members

according to section 2(55) of the companies act :

1-the subscribers to the memorandum of a company who shall be deemed to have agreed to
become members of the company ,and on 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 thecompany;

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.

who can be a member

the company law 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.
The relevant points in this context are as:

1- 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).

2- partnership firm - a partnership firm is not a legal person so it cannot buy shares in its own name.
therefore it cannot become a member of a company.

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.

3-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.

4-Foreigners : A foreigner may take shares in an Indian company and become a member subject to
the provisions of the Foreign Exchange Management Act, 1999.But if he becomes an alien enemy, his
rights as a member shall be suspended.

5-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.

if article do not permit then he cannot continue as member.

6-Section 8 company - A non-profit making company licensed under Section 8 of the Companies

Act,2013 can become a member of another company if it is authorized by its Memorandum of

Association to invest into shares of the other company.

7- minor- A member who is a minor, is wholly incompetent to enter into a contract and as such
cannot become a member of a company.

An agreement in writing for a minor to become a member of the co. may be signed on behalf of the
minor by his lawful guardian. and the registration of transfer of shares in the name of the minor,
especially where the shares are fully paid cannot be refused on the ground of the transferee being a
minor.

If shares are transferred to a minor, the transferor will remain liable for all future calls on such shares
so long as they are held by the minor even if the transferor was ignorant of his minority.

8- President and Governor: Shares in a government company can be held in the name of the
President of India or Governor of a State.

9- 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 counted as separate members but in a private company,
joint holders are treated as a single member
modes of becoming a member

1-By subscribing to the memorandum

2-By application and allotment of shares

3-By transfer of shares

4-By transmission of shares

termination of membership

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-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.

2- 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 ceases to be a member.

3-Winding up of Company: Membership terminates on the winding-up of the company, but he

continues to be liable as a contributory.

4-Surrender of Shares: When a member validly surrenders his shares to the company, he ceases to
be a member.

5-Transmission of Shares: On the death of a member, his shares get transmitted to his nominee/legal
representatives.

6-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.

7-Redemption of Shares: If a member is holding redeemable preference shares, then on their

redemption his membership terminates

8-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.
categories of members

In company law, the categories of members are often defined based on the type of shares they hold
and the rights

associated with those shares. Here are common categories of members in company law:

1. Equity Shareholders/Ordinary Shareholders:

These are the regular members of the company who hold ordinary shares. They have voting rights at
general meetings and may receive dividends if declared.

2. Preference Shareholders:

Holders of preference shares are entitled to a fixed rate of dividend before any dividend is paid to
ordinary shareholders.

They typically do not have voting rights, or their voting rights may be limited to certain matters
affecting their rights.

3. Cumulative Preference Shareholders:

Cumulative preference shareholders are entitled to receive any unpaid dividends from previous years
before ordinary shareholders receive dividends.

If the company does not make a profit in a particular year, the unpaid dividends accumulate and
must be paid in future profitable years.

4-Non-Cumulative Preference Shareholders:

Non-cumulative preference shareholders do not have the right to accumulate unpaid dividends from
previous years.

If the company does not declare a dividend in a particular year, the right to that dividend is lost.

5.Convertible Preference Shareholders: Holders of convertible preference shares have the option to
convert their preference shares into ordinary shares after a specified period or under certain
conditions.

6. Redeemable Shareholders: Some companies issue redeemable shares, which can be bought back
by the company after a certain period or under specific conditions.

7. Treasury Shareholder: Shares that have been bought back by the company and are held in its
treasury are sometimes considered a distinct category. These shares do not have voting rights or
receive dividends.

8. Nominee Shareholders: Certain shareholders may hold shares on behalf of others, acting as
nominees. These nominees may not have all the rights associated with the shares they hold.
rights of member

rights of member are statutory rights - the right that are lawfully attained by a member under the
provision of companies act .

When once a person becomes a member he is entitled to exercise all the rights of a member until he
ceases to be a member.

1- Right to receive copies of Memorandum and Articles of Association on

request and on payment of the prescribed fee.

2-Right to receive share certificate within the prescribed period of 3 months

from the date of allotment.

3-Right to transfer his shares according to the provisions of the Companies Act and Articles of
Association.

4- Right to have his name entered in the Register of Members.

5- Right of priority to have shares offered in case of increase of capital.

6- Right to receive notice of meetings, to attend, to appoint a proxy and vote at the meeting.

7- Right to participate in the appointment of directors, auditors, etc. at the annual general meeting.

8- Right to inspect register of members, register of debenture holders and copies of annual returns.

9- Right to apply to the Tribunal for rectification of register of members.

10- 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.

11- Right to receive copies of the financial statements and Director’s Report before the annual
general meeting.

12- Right to receive proper notice of resolutions requiring special notice.

13- Right to have, on request, minutes of proceedings at a general meeting.

14- Right to apply to the Tribunal for ordering an investigation into the affairs of the company.
15- Right to present petition to the Tribunal for relief in cases of oppression and mismanagement.

16-Right to participate in the removal of directors by passing an ordinary resolution.

17-Right to share in the surplus assets of the company on winding up.

liabilities of members

Liability of members of a company depends upon the nature of the company and its legal structure .

here are some common type of liabilities that members may have :

liability for member In Unlimited company : in a unlimited company the liability of members is
unlimited that means in case when company's assets are not sufficient to pay back the debt the
personal property of the members will be sold to set off the debt.

liability for member in Company limited by shares: 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.

liability for member in Company limited by guarantee: Every member is liable to contribute

to the extent of the amount guaranteed by him in the event of winding up.

Liability for Misconduct: Members can be held personally liable if they engage in fraudulent
activities, misrepresentation, or any illegal actions that cause harm to the company or its
stakeholders.

liability for compliance : members are responsible for ensuring that company complies with relevant
laws and regulations. failure to do so may result in legal consequences.
 difference between transfer and transmission

BASIS TRANSFER TRANSMISSION

definition Transfer refers to voluntary act Transmission refers to
of changing ownership of automatic transfer of shares
shares from one upon the death , bankruptcy or
person(transferor) to another insolvency of a shareholder.
person (the transferee)
nature It is a voluntary action initiated It is an involuntary process
by shareholder who wishes to triggered by certain events
sell or transfer their shares to such as the death of a
another party. shareholder or his insolvency.
process The transfer process involves The process of transmission
the completion of a share typically involves the legal heir,
transfer form which is typically executors or representatives of
provided by the company .the deceased shareholder
transferor signs the form and submitting the necessary
delivers it to the company documents like death
along with the share certificate to the company to
certificate. effect transmission.
consideration In most cases a transfer of Unlike a transfer transmission
shares involves a may not involve a specific
consideration(price) consideration .the ownership is
negotiated between the transferred as a result of a
transferor and transferee. legal process.
approval The company’s board of While approval may still be
directors or a relevant required from the company,it
authority usually needs to is often a formality to ensure
approve the transfer. This is to that the heir of the
ensure that the new shareholder has a legal right
shareholder meets any on it.
eligibility criteria that the
company has the right of first
refusal.
Borrowing power of the company

Every company needs additional capital for its business from time to time.

The company can meet such requirement of capital to an extent by the issue of share , but it is not
always possible to get the capital through the issue of shares as and when it is required.

As a result the company has to borrow money to meet the requirement.

The Companies Act does not expressly empower companies to borrow money.

Normally most companies are empowered by their articles to borrow money for the purpose of their
business.

It has been held that in case of GENERAL AUCTION ESTATE CO. VS SMITH that even if it is not
explicit in a trading company’s articles , every company has the right to borrow money and to charge
its assets by way of security for the amount borrowed.

Non-trading companies cannot seek loan unless it is expressly stated in their memorandum and
articles that they are authorised to do so. A company’s memorandum defines the maximum limit to
which the company may take loans whereas their article define the procedure for taking such loans.

Where the memorandum of a company has stated the limit of a company’s right to borrow money
any borrowing beyond such limit is beyond the authority of the company.

In such a case that loan is invalid and is not deemed to be a debt against the company.

Any such contact is void ab initio and cannot be implemented even if all members of the company
confirm the contract.

A power to borrow, whether express or implied, includes the power to charge the assets of the
company by way of security to the lender.

Every trading company has an implied power to borrow but it is wise to include an express

power to borrow in the objects clause of the Memorandum. Non-trading companies, however,

must be expressly authorised to borrow by their Memorandum

methods of borrowing

Almost all trading companies , in the course

Debenture

A debenture is a type of debt instrument that represents a formal acknowledgment of loan and an
agreement to repay the borrowed amount.

When a company issues debenture , it is borrowing money from investors or the public and
promising to pay back the principal amount at a specified future date , along with periodic interest
payments.

Features

1-intrument of debt- debenture is a instrument of debt which means that the debenture holder
become creditors of the company

2-fixed maturity date – debentures have a specific maturity date , indicating when the issuer must
repay the principal amount to the debenture holder.

3-fixed interest rate-debentures have fixed rate of interest which is payable at periodic intervals. and
the interest is charge against profit means it will be paid even in case of loss.

4-no voting rights- debenture holders do not get any voting rights. this is because they are creditors
of the company not the owners.

5-various types- debentures are of various types each type has its unique characteristics

Some of the types are convertible , non convertible ,redeemable debenture , non-redeemable ,etc.
basis debenture share
nature Part of borrowed fund Considered as part of owners
fund

Known as Debenture holders are known Shareholders are owners of

as creditors of company the company
Rate of return It has fixed rate of return It has fluctuating rate of return
which is known as interest depends on the profit of the
year and which is known as
dividend.
Voting right It does not have voting rights It does have voting rights.
risk Debenture holders are Shareholders are at greater
relatively safe risk
repayment Will be paid after a specific It will not be repaid through
period the whole life of the business
Priority as to repayment In case of winding up the In case of winding up the
company the payment made company the payment made
to debenture holders before to equity shareholders at the
the payment made to equity end.
shareholders.
convertible Debenture can be converted to Share cannot be converted to
shares debenture
Methods of borrowing

A company can adopt a number of methods to satisfy its long-term and short-term financial needs.

The short-term borrowing and long term term borrowing of a company are briefly explained below.

1-overdraft – an overdraft is a common form of short term borrowing that allows a company to
withdraw more money than is available in its account up to a specified limit.

2-loan from bankers – companies can approach banks for short term loans to meet immediate
financial needs.these loans are typically repaid within a year and may be unsecured or secured by
the company’s assets.

3- commercial paper- it is a short term debt instrument that companies issue to raise funds.

It is a promissory note ,typically unsecured where a company promises to repay the face value of the
paper on a specific maturity date. It allows them to raise funds quickly and efficiently in the capital
markets without the need for lengthy borrowing processes.

4- bills of exchange- a company can issue a bill of exchange to a creditor ,instructing them to pay a
specified amount at a future date . the creditor can then discount the bill with a financial institution
to receive immediate funds.

5-promissory notes- similar to bills of exchange , promissory notes are written promises to pay a
certain amount on a specified future date . companies can use promissory notes as a source of short
term borrowing either by negotiating them directly with creditors or by discounting them with
financial institutions.

Long term-methods of borrowing

1-bank loans- companies can secure long-term loans from banks to fund major projects, expansions
or capital expenditures. these loans often have a fixed repayment schedule ,with monthly or
quarterly instalments over an extended period.

2-coporate bonds-companies can issue bonds to raise long-term capital . investors purchase these
bonds, effectively lending money to a company and in return they receive periodic interest payments
and the return of the principal amount at maturity.

3-debentures-debenture are long-term debt instruments issued by companies. they carry fixed
interest rate and have a specified maturity date.
4-mortgages- if a company needs to finance the acquisition of real estate or other significant assets,
it may take out a mortgage. The assets serves as collateral and the company repays the loan over an
extended period.
Mortgage

In simple terms, a mortgage is a type of loan specifically used for buying real estate, such as a house
or a piece of land. When you take out a mortgage, you are borrowing money from a lender (usually a
bank or a mortgage company) to purchase a property. The property itself serves as
collateral for the loan.

A mortgage is a type of loan specifically used for purchasing real estate. It involves using the property
itself as collateral for the loan. Here are some key features of a mortgage:

Here's how a typical mortgage arrangement works:

1.Loan Agreement: The borrower (mortgagor) and the lender (mortgagee) enter into a loan
agreement, outlining the terms and conditions of the loan, including the loan amount, interest rate,
repayment schedule, and other relevant details.

2.Collateral: As part of the agreement, the borrower provides the property being purchased as
collateral for the loan. This means that if the borrower fails to repay the loan according to the
agreed-upon terms, the lender has the right to take possession of the property through a legal
process known as foreclosure.

In a traditional mortgage, the property being purchased (the house) typically serves as the collateral
or security for the loan. This means that if you can't repay the loan, the lender has the right to take
ownership of the house through a legal process called foreclosure.

However, there are other types of loans where you can use assets other than the property you're
buying as security. These are often referred to as "secured loans" where you provide collateral to
secure the loan. The collateral could be other valuable assets such as a car, investments,
or even savings

The mortgagor is the borrower who receives the loan and pledges their property as collateral, while
the mortgagee is the lender who provides the loan and takes a security interest in the property.

The mortgage agreement outlines the rights and responsibilities of both parties during the term of
the loan. If the borrower fails to repay the loan according to the agreed-upon terms, the mortgagee
may have the right to take ownership of the property through foreclosure.
Types of mortgage

There are several types of mortgages each designed to meet different financial needs and
preferences .here are some common type of mortgages.

1-fixed - rate mortgage (FRM) -

Charges

Whenever a company borrows money by way of loans whether term loan or working capital loans
from financial institutions or bank or any other person by offering the company’s property or assets
as security ,a charge is created on such property or assets of the company in favour of the person
who lends money to the company.

Section 2(16) of the Companies Act, 2014 defines charges

so as to mean an interest or lien created on the property or assets of a company or any of its
undertakings or both as security and includes a mortgage

The following are the essential features of the charge which are as under:

1. There should be two parties to the transaction, the creator of the charge and the charge holder.

2. The subject-matter of charge, which may be current or future assets and other properties of the
borrower.

3. The intention of the borrower to offer one or more of its specific assets or properties as security
for repayment of the borrowed money together with payment of interest at the agreed rate should
be manifested by an agreement entered into by him in favour of the lender, written or otherwise.

A charge may be fixed or floating depending upon its nature

1.Getting a Loan: Imagine a company needs money, and it decides to borrow from a bank or another
lender.

2. Giving Security: To reassure the lender that they'll repay the money, the company might offer
some of its assets, like property, machinery, or other valuable items, as security. This promise or
claim over the assets is what we call a "charge."

3.Protection for the Lender: The charge serves as a form of protection for the lender. If the company
can't repay the loan, the lender has a right to claim or sell the charged assets to
recover the money owed.
Difference between fixed and floating charge

A fixed charge is a type of security interest that is attached to a specific asset or piece of property ,

Such as real estate or equipment .

A floating charge , on the other hand is a type of security that is not attached to a specific asset , but
rather floats over company’s assets and property such as its inventory or accounts receivable .

In general a fixed charge takes precedence over a floating charge in the event of a bankruptcy or
liquidation

basis Fixed charge Floating charge

nature It applies to specific and It covers a fluctuating pool of
identifiable assets , providing assets , often general in
a more concrete and direct nature (eg. Inventory ,
claim on those assets. receivable) allowing the
company to use and replace
these assets in the ordinary
course of business.
Usage and sale of assets The company generally needs The company can use or sell
the lender’s consent to sell or assets subject to floating
deal with the assets covered charge in the ordinary course
by the fixed charge. of business without seeking
lenders approval as long as it
does not default.
Priority on liquidation In the event of liquidation the In liquidation the floating
holder of a fixed charge has charge crystallizes into fixed
higher priority over the charge and the assets covered
specified assets. by the floating charge then
The proceeds from the sale of have a lower priority
those assets go first to the compared to fixed charge or
holder of the fixed charge. other secured creditors.
Risk and flexibility Lower risk for the lender, as Higher risk for the lender, as
specific assets are directly the assets are not clearly
secured. However, it may limit defined until crystallization.
the company's flexibility with Offers more flexibility for the
those assets. company in
managing its assets