Introduction:
A company is a separate legal entity but what makes it an entity is its members only. Members are the people who provide a separate entity to the company for the time being.
In the case of an Unlimited Company, members are the people who are liable towards the company, to contribute the amount required to pay off its debts and liabilities during its winding up, each in consonance with the extent of their interests in the Company.
Members are the people who are liable under the Guarantee clause mentioned in the Memorandum of Association of the Company, in case of a Company limited by guarantee.
In a Company limited by Shares, the shareholders are considered to be its members. This is because membership in such companies can be acquired only by subscribing to its shares and not by any other method. Though, both the terms( Members and Shshareholderscan be used interchangeably), there might be exceptions to this scenario.
e.g. A person may have become a shareholder in the company by transfer of shares, but he will not become a member until his name is not entered in the register of members and the transfer is not registered by the company in its books.
Also, a person may have transferred his shares but will continue to be a member till the time this transfer is not registered in the books of the company and his name removed from the Company’s[1]register of members.
Meaning of a ‘Member’
According to Section 2(55) of the Companies Act, 2013, a member, about a company, means-
(1) The subscribers to the memorandum of a company who 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 shares of a company and whose name is entered as a beneficial owner in the records of a depository shall be deemed to be a member of the concerned company.
There are 2 cumulative conditions[2] that ought to be fulfilled if a person wants to become a member of a company. These are:
- Agreement to become a member
Only a person who is competent to contract[3] can .enter into an agreement to become a member of a company. If the person is not competent to contract, he cannot become a member of a company as well.
- The name of the person should be entered in the Company’s register of members.
Methods of Obtaining Membership
According to Section 2(55) of the Indian Companies Act, 2013, a person can obtain membership of a company by:
- By subscribing to the Memorandum of Association
- Agreeing to become a member in the Written form
- Holding shares as a beneficial owner
Subscribing to Memorandum of Association
A person can become a member of the company by subscribing to its MoA. By subscribing to the MoA, the person becomes a member and is also liable to the extent of shares he has subscribed for. No application or allotment of shares is required to become a member under this method.
A subscriber to the MoA of a company can not terminate the contract of purchase of the shares even if the promoters have done any fraud.
When a person signs a memorandum, he becomes entirely liable to take the shares. His liability will not be ignored even if there is any delay in fulfilling the obligations. His liability will continue till the time the company gets liquidated and he is also liable to pay the debts of the creditors by bringing in the amount payable by him.
By Application and Allotment
A person can apply for the shares of a company and become a member when these shares are allotted to him. An allotment notice is given to the person and his name is entered in the register of members.
By Transfer of Shares
A person can become a member by getting the shares of an existing member transferred in his name and getting this transfer recorded in the Company’s register of members. The transfer of shares takes place according to Section 56 of the Indian Companies Act and Articles of Association.
By Transmission of Shares
A person can become a member of a company by operation of law also. Anyone can become a member if he is a legal heir of a deceased member. The shares get transmitted to the heir in case of the death of an existing member and the heir, thus, becomes a member.
By Estoppel
If a person, gives his consent to his name being used as a Company’s member, then he is considered to be one. A person also becomes a member if he represents himself as a member and lets him be represented as a member by the company as well.
Holding Shares as a Beneficial Owner
Every person having shares of the company and whose name is entered in the records of the depository as a beneficial owner is a member of the specific company.
Who Can/Cannot Become a Member?
According to the MoA and AOA, every person can become a member of a Company. Only the company itself, cannot become its member. Below mentioned are some categories who can become a member:
The Company as Another Company’s Member
A company can become a member of any other company if it is recognized by the MoA to invest in the shares of the company. A company can invest in other company’s shares as it holds the identity of a lawful person and is competent to enter into contracts. But it cannot become its member.
As a general rule, a subsidiary of a company cannot be a member of its Holding Company[4]. But certain exceptions to this rule are mentioned below-
- where the subsidiary company held the shares as a lawful representative of a deceased member of the Holding Company.
- where the subsidiary company has the shares as a trustee.
- where the subsidiary company was a shareholder before becoming a subsidiary of the Holding Company.
Partnership Firm
A partnership firm cannot become a member of any other company as it does not have any separate legal entity from its partners and thus, cannot become a member of any company in its own name. Only companies registered under Section 8 can become a member of another company.
Limited Liability Partnership
A limited Liability Partnership firm [incorporated body under the Limited Liability Partnership Act, 2008] can be a member of any other company.
Section 8 :Company as a Member of the Company
A Section 8 company can become a member of another company only if it is mentioned in its Memorandum of Association that it can invest in other Company’s shares.
Foreigners as Members
A foreigner can become a member of a Company. but the foreigner will lose his voting rights as well as other rights as a shareholder as he will cease to have effect as he would be considered as an alien enemy.
Minor as a Member
A person who is dependent on someone else, such as a minor who is not able to enter into a contract, cannot become a member of a company. A minor’s agreement to take shares in a company is a void agreement from the beginning. A minor, on attaining the age of majority can reject all his liabilities on the basis of his minority. If the person repudiates his shareholding, the company cannot plead estoppel on the basis that he has been receiving the dividends regularly or he has misrepresented his age in the application itself[5].
Insolvent as a Member
An insolvent can remain a member of the company till the time his name is present in the register of members. The person will lose all his beneficial interests in the Company’s shares but will continue to enjoy his voting rights. His dividends will be paid to the Official Assignee or Receiver[6].
HUF as a Member
Though a HUF setup is not a legal person, for the purpose of the Income-tax Act,1961, it is considered to be a person. A HUF can become a member of a company and invest in its shares. The shares are registered in the name of the Karta[7].
Pawnee
A Pawnee is not considered as the shareholder of the shares pledged. It is only the Pawer who is considered to be the company’s member and enjoys all the rights of that of a member.
Society as a Member
A society can also become a member of a company as it is considered to be a ‘person’ who has a separate legal entity from its members who constitute it.
Persons Taking Shares in Fictitious Names
If a person purchases shares of a company by using an imaginary/ fictitious person and becomes a member, he is liable just like the members to pay off the debts. Apart from this, the person will also be criminally liable under Section 38 of the Indian Companies Act,2013, which provides the punishment for the commission of a fraud.
Trade Union as a Member
Any trade union which is registered under the Trade Union Act is entitled to get registered as a member of any company and hold shares in its own name[8] It can be registered as a member and can hold shares in a company in its own corporate name.
Conclusion
The members of a company are the people who give a separate legal entity to it. A member can also be called a shareholder of the company as membership in a company can only be obtained by subscribing to its shares. Any person can become a member of a company by subscribing to its Memorandum of Association, signing a written agreement but the person has to be a major to do so, and by holding shares as a beneficial owner.
The Indian Companies Act,2013 does not prohibit any person to become a member of a company. But there are strict regulations to stop the people who do not have any existence in the eyes of law and fraud in subscribing to the shares of the company. This is done in order to safeguard the interests of the existing members of the company and to protect them from any malpractices which people adopt to benefit themselves.
References:
[1]Section 88 of the Companies Act, 2013 (‘the Act’)
[2] Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) 58 Com Cases 563
[3]The Indian Contract Act, 1872 Section 11
[4]Indian Companies Act,2013 Section 9
[5]Sadiq Ali v. Jai Kishori, (1928) 30 Bom. L.R. 1346
[6]Morgan v. Gray, (1953) All E.R. 213
[7]Vickers Systems International Limited v. Mahesh P. Keshwani (1992) 13 Com Cases 317 (CLB)
[8]All India Bank Officers Confederation v. Dhanlakshmi Bank Ltd., (1997) 90 Com Cases 225
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