The concept of membership in company law is foundational to the functioning of companies in India. The Companies Act, 2013 governs the creation, regulation, and dissolution of companies in India. A member, as defined in the Act, holds an important position in determining the rights, obligations, and duties within the corporate structure. This article explores the concept of membership, the distinctions between members and shareholders, and the various legal aspects of membership under the Companies Act, 2013.
Definition of Membership in Company Law
The term member is broadly defined in Section 41 of the Companies Act, 2013. According to Section 2(55), a “member” in relation to a company, means:
- The subscriber to the memorandum of association of the company.
- Every person who agrees to become a member of the company, and whose name is entered in the register of members of the company.
- Every person who holds shares or debentures in the company, either in their own name or on behalf of another.
Essentially, a member is anyone who holds an interest in the company, whether through shares or through other formal means as outlined above.
Difference Between Member and Shareholder
While the terms “member” and “shareholder” are sometimes used interchangeably, they are not always synonymous. The key distinctions are as follows:
Aspect | Member | Shareholder |
|---|---|---|
Definition | A member includes shareholders, but may also include individuals who have other rights, such as debenture holders. | A shareholder is specifically a person who owns shares in the company. |
Legal Status | Membership can extend to various forms of participation (e.g., debenture holders). | A shareholder is specifically a member who holds shares in the company. |
Scope of Rights | A member’s rights extend to any rights granted under membership provisions, including attending meetings, voting, etc. | Shareholders generally have the right to vote, attend meetings, and receive dividends. |
Membership Creation | A person can become a member through shareholding, subscribing to the memorandum, or other means recognized by the company. | A shareholder becomes a member only upon acquiring shares in the company. |
Illustration:
- Example 1: Raj is a subscriber to the memorandum of a company and agrees to hold certain shares. In this case, Raj is both a member and a shareholder.
- Example 2: Maya buys debentures in the same company. Maya is a member but not a shareholder, as debentures are not equity shares.
Under the Companies Act, 2013, the following persons/entities may become members of a company:
- Subscribers to the Memorandum of Association: The initial members who sign the memorandum at the time of incorporation.
- Persons Who Agree in Writing to Become Members: Any individual or entity who agrees in writing to become a member, and whose name is entered in the register of members.
- Persons Holding Shares: A person who holds shares in the company and whose name is entered in the register of members.
- Transferees of Shares: Individuals who acquire shares from existing shareholders through a transfer, provided the transfer is valid and recorded in the register.
- Legal Representatives of Deceased Members: The legal heirs or executors of a deceased member can become members after the shares are transferred to them.
- Nominees of Deceased Shareholders: If a shareholder has nominated someone, the nominee becomes the shareholder upon the original shareholder’s death.
- Corporate Bodies (Companies, LLPs, etc.): Companies and other entities can hold shares and become members if their name is entered in the register.
- Trusts or Trustees: Trustees may hold shares on behalf of a trust, making the trust’s beneficiaries the effective members.
- Minors: Minors cannot hold shares directly but can have shares held in trust by a guardian or trustee.
- Employees: Employees may become members through Employee Stock Option Plans (ESOPs) or Employee Stock Purchase Plans (ESPPs), where their names are entered in the register after allotment.
For anyone to be a legal member, their name must be entered in the register of members, which is the official record of the company’s shareholders.
Modes of Acquiring Membership in Company Law
Membership in a company can be acquired in the following ways:
- Subscription to the Memorandum: When a person subscribes to the memorandum of association at the time of the company’s incorporation, they automatically become a member (Section 41).
- Transfer or Allotment of Shares: A person who acquires shares in a company through purchase or allotment is registered as a member. Upon transfer or transmission of shares, the new holder of the shares becomes a member.
- Purchase of Debentures: A person who purchases debentures (in case of debenture holders being considered as members) becomes a member of the company.
- Succession or Assignment: The rights of a member may be inherited or assigned to another individual, who would then become the new member.
Modes of Transferring Membership in Company Law
The transfer of membership typically occurs through the transfer of shares or debentures, and is governed by specific provisions under the Companies Act, 2013 and the company’s Articles of Association.
- Transfer of Shares: Section 56 of the Companies Act, 2013 governs the transfer of shares. A shareholder can transfer shares to another person by executing a share transfer deed, which must be registered with the company.
Procedure for Transfer:
- The transferor fills in the share transfer form.
- The transfer deed is signed by both the transferor and transferee.
- The transferee must submit documents (e.g., share certificates) for registration.
- The company registers the transfer in the register of members.
- Transmission of Shares: In case of death or insolvency of a shareholder, the transfer of shares is referred to as transmission, and it occurs according to the inheritance or legal rights of the deceased or insolvent person’s estate.
Key Features of Membership in Company Law
- Voting Rights: A member typically has the right to vote at company meetings (General Meetings, Board Meetings), depending on the class of shares they hold (e.g., ordinary or preference shares).
- Dividend Rights: Shareholders have the right to receive dividends declared by the company. The entitlement to dividends is proportional to the number of shares held.
- Participation in Meetings: Members can attend meetings, speak, and participate in discussions. However, voting rights may differ depending on the shareholding.
- Right to Transfer Ownership: A member can transfer their ownership (typically through share transfer) to another person under the company’s rules.
- Liability: A member’s liability is limited, typically to the unpaid amount on their shares. This limited liability is one of the main advantages of being a member of a company, as opposed to partners in a partnership.
Rights and Liabilities of Members under the Companies Act, 2013
The rights of members are outlined under several provisions of the Companies Act, including:
- Right to Vote: Members have the right to vote at general meetings (Section 105).
- Right to Dividends: Shareholders have the right to receive dividends, if declared (Section 123).
- Right to Access Records: Members have the right to access certain company records, including the register of members and financial statements (Section 94, Section 128).
- Right to Participate in Meetings: Members can attend, ask questions, and participate in company meetings.
Liabilities of Members include:
- Liability to Pay for Shares: A member is liable to pay any unpaid amount on their shares (Section 45).
- Liability in Case of Misuse: In cases where the member has acted fraudulently or in violation of the law, they may be held personally liable.
Types of Members in Company Law
Under the Companies Act, 2013, there are different categories of members:
- Registered Members: The individuals whose names appear in the register of members are the legal members of the company.
- Deemed Members: A person who is not directly entered in the register but is a member by virtue of holding beneficial interest in shares is considered a deemed member.
- Nominal or Associate Members: These members are usually those who are not directly interested in the company’s shares but may hold certain rights under specific circumstances.
- Debenture Holders: Although not shareholders, debenture holders may be considered members if the Articles of Association of the company so provide.
Relevant Case Laws
Herdilia Unimers Ltd. v. Renu Jain
This case revolves around the issue of membership in a company under the Companies Act, 2013. It primarily focuses on the transfer of shares and the legal question regarding whether a person, who has been allotted shares but not yet formally entered into the register of members of the company, can be considered a member.
Key Facts of the Case:
Background:
- Renu Jain was allotted shares in Herdilia Unimers Ltd. However, despite the allotment, she was not entered in the company’s register of members.
- Renu Jain later attempted to exercise rights as a member, but the company refused to acknowledge her as a member based on the fact that she had not been registered as such in the company’s official records.
The Dispute:
- The core issue was whether Renu Jain, who was allotted shares, had acquired the legal status of a member under the Companies Act, 2013, in the absence of her name being entered into the register of members of the company.
Key Findings:
Definition of Member:
- The court discussed the definition of a member under the Companies Act, 2013, particularly under Section 2(55), which defines a member as:
“A person who is the subscriber of the memorandum of association of the company; or 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.”
Role of the Register of Members:
- The register of members is the official record where a company’s members are listed. The court emphasized that for a person to be legally recognized as a member, their name must be entered into this register, regardless of whether the person has been allotted shares.
Allotment vs. Membership:
The court clarified the distinction between the allotment of shares and membership:
- Allotment of shares (i.e., the act of allocating shares to a person) does not automatically confer the status of a member unless the person’s name is entered in the register of members.
- In other words, while allotment signifies an agreement by the company to issue shares to a person, the legal status of membership is contingent on the formal act of registering the person in the company’s records.
Rights of the Allottee Before Registration:
Until the allottee’s name is registered in the register of members, they cannot exercise the rights attached to membership, such as voting at the annual general meeting or receiving dividends.
Implication for Renu Jain:
In the case of Renu Jain, since her name was not entered in the register of members, the court held that she was not entitled to the rights and privileges of membership, despite the allotment of shares.
Observations:
Importance of the Register of Members:
- The court reiterated that the register of members is the final and conclusive evidence of who holds membership in a company. The list of members in the register serves as a formal and legal record of a person’s rights and obligations as a shareholder.
Legal Significance of Membership:
- Membership in a company is not a mere matter of receiving shares but requires formal recognition through inclusion in the register. The court highlighted the legal status and rights that come with being a registered member, which include voting rights, the right to receive dividends, and the right to participate in the company’s decision-making process.
Importance of Proper Documentation:
- The decision underscores the importance of proper and timely updating of the company’s register of members. It is a safeguard for both the company and its shareholders to ensure that the list of members reflects the true ownership of shares in the company.
Company’s Duty:
- The case also places emphasis on the company’s responsibility to ensure that its register of members is properly maintained and updated to reflect any share allotments, transfers, or other changes in membership.
Bharat Barrel and Drum Manufacturing Company Ltd. v. Amin Chand Payrelal
The Supreme Court held that a person who holds shares in a company is deemed to be a member, but the person must be registered in the register of members for all intents and purposes.
R. R. Subrahmanian v. M. M. Iyengar
In this case, the Court discussed the rights of members regarding their entitlement to receive dividends and the right to participate in general meetings. The judgment emphasized the importance of proper registration of members.
Cessation of Membership in Company Law
Under the Companies Act, 2013, the cessation of membership refers to the termination of an individual’s membership in a company, typically when they cease to hold shares. This can occur in various ways:
- Transfer of Shares (Section 56): A member can voluntarily transfer their shares, causing their membership to cease once the transfer is completed, subject to the company’s Articles of Association (AoA).
- Death of a Member: On the death of a shareholder, their shares are transferred to legal heirs or representatives, requiring documentation such as a legal heir certificate or probate.
- Insolvency of a Member: If a member is declared insolvent, their shares may be sold or transferred by the Official Receiver, leading to cessation of membership.
- Reduction of Share Capital (Section 66): If a company reduces its share capital, it may cancel shares, which would result in the cessation of membership for affected shareholders.
- Disqualification or Resignation of Director: A member who is also a director may cease to be a member if they are disqualified under Section 164, or they may resign if allowed by the AoA.
- Expulsion (Section 43): A company’s AoA may allow for the expulsion of a member for certain reasons, ending their membership.
Buy-back of Shares (Section 68): A company may buy back shares from its members, leading to the cessation of membership for those whose shares are repurchased. - Removal from Register (Section 58): If a person is wrongly included in the register of members, they can be removed, ceasing their membership.
The cessation of membership affects the rights of the individual, including the right to vote or receive dividends, and is governed by the company’s Articles of Association and relevant provisions of the Companies Act.
What is the effect of the death of a member on their membership?
In the event of a member’s death, their shares are transferred to the legal heirs or representatives as per the process outlined in Section 109A and Section 109B. The company may require a legal heir certificate, probate of will, or other documents before transferring the shares to the heirs. The membership ceases for the deceased shareholder, but their heirs become the new members once the transfer is completed.
What happens if a company fails to maintain the register of members?
If a company fails to maintain or update the register of members, it can face penalties under Section 88 of the Companies Act, 2013. The company may also face legal challenges from shareholders, and the Registrar of Companies (RoC) may issue a notice for non-compliance.
Can a company expel a member?
Yes, a company can expel a member if the Articles of Association (AoA) allow for it, usually due to misconduct, non-payment of calls on shares, or any other reason specified in the AoA. The expulsion process usually requires a special resolution passed by the shareholders.
Conclusion
Membership in Company Law is a vital legal concept under the Companies Act, 2013. It defines the rights, duties, and responsibilities of individuals within the corporate structure. A member may or may not be a shareholder, and the acquisition and transfer of membership are governed by clear statutory provisions. Understanding the nuances of membership, including the types of members, rights, and liabilities, is essential for anyone involved in the management or operation of a company. Companies must ensure that they maintain an accurate and up-to-date register of members to uphold the legal framework of corporate governance.
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