Acquisition and Termination of Membership (Members & Shareholders)

Now a day’s many companies are being started to improve employment opportunities and many young generations like to become a shareholder or a member of that company. But they don’t know much about the rules and rights of being a member or a shareholder. This research speaks about the rights and liabilities of being a member and will helps us to understand the benefits available for being a member or shareholder.

Key Provisions

Section 2(55) of the Companies Act, 2013, Section 19 of the Companies Act, 2013, Section 266 of the Companies Act, 2013, Section 44 of the Companies Act, 2013, Section 24 of the Companies Act, 2013, Section 3 of the Companies Act, 2013, Trade Unions Act, 1926, Registration Act, 1860, Foreign Exchange Management Act, 1999.

Introduction

Many Acts are passed by the government to ensure that the rights of a member are conveyed properly to them, one of such Act is the Companies Act, 2013. This made many changes and provided a large scope about how to terminate and acquire a member and rights of a member.

Membership in a Company

A.    Who is a Member of the Company?

Persons who collectively constitute the company as a corporate entity are known as members of the company. According to the definition of a member under Section 2(55) of the Companies Act, 2013

  1. The subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as member 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 the register of members of the company;
  3. Every person holding shares of the 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 company.

B.    Who can become a member of a company or Capacity of parties to become a member of a company

As per the provisions of the Memorandum and Articles of Association of the company, any person who is competent to contract may become a member of the company. The provisions of the Companies Act, 2013 for various categories of person are given below:

  1. Minor: With the ignorance of minority if a company allots shares to a minor then the following consequence shall follow
  2. There will be no liability on the minor to pay any calls remaining unpaid on the shares held by him.
  3. Due to the share held by the minor the company cannot compel the Guardian to pay the calls due on the shares.
  4. The minor can reject the allotment made to him. The company can reject the allotment made to the minor. The minor shall be entitled to receive that the money paid by him.
  5. The minor cannot automatically become a member of the company when he attains majority.
  6. If the minor does anything on attaining majority, which shows that he has accepted the membership, the minor shall be henceforth deemed to be a member.
  7. Company: If a company is specifically authorized by the memorandum to purchase any other company then that company can become a member of any other company. A subsidiary company cannot become a member of the holding company which is stated under Section 19 of the Companies Act, 2013
  8. Cooperative Society: A cooperative society is a legal person, and so has the power to hold property. Hence, it can also become a member of the company. When a society is registered under the Societies Registration Act, 1860 it is a legal person. So, it can become a member of the company.
  9. Trade Union: A trade union registered under the Trade Unions Act, 1926, is a legal person capable of holding property. Therefore, a trade union can become an American company.
  10. Partnership firm: A firm cannot hold property in its name as the firm is not a legal person. The property is held in the name of the partner on behalf of the firm. Therefore, a firm cannot become a member of the company, but a partnership firm may become a member of the company under the Companies Act, 2013
  11. Hindu Undivided Family (HUF): Hindu Undivided Family is not a legal person. Therefore, a HUF cannot become a member of the company.
  12. Trust: Trust cannot become a member of the company as it is not a legal person.
  13. Joint holders: Two or more persons can hold the shares in the company in their joint names.
  14. Foreigner: Under the Foreign Exchange Management Act, 1999 a foreigner can become a member of a company by complying with the requirements of the Act. In case of war breaks out with a foreign country; the foreigner cannot enforce any right available to the members.
  15. Government: Central Government or the State Government can become a member and a body corporate.
  16. Insolvent: An insolvent’s share is based on the official assignee or official receiver, as the case may be. However, until the shares of the insolvent are sold by the official assignee or official receiver as the case may be the insolvent continues to be a member of the company. Until and unless an insolvent discharged, he cannot become a member.

What are the modes of acquiring the membership

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

  1. By subscribing to the memorandum of association: The person subscribing to the memorandum of the company is deemed to have agreed to the conditions to become the member of the company, and on the registration of the company their names are entered as members of the register of members
  2. By agreeing to take qualification shares: Under section 266 of the Companies Act, 2013, the directors of the company on delivering to the registrar a written undertaking to take a qualification shares to pay for them to come to the member of the company, and they are in the same position as if they were subscribers of the memorandum.
  3. By the transfer of shares: According to Section 44 of the Companies Act, 2013 shares in the company are movable property and are transferable on the same day. Thus, a person possesses the right to transfer his shares to another person. The transferee becomes a member of the company on the registration of the transfer.
  4. By application and allotment of shares: The application of shares serves as an agreement by an entity bounded by the Constitution of the company, and authorizing the company to enter the name of the shareholder in the register of members. Allotment arises when directors of the company earmark new shares to predetermine shareholders. These are shareholders who have either applied for new shares or earned them by owing existing shares.
  5. By succession: The legal heir based on the succession certificate of the deceased member/shareholder the right to be a member of the company. The company on the basis name in the register of members.
  6. By estoppel or acquiescence: a person who knowingly permits this name in the register of members becomes a member by estoppel or acquiescence.

How is Membership Terminated

There are two ways of termination that is the Voluntary Termination, and the Compulsory Termination.

  1. Voluntary Termination: A person ceases to be a member of a company by doing the following act:
  2. By the transfer of shares.
  3. By forfeiture of shares.
  4. By the surrender of shares.
  5. By exercising lien by the company.
  6. By issue of share warrants.
  7. By redemption of shares.
  8. By the buyback of shares by the company.
  9. By irregularity in the allotment.
  10. By repudiating the contract on the ground of false or misleading statements regarding the prospects of the company.
  11. Compulsory Termination: A person ceases to be a member by operation of law in the following cases:
  12. By the termination of shares.
  13. By insolvency of the person.
  14. By the order of the court on acquiring shares.
  15. On winding up to a company.
  16. On the death of the person.

The distinction between a Member and a Shareholder

a)     Member

A registered shareholder is a member. A person can be a member of the total holding any shares. A legal representative may not be a member until he applies for registration. The holder of the share warrant is not a member, his Name the stock off from the register of members. A person who subscribes to the memorandum immediately becomes a member. On transfer of shares, the person remains the member till the time the transfer is registered in the name of the transferee. Members are essential for a company.

b)     Shareholder

A registered member may not be a shareholder. No person can be a shareholder without holding shares. The legal representative remains a shareholder though his name does not appear on the register. A person who owns a share warrant is a shareholder. When the shares are allotted to the subscriber they become a shareholder. A person who transfers his shares ceases to be a holder of shares from the date of transfer. Shareholders are not essential for every company.

Rights and liabilities of the member

a)     Rights of a member

  1. The right to obtain a share certificate from the company.
  2. Right to have his name entered in the register of members.
  3. The right to transfer the securities under section 24 of the Companies Act, 2013.
  4. The right to receive the notice to general meetings, attend the general meetings, and vote thereat.
  5. The right to receive the dividend, that the dividend is declared by the company.
  6. The right to apply to the court seeking an injunction restraining the directors from paying dividends out of capitals.
  7. Right to inspect and obtain extract and copies of the registers, and indices of members, debenture holders, and other security holders, and annual returns.
  8. Right or obtain copies of the memorandum and articles.
  9. The first right to have the shares offered to him in case of further issues of shares.
  10. The right to apply to the court to set aside any variation in the right attached to any class of shares.
  11. The right to give special notice to move a resolution requiring special notice.
  12. Right  to receive a copy of the special notice when special notice served on the company
  13. Right or receive a copy of the minutes of the general meeting.
  14. The right to requisition an extraordinary general meeting of the company.
  15. Right to vote at the general meeting in respect of any matter requiring an ordinary resolution or special resolution.
  16. Right to vote by postal vote when a resolution is put to vote by the company by way of a postal vote.
  17. The right to vote through electronic mode in respect of any matter requiring an ordinary resolution or a special resolution.
  18. The right to obtain copies of profit and loss account, balance sheet, auditor’s report, and other documents.
  19. The right to make an application to the Company Law Board seeking an order of calling the Annual General Meeting (AGM).
  20. The right to make an application to the Company Law Board seeking an order for calling the Extraordinary General Meeting (EGM).

b)     Liabilities of a member

  1. Companies limited shares: The most common are the companies limited by the shares that may be a public company or private company. In these companies, the liabilities of members limited to the amount unpaid to the shares.
  2. Companies limited by guarantee: Based on the fixed amount which members undertake to contribute to the assets of the company the liability of the members is limited on that basis.
  3. Unlimited companies: These companies are those without limited liability. Section 3 of the Companies Act, 2013 speaks about the formation of a company where it says that seven or more persons can start the public company and whereas two or more persons can start a private company with or without limited liabilities.

Conclusion

Many people would not be aware of the rights and liabilities available to a member and some think that members and shareholders are the same. To solve this unawareness this research will help them to understand the basics of acquiring and terminating a member in a company and also some rights and liabilities of a shareholder had been spoken in Balkrishan Gupta and Ors. vs Swadeshi Polytex Ltd. And Anr, 1985 AIR 520.

Frequently Asked Questions (FAQs)

  1. Who can become a Member?
  2. What are the rights available to a member?
  3. How can a company terminate a member?
  4. Difference between a Member and a Shareholder?
  5. What are the modes of acquiring a Member?

References

  1. https://easyadvocacy.com/indian-kanoon/companies-act-2013
  2. https://freebcomnotes.blogspot.com/2017/03/rights-and-liabilities-of-member.html
  3. https://freebcomnotes.blogspot.com/2017/02/termination-of-membership-in-company.html
  4. https://indiankanoon.org/doc/1169064/

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