UNIT 12 MEMBERSHIP OF A COMPANY

Structure
12.0 Objectives
12.1 Introduction
12.2 Member and Shareholder
12.2.1 Definition of a Member
12.2.2 Distinction between Member and Shareholder
12.2.3 Who can become a Member?
12.3 Modes of becoming a Member
12.4 Termination of Membership
12.5 Rights of Members
12.6 Liability of Members
12.7 Register of Members
12.8 Let Us Sum Up
12.9 Key Words
12.10 Answers to Check Your Progress
12.11 Terminal Questions

12.0 OBJECTIVES
After studying this Unit, you should be able to:
• explain the meaning of a member;
• distinguish between a member and a shareholder;
• describe the modes of becoming a member;
• discuss the circumstances when a person ceases to be a member;
• list of rights and liabilities of members; and
• explain the rules relating to the maintenance of the register of members.

12.1 INTRODUCTION
You have learnt that a registered company has a corporate entity of its own
which is distinct from the members who constitute it. The terms ‘member’ and
‘shareholder’ are used interchangeably. But, in law, there is a fine distinction
between the two. In this unit you will learn about the exact meaning of the
term ‘member’, modes of becoming a member, the circumstances under which
a person ceases to be a member, and the rights and liabilities of members.
In addition, you will learn the rules regarding the maintenance of Register of
Members.

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Share Capital and
Membership 12.2 MEMBER AND SHAREHOLDER
12.2.1 Definition of a Member
Section 2 (55) of the Companies Act, 2013 defines a member in the following
words :
1. The subscribers to 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 the
company and whose name is entered in its register of members shall be
a member of the company. In Herdilia Unimers Ltd. v. 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
allottee became the shareholder, irrespective of the allottee receiving the
shares or not.
3. Every person holding shares of the company and whose name is entered
as beneficial owner in the records of a depository.
On this basis, two pre-requisites for a person to become a member of a company
are:
i) the agreement in writing to take shares of the company; and
ii) the registration of his name in its register of members.
Besides, a person may also become a member of a company through the
depository system.
Thus, a person can agree to take shares of a company either as the subscriber
at the initial stage of its formation or in any of the following manner :
a) by subscribing to its further or new shares;
b) on transfer of its shares from an existing member;
c) on acquisition or purchase of its shares (for example, take-over bid,
renunciation of rights shares by an existing member); and
d) on acquisition of its shares by devolution (for example, transmission of shares
to legal heirs of a deceased member, on insolvency, upon merger/
amalgamation through Tribunal’s order);
e) on conversion of convertible debentures or loans pursuant to the terms
of issue of such debenture or loan agreement respectively.
The fundamental difference between the subscribers who agree to take shares
at the time of formation of the company and persons who agree to take shares
later is that the former become members immediately on incorporation of the
company, that is, they automatically become members. The latter, though having
agreed to take shares, become members only after their names are entered
in the register of members of the company.
12.2.2 Distinction between Member and Shareholder
In normal usage the two terms ‘member’ and ‘shareholder’ are used synonymously.
234 But, legally, there is a difference between the two. A shareholder is a person
who holds or owns the shares in a company, whereas a member is one whose Membership of a Company
name is recorded in the Register of Members. In some cases, a person may
be a member but not a shareholder, or he may be a shareholder but not a
member. Following are the main points of difference:
i) A company limited by guarantee having no share capital will have only
members but no shareholders.
ii) When a person transfers his shares, he ceases to be a holder of those
shares but continues to be the member of the company until his name is
replaced by the name of the transferee.
iii) the legal representatives of a deceased member become shareholders
immediately on the death of the member but they do not become members
until their names are entered in the Register of Members.
iv) A person whose shares are forfeited or who has surrendered his shares
to the company may be held liable as a member to contribute to the assets
of the company, if winding-up commences within twelve months of his
ceasing to be a member, though he is no longer the shareholder of the
company.
In Kedarnath Agarwal v. Jay Engineering Works Ltd. it was held that a
member may be a shareholder, but a shareholder may not be a member.
From the above discussion, it should be clear to you that person holding shares
of a company are shareholders, while members are persons who constitute the
company as a corporate entity and whose names are entered in the Register
of Members.
12.2.3 Who can become a Member?
The Companies Act does not specifically lay down as to who can be a member
of a company. It also does not prescribe any disqualification for any person
which would debar him from becoming a member of a company. The Act simply
provides that any person who agrees in writing to become a member of a
company can become a member. You know that a contract to purchase shares
in a company is like any other contract. Therefore, only such persons can become
members of a company who are competent to contract. However, as regards
competency of a member, the provisions of the Indian Contract Act shall apply.
This means that minors, persons of unsound mind and those who have
been disqualified by law from contracting cannot become members of
a company.
Let us now discuss the position of a few special types of members:
i) Minor: According to Section 11 of the Indian Contract Act, a minor is
incompetent to contract, therefore, he cannot become a member of the
company. In Palaniappa vs. Official Liquidator, Pasupati Bank Ltd.,
an application was made by a father as guardian of his minor daughter
describing her as minor. The company went into liquidation. It was held
that the allotment was void and neither the minor nor her guardian could
be held liable as contributories. But, if in ignorance of the fact of minority,
a minor is allotted shares, the company can repudiate the allotment and
remove his name from the Register of Members. The minor may also rescind
the allotment any time during his minority. In either case, the company has
to refund all moneys received from minor in respect of the shares allotted 235
Share Capital and to him. If neither party repudiates allotment, the name of the minor shall
Membership continue to appear on the Register of Members, but in that event a minor
incurs no personal liability.
After the minor attains majority, he can still repudiate his liability even if
he had received dividends during his minority (Sadiq Ali v. Jai Kishori).
But, he cannot repudiate the same if he had received dividends after attaining
majority and intentionally permitted the company to believe him to be a
shareholder (Fazalbhoy v. The Credit Bank of India Ltd.). Thus, it is
in the interest of the companies to allot only fully paid shares to the minor
because otherwise he will not be liable for the unpaid amount of shares.
There is nothing in the Act to bar a minor from becoming a transferee
of fully paid shares. In Miss Nandita Jain v. Bennel Coleman and
Company Ltd., the Company Law Board held that the contract entered
into by a minor for registration of transfer of fully paid shares through the
natural guardian was a valid and binding contract. In such a case the entry
in the Register of Members will be made as follows: “A (a minor) through
................................... guardian”.
If shares are transferred to a minor, the transferor will continue to remain
liable for all future calls on such shares even if he was ignorant of the
minority of the transferee. If the company is aware of the minority of the
transferee at the time of transfer, it can refuse to register the transfer in
favour of a minor unless the shares are fully paid.
ii) Company: A company, being a legal person, is competent to contract.
Therefore, a company may become a member of another company if it
is authorised by its memorandum or articles of association. However, a
subsidiary company cannot become a member of its holding company
(Section 19).
iii) Partnership firm: A partnership firm is not a legal person. Therefore, it
cannot buy shares in its own name. A firm may hold shares in the names
of individual partners who may be entered as joint holders in the Register
of Members. However, it can become member of a non-profit making
company licensed under Section 8 of the Act. A limited liability partnership
created under Limited Liability Partnership Act, 2008 is a separate legal
entity and, therefore, may become a member of a company.
iv) Hindu Undivided Family (HUF): A HUF can have shares in a company
in the name of its Karta. Thus, the Karta will be a member of the company
as his name alone will be entered in the register of members.
v) Insolvent: If any member is declared insolvent, he remains a member of
the company till his name appears on company’s Register of Members.
He is entitled to vote in respect of shares held by him, but the dividend
on shares will be paid to Official Assignee or Official Receiver.
vi) Foreigners: A foreigner may become a shareholder with the general or
special permission of the Reserve Bank of India under the Foreign Exchange
Management Act, 1999. But if he becomes an alien enemy, his rights as
a member shall be suspended.
vii) Joint Holders: The shares of a company may also be held jointly by
two or more persons. In a public company, even joint shareholders are
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 counted as separate members but in a private company, joint holders are Membership of a Company
treated as a single member for purposes of Section 2(68) of the Act. The
joint holders of shares may get themselves registered in any order they
like. The company may pay dividend to the person whose name is first
written in the register of members. Similarly, a notice served by the company
on the joint holder named first in the register of members will be deemed
to have been served properly on all of them. You should, however,
remember that joint holders are jointly and severally liable for payment of
calls. The transfer of shares by the joint holders will be effective only if
it is made by all of them jointly.
viii) Public Office: A public office like income tax department, sales tax
department etc. cannot be a member of a company. It cannot register shares
in its own name. A registered trade union or a registered society can hold
shares in its own name.
ix) President and Governor: Shares in a government company can be held
in the name of the President of India or Governor of a State.

12.3 MODES OF BECOMING A MEMBER

A person may become a member in a company in any of the following ways:
1) By subscribing to the memorandum: A signatory to the memorandum
automatically becomes a member of the company on its incorporation.
Neither application nor allotment of shares is necessary to constitute them
members of the company. Even if his name is not entered in the register
of members, he will still be treated as a member of the company.
2) By application and allotment of shares: A person who agrees in writing
to become the member of the company and whose name is entered in
the Register of Members is also a member of the company. An application
for shares is an offer to take shares and allotment is the acceptance of
that offer. The rules regarding offer and acceptance (Law of Contract) are
applicable. Thus, if a person applies for shares subject to certain conditions,
the allotment by the company must be made according to those conditions;
otherwise the allottee shall not be bound to accept the shares.
3) By transfer of shares: You know that the shares of a public company
are freely transferable. Thus, a person may buy shares in the open market
and get those shares registered in his name. On the registration of transfer
of shares, transferee becomes the member of the company.
4) By transmission of shares: A person may become a member by operation
of law i.e. transmission. On the death of a member, his nominee/legal
representatives have the right to get the shares of the deceased member
registered in his/their names. No instrument of transfer is necessary in this
case.
5) By estoppels/holding out: This arises when a person holds himself out
as a member or knowingly allows his name to remain on the register when
he has actually parted with his shares. In the event of winding-up, he will
be liable, like other genuine members as a contributory (Hans Raj v.
Asthana). But in view of the rule laid down in Section 2(55) of the
Companies Act that the person must agree in writing to be a member,
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Share Capital and a person cannot be treated as a member of a company simply because
Membership his name is entered in the register of members. Thus, he enjoys no rights
of a member though he may be held liable as a member. However, he
may escape liability by applying to Tribunal for rectification of register of
members under section 59.

12.4 TERMINATION OF MEMBERSHIP

You learnt that a person becomes a member of a company when his name
appears in the Register of Members. Accordingly, a person ceases to be a
member of a company when his name is removed from the Register of Members.
A person may cease to be a member in any one of the following ways:
1) Transfer of Shares: When he transfers his shares to another person
and the transfer is duly registered by the company, the name of the
transferor is removed from the Register of Members.
2) Transmission of Shares: On the death of a member, his shares get
transmitted to his nominee/legal representatives.
3) Forfeiture of Shares: Shares may be forfeited for non-payment of calls
and other reasons contained in the articles. The membership terminates
on share forfeiture.
4) Surrender of Shares: When a member validly surrenders his shares
to the company, he ceases to be a member.
5) Insolvency of Member: When a member is declared insolvent, his
shares vest in the Official Receiver or Official Assignee. The Assignee
or Receiver may sell these shares and when the transferee’s name is
entered in the Register of Members, insolvent member cases to be a
member.
6) Winding up of Company: Membership terminates on the winding-up
of the company, but he continues to be liable as a contributory.
7) Repudiation of Contract: If he repudiates the contract to take shares
on the ground of misrepresentation or mistake in the prospectus or on
the ground of irregular allotment.
8) Enforcement of Lien: When the company has a lien on the shares
and the shares are sold by the company to enforce this lien or if the
shares are sold in the execution of a decree of the court, the membership
terminates.
9) Redemption of Shares: If a member is holding redeemable preference
shares, then on their redemption his membership terminates.
10) Tribunal’s Order: When the Tribunal passes an order for the purchase
of shares of a member under Section 242 of the Companies Act, his
membership terminates.

12.5 RIGHTS OF MEMBERS

A number of rights have been conferred on the members by the Companies
Act, 2013, some of the important rights are as under:
i) Right to receive copies of Memorandum and Articles of Association on
238 request and on payment of the prescribed fee.
ii) Right to receive share certificate within the prescribed period of 3 months Membership of a Company
from the date of allotment.
iii) Right to transfer his shares according to the provisions of the Companies
Act and Articles of Association.
iv) Right to have his name entered in the Register of Members.
v) Right of priority to have shares offered in case of increase of capital.
vi) Right to receive notice of meetings, to attend, to appoint a proxy and
vote at the meeting.
vii) Right to participate in the appointment of directors, auditors, etc. at the
annual general meeting.
viii) Right to inspect register of members, register of debenture holders and
copies of annual returns.
ix) Right to apply to the Tribunal for rectification of register of members.
x) Right to request to the Tribunal for calling an annual general meeting
when the Board of Directors fails to call such meeting or apply for an
extraordinary meeting of the company, whenever necessary.
xi) Right to receive copies of the financial statements and Director’s Report
before the annual general meeting.
xii) Right to receive proper notice of resolutions requiring special notice.
xiii) Right to have, on request, minutes of proceedings at a general meeting.
xiv) Right to apply to the Tribunal for ordering an investigation into the affairs
of the company.
xv) Right to present petition to the Tribunal for relief in cases of oppression
and mismanagement.
xvi) Right to present petition to the Tribunal for the winding up the company.
xvii) Right to share in the surplus assets of the company on winding up.
xviii) In the case of a body corporate which is a member, the right to appoint
a representative to attend a general meeting on its behalf.
xix) The right to require the company to circulate resolution under section
111.
xx) Right to apply to the Tribunal under section 48 to have any variation
of shareholders’ rights set aside.
xxi) Right to participate in the removal of directors by passing an ordinary
resolution.
From the above you must have noted that these rights are very valuable to
keep the management of the company on the right track. How far these rights
are exercised effectively by members is a different question.

12.6 LIABILITY OF MEMBERS

Liability of members of a company depends upon the nature of the company.
This is discussed accordingly as follows: 239
Share Capital and i) Unlimited company: Every member of such a company is liable for
Membership all debts contracted by the company during the period when he was
a member. However, a company being a separate legal entity, no
member/shareholder can be proceeded against directly by the claimants/
creditors. Their liability, unlike a partnership firm, is not joint and several.
ii) Company limited by guarantee: Every member is liable to contribute
to the extent of the amount guaranteed by him which is given in the
liability clause of the memorandum.
iii) Company limited by shares: The majority of the companies belong
to this category. In the case of such companies, the liability of a member
is limited to the amount unpaid on the shares held by him. If he has
paid full amount on shares, his liability is nil.
You should remember that all money payable by any member of the company
under the memorandum or articles are a debt due from him to the company.
If a shareholder dies and he was holding partly paid-up shares, then his estate
will be liable or the legal representatives will be liable for the unpaid amount.
Check Your Progress A
1) What do you mean by the term ‘member’ of a company?
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2) Distinguish between a ‘member’ and a ‘shareholde’.
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3) List the different ways of becoming a member of the company.
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4) Give three cases when a person ceases to be the member of a company.
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5) State whether the following statements are True or False:

240 i) The terms ‘member’ and ‘shareholder’ mean the same thing.
 ii) A minor cannot become member of a company. Membership of a Company

iii) A foreign national cannot become a member of a company.

iv) A person ceases to be a member of the company when his shares
are forfeited.
v) A member has a right of priority to have shares offered in case of
increase of capital.
vi) A member cannot repudiate the contract to take shares in the company
on the ground that the prospectus was misleading.

12.7 REGISTER OF MEMBERS

Section 88 requires every company to maintain in the prescribed form and
manner the register of members indicating separately for each class of equity
and preference shares held by each member residing in or outside India.
Every register, as aforesaid, shall include an index of the names included therein.
In case of shares held in depository mode, the register and index of beneficial
owners maintained by a depository shall be deemed to be the corresponding
register and index for the purposes of this Act.
Companies (Management and Administration) Rules, 2014, in this regard, inter
alia, provide as follows:
1. Entries in the Register: The entries in the register maintained under
section 88 shall be made within seven days after the Board of Directors
or its duly constituted committee approves the allotment or transfer of
shares.
2. Place of Keeping: The register shall be maintained at the registered office
of the company unless a special resolution is passed in a general meeting
authorising the keeping of the register at any other place within the city,
town or village in which the registered office is situated or any other place
in India in which more than one-tenth of the total members entered in the
register of members reside.
3. Changes in the Entries: Changes on account of forfeiture, buy-back,
reduction, issue of sweat equity shares, transmission of shares, shares issued
under employees stock option scheme, etc shall be recorded within seven
days after approval by the Board or committee.
The company shall make the necessary entries in the index simultaneously with
the entry for allotment or transfer of any security in the Register of members.
In case of shares held by a trustee,
A declaration specifying the name and other particulars of the person who holds
the beneficial interest in such shares must be filed with the company. As per
Rule 9 of the Companies (Management and Administration) Rules, 2014, the
said declaration shall be filed within a period of thirty days from the date on
which his name is entered
Penalty
If a company does not maintain a register of members or fails to maintain them
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Share Capital and in accordance with the provisions of Act, the company and every officer of
Membership the company who is in default shall be punishable with fine which shall not
be less than fifty thousand rupees but which may extend to three lakh rupees
and where the failure is a continuing one, with a further fine which may extend
to one thousand rupees for every day, after the first during which the failure
continues [Section 88 (5)].
Check Your Progress B
1) What is meant by Register of Members?
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2) State whether the following statements are True or False:
i) It is optional for a company to maintain a register of members.
ii) Register of members may be maintained at a place other than the
registered office by passing an ordinary resolution.
iii) The entries in the register of members must be made within seven
days after the Board of Directors or its duly constituted committee
approves the allotment or transfer of shares.

12.8 LET US SUM UP

Any person whose name appears on the register of members of a company
is known as a ‘member’. The terms ‘member’ and ‘shareholder’ are used
synonymously. But a shareholder may not necessarily be a member and a member
may not necessarily be a shareholder. Companies having no share capital have
members only.
Any person may become a member of a company in any of the following ways:
(i) by subscribing to the memorandum; (ii) by agreeing in writing to take shares;
(iii) by estoppe/holding out; (v) by transfer or transmission of shares.
A person may cease to be a member, if (i) he transfers his shares; (ii) he dies
or becomes of unsound mind; (iii) his shares are forfeited; (iv) he surrenders
his shares; (v) he is declared insolvent; (vi) the company is wound-up; (vii)
he repudiates the contract; (viii) the company enforces the right of lien of shares;
(ix) the shares are redeemed; and (xi) by an order of the Tribunal.
Every company is required to maintain a register of its members in the prescribed
form, containing the prescribed information about the members. The register must
be kept at its registered office of the company.

12.9 KEY WORDS

Member: Anyone whose name is entered in the register of members.
Shareholder: A person who holds or owns the shares.
Register of Members: A register containing the names, addresses and other
242 particulars of all the members.
 Membership of a Company
12.10 ANSWERS TO CHECK YOUR PROGRESS
A 5 i) True; ii) True; iii) False; iv) True ;
v) True; vi) False
B 2 i) False; ii) False; iii) True

12.11 TERMINAL QUESTIONS

1) Distinguish between a ‘share’ and a ‘shareholder’.
2) Who can become a member of the company? Can a ‘minor’, ‘partnership
firm’ become member of the company?
3) Can a person become a member of a company without there being an
agreement in writing?
4) When does a member cease to be a member of the company?
5) Explain briefly the rights and liabilities of a member.
6) Write a note on ‘Register of Members’
Problems
1) A partnership firm of A,B, C and D, wants to register shares in the name
of the firm. The company refuses. What is the way out ? (see pt. 12.2.3)
2) The name of X is found in the register of a company. But X contends
that he is not a member of the company. But company contents that he
orally agreed, so he is a member. Discuss (refer to pt.12.3).

Note: These questions will help you to understand the unit better.
Try to write answers for them but do not submit your answers
to the University. These are for your practice only.

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