12.8.4 (Who may Become a Member)

Subject to the provisions of law, the Memorandum and the Articles, any person sui juris can become a member of a company. The position of certain person in this regard is given below.

            (a) Minor. The position of a minor as a member of a company is summarised as under:

            (i) As a minor is wholly incompetent to enter into a contract [Mohir Bibi v.Dharmodas Ghose, (1903) 30 Cal. 539 (P.C)], an agreement by a minor to  take shares is void and hence, he cannot be a member of a company.

            (ii) If shares are allotted to a minor in response to his application and his name  entered on the Register of members, in ignorance of the fact of minority, the  company can repudiate the allotment and remove his name from the register on coming to know of the minority of the member. The company must repay all money received from him respect of the allotted shares.

            (iii) The minor can also repudiate the allotment during his minority and he shall be returned the amount he paid towards the allotment of shares.

            (iv) If the name of the minor continues on the register of members and neither   party repudiates the allotment, the minor does not incur any liability on the  shares during minority and he cannot be held a contributory at the time of winding up [Fazalbhoy Jaffar v.The Credit Bank of India (I914) 39 Bcom 331].

            (v) If an application for shares is made by a father as guardian of his minor  child and the company registers the shares in the name of the child describing   him as a minor, neither the minor nor the guardian can be placed on the list of  contributories at the time of winding up [Pahaniappa v. Official Liquidator,           Pasupati Bank Ltd., 1942 Mad 470 and 875].

            (vi) If somehow the name of a minor appears on a register of members and in the meantime he attains majority and if he does not want to continue to be a   member, then he must repudiate his liability on the shares on the grounds of minority. The company cannot take defence on the principle of estoppel that  the minor had fraudulently misrepresented his age or had received dividends   and other privileges as a member. However, if he had received dividends and   exercised his rights as a member of the company after attaining majority, then he cannot repudiate his liability on shares.

            (vii) In case of transfer of a partly-paid shares to a minor, the company may refuse to register him as a member. In case, the company, in ignorance of the  minority, has permitted the transfer, then the company may remove the name  of the minor and replace it by that of transferor, even though the latter may            have been ignorant of the minority.

            (viii) In case of fully paid shares, minor's name may be admitted in the register of members, if he happens to acquire the same by way of transfer or  transmission. In Deavn Singh v. Minerva Films Ltd. (AIR 1956 Punjab 106),   the Punjab High Court held that there is no legal bar to a minor becoming a             member of a company by acquiring shares (by way of transfer) provided the shares are fully paid-up and no further obligation or liability is attached to  them. Similarly, in S.L Bagree v. Britania Industries Ltd. (1980), Company   Law Board upheld transfer in favour of a minor.

   (b) Company. A company, being an artificial person and a separate legal entity may become a member of another company, if it is so authorised by its memorandum to purchase shares. This is, however, subject to the provisions of s.42. Under this section, a subsidiary company cannot be member of its holding company and any allotment or transfer of shares in a holding company to its subsidiary, or even to a nominee for such subsidiary, is void, except that a subsidiary company may:

            (i) hold shares in the holding company in the capacity of a personal                                     representative of a deceased shareholder, or

            (ii) hold such shares as trustees, (except where the holding company or  another subsidiary is beneficially interested under the trust otherwise than merely by way of the holding company's business), or

            (iii) remain a member of its holding company, if it was a member before April 1, 1956, but may not vote at meetings of a holding company or any class of its members.

As has been mentioned earlier, a company cannot purchase its own shares (s.77) and, therefore, cannot become a member of itself. However, a company may acquire a beneficial interest in its own shares, as by the exercise of its paramount lien on the shares of a member as security for moneys owning by him to the company, or by forfeiture of shares for non-payment of calls.

            (c) A partnership firm: A partnership firm being an unincorporated association and therefore, not having a separate legal entity from the Partners, cannot be registered as a member in the register of members of a company. However, partners, either individually or in their joint names (as joint members) may hold shares in a company as a part of the partnership property. But a partnership firm may become a member of a company registered under s.25 of the Companies Act, 1956 (i.e., associations not for profit).

            (d) A foreigner. As per the Law of Contract, a foreigner can enter into contracts and therefore, can purchase shares in a company but this is subject to the provisions of Foreign Exchange Management Act, 1999 (FEMA).

When the country, of which the foreigner is resident, is at war with India, then the foreigner becomes an alien enemy and therefore, his power of voting at company meetings and his right to receive notices are suspended during the war-period.

12.8.3 (Modes of Acquiring Membership)

A person may become a member or a shareholder of a company by any of the following ways:

            1. By subscribing to the memorandum of association. The subscribers of the memorandum of a company are deemed to have agreed to become members of the company only by reason of their having signed the memorandum. A subscriber to the memorandum becomes a member, the moment the company is registered and it is not necessary that their names must have been entered in the register of members.

Further, by subscribing the memorandum every one of the subscribers is deemed to have contracted to become a shareholder in respect of the shares he subscribed for.

            2. By agreement and registration. Section 41(2) provides that apart from the subscribers of the memorandum, 'every other person who agrees in writing to become a member and whose name is entered in its register of members shall be a member of the company’. It follows that except in the case of the subscribers to the memorandum, a person does not become member of the company, until his name is dult recorded in the register of members.
 

Registration of the name of a person as a member of a company may arise:

            (a) Upon application and allotment.
 

            (b) By transfer, The member may acquire shares from an existing member by sale, gift or some other transaction.

            (c) By transmission. Here a person becomes a shareholder by transmission of shares to him through death, lunacy or insolvency.

            (d) By estoppel. 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. However, he may escape liability by applying for removal of his name under s.155.

            (e) By agreeing to purchase qualification shares. A person who signs and delivers to the Registrar a written undertaking to take from the company and pay for qualification shares is in the same position as if he had subscribed to the memorandum for a similar number. As such, he is also deemed to have become a member automatically on incorporation of the company.

12.8.2 (Member and shareholder)

In the case of a company, limited by shares, the persons whose names are put on the register of members, are the members of the company. They may also be called shareholders of the company as they have been allotted shares and are holding them in their own right. In such a situation, the terms 'member' and 'shareholder' are interchangeably used to mean the same person. In Srikanta Data v. venkateshwara Real Estate Enterprises (P) Ltd. (1990) 68 Comp. Cas.216 (Kar), it was held that unless the context otherwise requires, the word 'member' under s.2(27) means a ‘shareholder’ excepting a person who is a bearer of a share warrant of the company. But in the case of an unlimited company or a company limited by guarantee, a member may not be a shareholder, for such a company may not have a share capital. However, sometimes a distinction is maintained between a member and a shareholder in the case of a company having a share capital. In other words, as regard the same set of shares one may be a members and another be the shareholder of the company. This distinction arises in the following situations:

            (1) X is a member of a company limited by shares. His name is placed on the register of members as he is holding shares in his own right and, therefore whether we call him a member or a shareholder, it is immaterial. In such a situation, the terms 'member' and. 'shareholder' may be used interchangeably. Now, in the following three situation he will cease to be a shareholder, though he continues to be the member of the company:

            (a) On sale. X sells the shares to Y. He fills in a share transfer form and hands   it over to Y. He also gives the share certificate representing the shares to y. In   return for sale of shares, he receives consideration from Y. X is no longer a   shareholder as he has sold the shares and property in the shares has passed to  Y. But the name of X continues to be on the Register of members till the transfer of shares is registered by the company in favour of Y.

            (b) On death. X dies and his property, including shares, is inherited by Y, his legal representative. X is no longer the shareholder. He is not in existence to   hold the shares. Y is holding the shares in his own right and, therefore, can rightly be called the shareholder. But X continues to be the member as his name still appears on the register of members. However, as soon as Y gets his  own name registered in the register of members, then X will cease to be a   member.

            (c) On becoming insolvent. X becomes insolvent and his property, including shares, vest in the official Receiver or Official Assignee. The Official   Receiver or Assignee is holding the shares in his own right. Therefore, X is no   longer the shareholder, though he continues to be the member of the company.

            (2) A person who is holding a share warrant is a shareholder but he is not a

member of the company as his name is struck off the register of members (s.115).

            (3) A person who subscribes to the memorandum of association immediately becomes the member, even though no shares are allotted to him. Till shares are allotted to the subscriber, he is a member but not the shareholder of the company.

            (4) In the case of a company limited by guarantee having no share capital or an unlimited company having no share capital, there will be only ‘members’ but  not

'shareholders'.

12.8.1 (MEMBERSHIP)

Definition of a Member. Section 41 provides that: (1) The subscribers of 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 a company and whose name is entered in its register of members, shall be a member of the company. 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. Every person holding equity share capital of a company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company. (vide Depository Act, 1996).

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 court'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 subscribes 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 registered in the register of members of the company.