Membership of a Company 34

MODULE II CHAPTER – 7

MEMBERSHIP OF A COMPANY.

Synopsis.
A. Who can become a Member of a Company … 34
B. Various Modes of Acquiring Membership of a Company …36
C. What are Modes of Cessation of Membership of a Company? …37
D. What are Rights and Duties of Members of a Company? …38

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A. WHO IS A MEMBER
Section 2(55) “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;
It states that every person holding equity share capital of the company and whose name is entered
as the beneficial owner in the records of the depository shall be deemed to be a "member" of the
concerned company. The subscribers of the memorandum of a company are deemed to have agreed
to become members of the company, and when the company is registered; their names are to be
entered in the registrar of members of the company. Thus, they become the first members of the
company. Thereafter, every other person who agrees in writing to become a member of a company
and whose name is entered in its registrar of members becomes a member of the company. A
member is a person who has interest in a company where the company has no share capital. While a
shareholder is a person having shares in a company.

B. WHO CAN BECOME A MEMBER OF A COMPANY?

Following are the persons who can become the member of a company under
Companies Act 2013:
(a) Any person competent to contract
(b) A company can become a member of another company since they are
artificial legal person
35 Business Law (S.Y.B.Com.) (Sem.–IV)

(c) A firm may hold shares in the names of individual partners who may be
entered as joint holders. Since a firm is not a legal person cannot enter into
contract in its own name.
(d) A trustee who buys shares will be treated as individual member in his
personal capacity. Companies Amendment Act 1963 provides for appointment of
public trustee by the Union Government. Hence the trustee must make a
declaration to the public trust within the prescribed period. A copy of the
declaration must be sent within 21 days to the company after the declaration to
the public trust. Failure to comply with these provisions will invite a penalty of
fine. These provision are exempted in the following cases:
(i) where a trust is not created in writing
(ii) even if the trust is created by an instrument in writing, if the value of the
shares, held in trust does not exceed Rs. One lakh or it exceeds that amount, it
does not exceed Rs. 5 lakh or 25% of the paid up share capital of the company
whichever is less.
e) A registered society can become a member of a company since on registration a
society acquires legal identity.
f) A non-resident can become a member only with the prior permission of the
Reserve Bank of India under Foreign Exchange Regulation Act 1973.
g) An insolvent may continue as a member so long his name appears in the
register of members, notwithstanding the right of official assignee or receiver to
be registered as a member.
h) A minor cannot become a member by direct subscription of shares. This is
based on the principle of an agreement with a minor is ab-initio void (Mohiri Bibi
vs. Dharmados Ghose). However he can become a member on transfer or
transmission of shares made in his favour and for his benefit provided the
transferred or transmitted shares are fully paid and no liability is attached to
them.

B. VARIOUS MODES OF ACQUIRING MEMBERSHIP OF A COMPANY.

A person may become a member (shareholder) of a company in any of the

following ways :
1. Subscribing to Memorandum of Association
A subscriber of the Memorandum of Association shall be deemed to
have agreed to become a member of the company. Hence, neither
application form, nor allotment of shares is necessary.
2. Membership by Allotment of Shares
A person may become a shareholder, if he agrees to take shares in the
company by allotment. Allotment means an appropriation by directors of
shares to a particular persons. It is an appropriation out of previously
inappropriate capital of a company.
3. Membership by Transfer of Shares
If a person buys a share of a company from open market and then
applies to the company to register him as a member, he becomes a
member on registration of his name.
4. Membership by Transmission of Shares
Membership of a Company 36

On the death of a shareholder or member, the survivor or survivor's

where the member was a joint holder, and his legal representatives where
he was a sole holder, shall be the only person recognized by the company
as having all title to his interest in the shares.
5. Membership by Acquiescence and Estoppels
A person is deemed to be a member of a company, if he allows his
name to be put on the registrar of members or otherwise holds himself out
as a member, even if, no agreement to become a member. Thus, his
liability springs into existence as a result of acquiescence and estoppels.
6. Joint Membership
When two or more persons hold shares in a company in their joint
names it is called a joint membership.
7. Membership By Taking Qualification Shares.
No person can be appointed a director of a public company, unless he
takes, or signs and files with the Registraranundertaking to take, from the
company his qualification shares, if any. They are deemed to have become
members automatically as soon as the company is registered. Private
company & company not having share capital cannot be covered under
this provisions.
8. Name in the Records of Depository.
Where the name of a person is entered as a beneficial owner in the records of
the depository, he becomes a member of the company.

C. WHAT ARE MODES OF CESSATION OF MEMBERSHIP OF A COMPANY?

A person may cease to be a member of a company in any one of the
following ways :
1. If he transfers his shares to another person. However, he remains liable
to be placed in the 'B' list for one year, if the company were to go into
liquidation.
2. If his shares are forfeited by the company.
3. If the company sells his shares under some provision in its Articles, as
for example, in the exercise of its rights to enforce a lien.
4. If he validly surrenders shares to the company, where such surrender is
permitted.
5. If his shares are sold in execution of a decree of the court.
6. If he rescinds the contract to take shares on the ground of
misrepresentation in the prospectus or of irregular allotment.
7. If he is adjudicated insolvent. The shares of an insolvent vest in the
Official Receiver or Assignee.
8. If he dies. However, the estate of the deceased member remains liable
until the shares are registered in the name of his legal representative.
9. If redeemable preference shares are redeemed.
10. If the company is being wound up, a member remains liable as a
contributor and is also entitled to share in the surplus assets, if any.
37 Business Law (S.Y.B.Com.) (Sem.–IV)

D. WHAT ARE RIGHTS AND DUTIES OF MEMBERS OF A COMPANY.

I. Liabilities, Duties, and Obligations of Members.
The liability of members of a company depends upon the nature of the
company, as explained below :
1. A Company with Unlimited Liability.
If the company is registered with unlimited liability, each and every member
is liable in full for all the debts of the company, contracted during the period of
his membership.
2. A Company Limited by Guarantee.
If the company is limited by guarantee, each member is bound to contribute
a sum of money, agreed and specified in the liability clause of Memorandum of
Association, in the event of being wound up.
3. A Company Limited by Shares.
Most companies are registered with the liability of members, limited by
shares. Each member is bound to be liable to pay the full nominal (face) value of
the share, held by him; his liability ends there. However, if he has already paid
only a part of the amount on the shares, then his liability is limited to the unpaid
amount on the shares in respect of which, he is a member. In such a case, he is
liable to pay the unpaid amount as and when the calls are made.

II. What are the Rights of Members of a Company?

The following are the rights of the members of a company :
1. Statutory Rights.
The statutory rights are conferred upon members of a company by the
Companies Act. These rights cannot be withheld, taken away, or modified by the
Memorandum or Articles of Association. Some of the Statutory rights of a
member are as under :
a) A member has a right of priority to have shares offered in case of increase
of capital.
b) Right to receive notices of meetings, attend and vote at meetings.
c) Right to transfer shares.
d) Right to receive a share certificate
e) Right to receive copies of annual accounts of the company.
f) Right to inspect the register of members, register of debenture-holders
and copies of annual returns.
g) Right to apply to the Central Government for calling an annual general
meeting if the board of directors fails to call such a meeting.
h) Right to apply to the Court for calling an extraordinary meeting of the
company.
j) Right to participate in appointments of directors and auditors in the
annual general meetings.
j) Right to petition to the Central Government for ordering an investigation
into the affairs of the company.
k) Right to petition to the High Court for relief in cases of oppression and
mismanagement.
l) Right to petition to the High Court for winding up of the company.
Membership of a Company 38

2. Documentary Rights.
These rights are conferred upon the members by the Memorandum and
Articles of Association.
3. Proprietary Rights.
Proprietary rights include the following rights :
a) Right to be registered as a member in the company's register of members,
subject only to valid and authorised transfer of shares.
b) Privilegeofimmunity from personal liability of company's debts.
c) Right to participate in dividend distribution, if ordered in the discretion of
the directors.
d) Finally, right to participate in the distribution of assets in case of
liquidation of the company.
4. Remedial Rights.
Remedial rights include the following rights :
a) Right to information and inspection of company's records.
b) Right to bring representative suits on company's causes of action to
remedy mismanagement or unauthorised acts and thereby to compel the
company to enforce its rights.

REVIEW QUESTIONS.
Questions and Answers available Free with scratch card provided in the book. Please follow
instructions provided for downloading.
1. Who can became a member of a company? In what way may a person cease to be
a member?
2. Enumerate the various modes of becoming a member of a company and state how
a person may cease to be a member.
3. What do you understand by "Register of Members" and "Index of Members"? How
is the "Register of Members" rectified? Who has the right to inspection of
Register?
4. Discuss the rights and duties of a shareholder of a company.
5. Write short notes on the following :
a) Membership by acquiescence. b) Register of Members.
c) Index of Members. d) Foreign Register.
6. Fill in the blanks with correct words, chosen from the statements printed against
each of the following questions :
i) Joint members of a company are treated as _____.
a) two separate members.
b) a single member.
c) double members.
ii) A person can become a member of a company by _____.
a) subscribing to the Memorandum of the Company.
b) subscribing to the Articles of the Company.
c) accepting the Act.
iii) Persons of unsound mind _____.
a) can become directors of a company.
b) can become members of a company.
39 Business Law (S.Y.B.Com.) (Sem.–IV)

c) cannot become members of a company.

iv) A partnership firm _____.
a) can become a member of a company.
b) cannot become a member of a company excepting under Sec. 25.
c) can buy shares in its own name.
v) A registered company _____.
a) cannot become a member of a company.
b) can become a member of another registered company.
c) can become a director of a company.
vi) A non-resident cannot become a member of a company without _____.
a) the permission of the Reserve Bank of India.
b) the permission of Bank of India.
c) the permission of the President of India.
vii) A member of a company with unlimited liability is liable _____.
a) in full for all debts of the company.
b) in proportion to his financial capacity.
c) partly for debts of the company.
[Ans. (i) – (b). (ii) – (a). (iii) – (c). (iv) – (b). (v) – (b). (vi) – (a). (vii) – (a)]
7. Match correctly the words of Group 'A' with those of Group 'B'.
Group 'A' Group 'B'
i) Joint members of a company are a) a single member.
treated as
ii) A person can become a member of a b) two members.
company
iii) A person of unsound mind cannot c) by subscribing to the Memorandum
become
iv) A partnership firm cannot d) by subscribing to the Articles.
v) A registered company e) a member of a company.
vi) A non-resident can become a member f) become a member of a company.
of a company
g) can become a member of another
company
h) with the permission of the Reserve
Bank of India.
i) with the permission of the President
of India.
[Ans. (i) – (a). (ii) – (c). (iii) – (e). (iv) – (f). (v) – (g). (vi) – (h)]
8. State whether the following statements are trueor false and correct them if these are
false :
i) Persons of unsound mind cannot normally become members of a company.
ii) A partnership firm can become a member of a company.
iii) A registered company can become a member of an another company.
iv) A non-resident can become a member of a company with the permission of
the Reserve Bank of India.
v) A member of a company with unlimited liability is liable in proportion to his
financial capacity.
[Ans. (i) True. (ii) False. (iii) True. (iv) True. (v) False]