CS Executive Conecpt – Membership a Company

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14.1     DEFINITION OF ‘MEMBER’                                               (Sec. 2(55) of 2013 Act)

 

‘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; (Subscriber to memorandum)
(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; (Person named in the register of members)
(iii)       every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository. (Beneficial owner of shares)

 

 

14.2     DISTINCTION BETWEEN A MEMBER AND A SHAREHOLDER

 

Nov. 2005       “Every shareholder of a company is also known as a member, while every member may not be known as a shareholder,” Examine the validity of the statement and point out the distinction between a ‘member’ and a ‘shareholder’.

 

May 2012        In what way a ‘Member’ of a company is different from that of a ‘shareholder’ of the company?

Nov. 2012       State whether the following statements are correct or incorrect:

Every shareholder is a member, but every member may not be a shareholder of the company.

 

Basis of distinction Member Shareholder
1.      Definition The term ‘member’ is defined u/s 2(55) of the Companies Act, 2013. The term ‘shareholder’ has not been defined under the Companies Act.
2.      Meaning The term ‘member’ generally means a person whose name is entered in the register of members. The term ‘shareholder’ means a person who holds shares in a company.
3.      Nature of company Every company shall have the minimum number of members, whether it is limited by share capital or guarantee. Only a company having a share capital can have shareholders. A company limited by guarantee and having no share capital does not have any shareholders.
4.      Signatory to memorandum A person who signs the memorandum is a deemed to be a member from the date of registration of the company . A   person   who   signs   the   memorandum  becomes a  shareholder only when the shares are actually allotted to him.
5.      Transferor of shares until change in the register A transferor of shares continues to be a member until his name is removed from the register of members, although he may not be a shareholder. Where a person transfers his shares, he immediately ceases to be a shareholder, even though his name continues to appear in the register of members.

 

14.3     MODES OF ACQUIRING MEMBERSHIP or HOW TO BECOME A MEMBER

 

1.      By subscribing to memorandum §  The fact that a person is a subscriber to memorandum is sufficient to constitute such person a member of the company. The subscribers to memorandum’ of association become members by the fact of subscription (i.e. signing on the memorandum), and not by reason of allotment of shares to him.

§  the subscribers to memorandum become the members of the company immediately on incorporation of the company.

§  No application in writing is required from a subscriber to memorandum.

§  It is immaterial as to whether the shares have actually been allotted to him or not.

§  No entry in the register of members is required to constitute him a member.

§  A subscriber cannot deny his obligation to take shares on the ground that he was induced to sign the memorandum by fraud or misrepresentation.

§  Generally, the subscribers to memorandum are called as ‘founder members’.

2.      By allotment of shares Where shares are allotted to an applicant he becomes a holder of shares. However, he becomes a member only when his name is entered in the register of members.
3.      By transfer The transferee of shares becomes a member only when the transfer of shares is registered by the company, and the name of the transferee is entered in the register of members.
4.      By transmission A person entitled to the shares of a member, as a consequence of transmission, becomes a member when he gives a notice of fact of transmission to the company, and his name is entered in the register of members.
5.      By becoming a beneficial owner of shares A beneficial owner of shares whose name is entered in the records of the depository is called as a member.
6.      By estoppel or acquiescence A person who knowingly permits entering his name in the register of members, becomes a member by estoppel or acquiescence. In other words, if the name of a person is entered in the register of members, although he is not a member, but such person does not object to it (i.e., he does not apply for rectification of register of members), he becomes a member by estoppel.

 

Nov. 2006       Whether a person who does not object to including his name in the register of members is liable to pay unpaid calls on shares?

(Sec. 164)

 

P 14.3A. X had applied for the allotment of 1,000 shares in a company. No allotment of shares was made to him by the company. Later on, without any further application from X, the company transferred 1,000 partly-paid shares to him and placed his name in the Register of Members. X, knowing that his name was placed in the Register of Members, took no steps to get his name removed from the Register of Members. The company later on made final call. X refuses to pay for this call. Referring to the provisions of the Companies Act, examine whether his (X’s) refusal to pay for the call is tenable and whether he can escape himself from the liability as a member of the company.

Ans.

Register of members is a prima facie evidence –        of any matters directed or authorised to be inserted therein by the Act (Sec. 164).
X is a member by estoppels –        since he knowingly permitted entering his name in the register of members.
X is liable to pay the final call –        since a member by estoppel is liable to pay the unpaid calls.

 

14.4     CAPACITY TO BECOME A MEMBER (WHO CAN BECOME A MEMBER)?

 

Nov. 2011       Examine the position of a minor in relation to obtaining membership in a company under the provisions of the Companies Act.

 

1.      Minor Consequences where a company allots shares to a minor If the company allots shares to a minor in ignorance of minority, following consequences shall follow:

(i)     The minor shall not be liable to pay any calls remaining unpaid on the shares held by him.

(ii)   The guardian cannot be compelled to pay the calls due on the shares held by a minor.

(iii) The minor can repudiate the allotment made to him. The minor shall be entitled to receive back the money paid by him.

(iv) The company can repudiate the allotment made to the minor. The minor shall be entitled to receive back the money paid by him.

Consequences where minor attains majority (i)     On attaining majority, the minor does not automatically become a member in a company.

(ii)   If on attaining majority, the minor does anything which shows that he has accepted the membership, the minor shall be henceforth deemed to be a member.

A minor can hold fully paid shares §  There is no legal bar on minor becoming a member of a company, provided minor acquires the shares by way of transfer and the shares
are fully paid up, and no further obligation or liability is attached to such shares [Devan Singh v Minerva Films Ltd.]. Similar judgement
was delivered in S. L. Bagree v Britannia Industries Ltd.

§  In such a case, the shares shall be registered in the name of the minor, i.e. the share certificate shall be made in the name of the minor and the name of the minor shall be entered in the register of members. There is no question of entering the name of the guardian in the share certificate or register of members.

2.      Company §  A company can become a member of any other company only if it is specifically authorised by the memorandum to purchase shares of any other company.

§  A subsidiary company cannot become a member of its holding company (Sec. 19 of the Companies Act, 2013).

3.      Co-operative Society and Society §  A cooperative society is a legal person, and so it has power to hold property. Therefore, a cooperative society can become a member in a company.

§  A society when registered under the Societies Registration Act, 1860 is a legal person, and so it can become a member in a company.

4.      Trade union A Trade Union registered under the Trade Unions Act, 1926 is legal person (i.e., a body corporate) capable of holding property. Therefore, a trade union can become a member in a company.
5.      Partnership firm §  A firm is not a legal person. It cannot hold property in its own name; the property is held in the names of the partners on behalf of the firm. Therefore, a firm cannot become a member in a company.

§  However, a partnership firm may become a member in a company licensed u/s 8.

6.      HUF Hindu Undivided Family (HUF) is not a separate legal person. Therefore, an HUF cannot become a member in a company in its own name.
7.      Trust A trust is not a separate legal person. Therefore, the shares cannot be allotted or transferred in the name of a trust.
8.      Joint holders Two or more persons may hold the shares in a company in their joint names.
9.      Foreigner §  A foreigner can become a member in a company by complying with the requirements of Foreign Exchange Management Act, 1999.

§  In case a war breaks out with such foreign country, the foreigner cannot enforce any right available to the members.

10.  Government CG or SG can become a member in a body corporate.
11.  Insolvent §  The shares of the insolvent vest in the official assignee or the official receiver, as the case may be. However, an insolvent continues as a member until his shares are sold by the official assignee or the official receiver, as the case may be.

§  Until an insolvent is discharged, he cannot become a member.

§  Notice of general meeting is also given to the official assignee or official receiver, as the case may be. However, the insolvent has the right to vote in the general meeting.

 

Nov. 2002       Whether a minor on his father is liable to pay calls where shares are allotted to a minor in response to an application signed by the father of minor?

 

P 14.4A. A company issued 20partly paid equity shares and registered them in the name of the minor describing him as minor. The father of the minor signed the application on the minor’s behalf. After some time company went into liquidation. The company filed a suit against father of the minor to recover the remaining amount on the shares. Whether the company will succeed? Advise.

Ans.

The company cannot recover unpaid calls on shares –        from the minor since an allotment of partly paid shares to a minor does not bind him to pay the unpaid calls;

–        from the father of the minor since signing an application for shares on minor’s behalf does not create any contractual relationship between the father of minor and the company.

 

Nov. 2004       Whether shares can be allotted to a minor and what Is the contractual liability of a minor?

 

P 14.4B. M/s Honest Cycles Ltd. has received an application for transfer of 1,000 equity shares of Rs. 10 each fully paid up in favour of Mr. Balak On scrutiny of the application form it was found that the applicant is minor. Advise the company regarding the contractual liability of a minor and whether shares can be allotted to Balak by way of transfer.

Ans.

The company is advised to transfer fully paid, shares to Mr. Balak –        since a minor can become a member, if the shares are fully paid up;

–        since there is no question of liability of minor if the shares are fully paid up.

 

June 2009       Whether partly paid shares can be transferred to a minor?

 

P 14.4C. X, a minor purchased 500 equity shares of Rs. 10 each of a company, on which only Rs. 5 per share were paid, from the Mumbai Stock Exchange, and submitted an application to the company for transfer of these shares in his name. Examining the provisions of the Companies Act, decide whether these shares can be transferred to X.

Ans.

The company is advised not to transfer portly paid shares to X, the minor –        since a minor is not bound to pay the unpaid calls;

–        since such transfer does not create any contractual relations between the minor and the company;

–        since, if the shares are transferred to the minor, the minor or the company may afterwards, repudiate such transfer.

 

Nov. 2010       Whether the cancellation of allotment of fully paid shares to minor is valid, and whether company is entitled to forfeit the money paid by minor?

 

P 14.4D. RSP Limited allotted 500 fully paid-up shares of Rs. 100 each to Z, a minor, in response to his application without knowing that he was a minor and entered his name in the Register of members. Later on, the company came to know of the fact. The company cancelled the allotment and struck-off his name from the Register of members and also forfeited his entire share money. He filed a suit against the action of the company. Decide whether Z would be given any relief by the court under the provisions of the Companies Act.

Ans.

The cancellation of allotment of shares to minor is not valid –        since a minor can become a member, if the shares are fully paid up;

–        since there is no question of liability of minor if the shares are fully paid up.

Forfeiture of money paid by the minor is not valid –        since the company has no right to cancel the allotment to minor;

–        since even in a case where partly paid shares are allotted to a minor, and afterwards such allotment is repudiated by the company, the company has no right to forfeit the money paid by the minor, i.e. the minor is entitled to receive back the money paid by him.

 

14.5 RIGHTS OF A MEMBER UNDER THE COMPANIES ACT, 2013

  1. Right to obtain the share certificate from the company (Sec. 56).
  2. Right to have his name entered in the register of members (Sec. 88).
  3. Right to transfer his securities (subject to the restrictions contained in the articles and the Act) (Sec. 44 and 58).
  4. Right to receive the notice of general meetings, attend the general meetings and vote thereat (Sec. 101).’
  5. Right to receive the dividend, where a dividend is declared by the company (Sec. 123).
  6. Right to apply to the Court seeking an injunction restraining the directors from paying dividend out of capital (Sec. 123).
  7. Right to inspect and obtain extracts and copies of the registers and indices of members, debenture-holders and other security holders, and annual returns (Sec. 94).
  8. Right to obtain copies of Memorandum and Articles (Sec. 17).
  9. First tight to have the shares offered to him in case of further issue of shares (i.e. the right of pre-emption) (Sec. 62).
  10. Right to apply to the Court to set aside any variation in the rights attached to any class of shares (Sec. 107 of the Companies Act, 1956).
  11. Right to give a special notice so as to move a resolution requiring special notice (provided he is eligible as per the provisions of Sec. 115) (Sec. 115).
  12. Right to receive a copy of special notice when special notice is served on the company (Sec. 115).
  13. Right, to obtain a copy of the minutes of the genera! meeting (Sec. 119).
  14. Right to requisition an Extra-ordinary General Meeting (EGM) of the company (provided he is eligible as per the provisions, of Sec. 100) (Sec. .100).
  15. Right to vote at a.general meeting in respect of any matter requiring an ordinary resolution or a special resolution (Sec. 107 and 109).
  16. Right to vote by means of electronic mode in respect of any matter requiring an ordinary resolution or a special resolution. (Sec. 108).
  17. Right to vote by postal ballot when a resolution is put to vote by the company by way of postal ballot (Sec. 110).
  18. Right to obtain copies of profit and loss account, balance sheet, auditor’s report and other documents (Sec. 136).
  19. Right to- make an application.to CLB seeking an order for calling the AGM (Sec. 167 of the Companies Act, 1956).
  20. Right to make an.application to CLB seeking an order for calling an EGM (Sec. 186 of the Companies Act, 1956).

 

 

 

14.6     HOLDING SHARES BY A COMPANY IN ITS HOLDING COMPANY

(Sec. 19 of 2013 Act)

 

1.      Prohibitions w.r.t. shares in holding company (a)    A company shall not ( either by itself or through its nominees)  hold any shares in its holding company.

(b)   a holding company shall allot or transfer its shares to any of its subsidiary companies.

2.      Effects of contravention Any allotment or transfer of its shares by a holding company to any of its subsidiary companies shall be void.
3.      Exceptions The prohibitions shall not apply in the following 3 cases:
(a)   Shares held as a legal representative Where the subsidiary company holds such shares as the legal representative of a deceased member of the holding company.
(b)   Shares held as a trustee Where the subsidiary company holds such shares as a trustee.
(c)    Shares held before the company became a subsidiary Where the subsidiary company is a shareholder even before it became a subsidiary company of the holding company.
Out of above 3 cases, the subsidiary shall have a right to vote at a meeting of the holding company only in case (a) and case (b).

 

 

May 2014        Company already holding shares in another Becomes a subsidiary of such other company – Consequences                          (Sec.  19 of 2013 Act)

 

P 14.5A. Anson Limited held equity shares in Booban Limited. Later on Anson Limited became a subsidiary company of Booban Limited. Decide under the Companies Act, whether it is necessary for Anson Limited to surrender the equity shares of Booban Limited?

Ans.

Anson Limited con continue to hold equity shares in Booban Limited –        since Anson Limited became a shareholder in Booban Limited even before it became a subsidiary company of Booban Limited.
Anson Limited shall not have any right to vote –        in any general meeting of Booban Limited.

 

14.7     CESSATION OR TERMINATION OF MEMBERSHIP

  1. Forfeiture of shares
  2. Surrender of shares
  3. Transfer of shares
  4. Transmission of shares
  5. Sale of shares of a member by the company, where the company has exercised lien on shares.

 

14.7     ‘TRUE OR FALSE’

 

State whether the following statements are True or False and give reasons (1 Mark each):

 

1. May 2007 A Minor also can become a member of a Company.

Ans. The given statement is false.

Reason: A minor Has no capacity to contract or to incur any obligation. So, he cannot become a member. However, transfer of fully paid up shares to a minor is permissible.

2. Nov. 2009 A transferee becomes a member of the company when the instrument of transfer is submitted with the company.

Ans. The given statement is false,

Reason: As per Sec. 2(55) of the Companies Act, 2013, every 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. Thus, the transferee becomes a member only when the company gives effect to the transfer deed and enters the name of the transferee in the register of members.

 

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