A co-operative society;
• A trade union;
• Limited Liability Partnership;

The following categories cannot become member of the company:

• Minor;
• Partnership firm;
• Hindu Undivided Family;
• Person of unsound mind;
• Citizens of alien countries;
• Insolvents;
• Trusts;
• NRIs cannot become a member without RBI’s permission.

A member is entitled to exercise all the rights of membership until he ceases to be a member in accordance with the provisions of the Act. A person may cease to be a member of a company by-

• Surrender of shares;
• Disclaimer of an insolvent member’s shares;
• Transfer of shares and registration of transfer;
• Rescission of membership (on the ground of fraud or misrepresentation);
• Sale of shares by the company in the exercise of powers reserved in the company’s articles;
• Forfeiture of shares;
• Death;
• Expulsion from membership;
• Cancellation of entry in the register of members;
• A member seeking to avoid an illegal allotment contravening the provisions of any law or contract and which is therefore, voidable;
• Buy back of shares under Section 77A;
• Redemption of redeemable preference shares under Section 80;
• A reduction of capital under Section 100.

A subsidiary company cannot hold shares in or be a member of its holding company.  The term ‘contributory’ and ‘member’ are not interchangeable since under Section 428 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. 

A member does not cease to be a member merely because winding up of the company has commenced. He continues to be a member so long as the requirements of Section 41 read with Section 150 are complied with.  If more than one person jointly applies for and allotted share in a company each one becomes a member.  The Joint holders can insist on having their names registered in such order as they may require and they may also require their holdings to be split into several joint holdings with their name in different orders, so that all of them may have a right to vote as a first named holder in one or other of the joint holdings.