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Contents

Introduction ............................................................................................................................. ii
Research Methodology ............................................................................................................ 1
Research Problem .................................................................................................................... 1
Scope and Objective ................................................................................................................. 1
List of Abbreviations ............................................................................................................. iii
List of Cases .............................................................................................................................iv
I. Definition of Member ........................................................................................................... 1
II. Modes of Acquiring Membership ...................................................................................... 3
III. Who May Become A Member .......................................................................................... 5
IV. Legal Compliances Relating to Membership .................................................................. 7
Rights of a member........................................................................................................................... 7
Duties and Liability of Members ..................................................................................................... 8
V. Expulsion of a Member..................................................................................................... 10
VI. Member v. Shareholder .................................................................................................. 10
Conclusion .............................................................................................................................. 11

i
Introduction
A company is a separate legal entity as distinct from its members, therefore it is separate
at law from its shareholders, directors, promoters etc. and as such is conferred with rights and
is subject to certain duties and obligations. However, it works through a human agency. The
primary human agency in case of a company is their members. It thus becomes pertinent to
develop an insight into the role of members, their rights and duties so as to understand the
functioning of a company in a better manner.
This project report intends study the concept of membership, the modes of acquiring such
membership and the legal compliances relating to it such as rights, duties etc. Furthermore,
the project report also aims to find the difference between the expressions ‘member’ and
‘shareholder’, if any.
The project report has been divided in six chapters. The first chapter provides the
definition of a member. The second chapter describes the modes of acquiring membership in
a company. The third chapter enlists the persons who are eligible for member ship. The
fourth chapter relates to the legal compliances relating to membership in a company such as
rights and liabilities. The fifth chapter deals with provisions relating to expulsion of a
member from a company and the last chapter illustrates the difference between the
expressions ‘member’ and ‘shareholder’

ii
List of Abbreviations
&…………………………………………………………………………………………..And
AIR…………………………………………………………………………All India Reporter
Comp Cas……………………………………………………………………..Company Cases
Ch…………………………………………………………………………...Court of Chancery
CLB………………………………………………………………………Company Law Board
Edn……………………………………………………………………………………..Edition
Etc……………………………………………………………………………………..Et Citra.
Hon’ble……………………………………………………………………………. Honorable
HC…………………………………………………………………………………High Court
P…………………………………………………………………………………Page Number
S………………………………………………………………………………………..Section
SC……………………………………………………………………………...Supreme Court
v…………………………………………………………………………………………Versus

iii
List of Cases
Jayalakshmi Acharya v. Kal Electronics and Consultants (P) Ltd, (1997) 90 Comp Cas 200 (CLB)

Kamla V Pai v. Esso Standard Refining Co (P) Ltd, (1997) 3 Comp LJ 138 (CLB)

Official Liquidator v. Suleman Bhai Kachhi AIR 1955 Madhya Bharat 166.

London Hamburgh and Continental Exchange Bank, re, (1867) LR 2 Ch App 427

Lalithamba Bai v. Harrisons Malayalam Ltd, (1988) 63 Comp Cas 662

Margaret T Desor v. Worldwide Agencies (P) Ltd (1989) 66 Comp Cas 5 (Del)

Kamlabai v. Vithal Prasad Co (P) Ltd, (1993) 77 Comp Cas 231 (Kant)

Fazullbhoy Jaffar v. Credit Bank of India Ltd AIR 1914 Bom 128

Morgan v. Gray. 1953 Ch 83

All India Bank Officers Confederation v. Dhanalakshmi Bank Ltd, (1997) 90 Comp Cas 225

Suresh Chandra Marwaha v. Lauls (P) Ltd. [1978] 48 Comp Cas 110 (Punj. & Har.)

Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 58 Comp Cas 563 (SC)

Stadmed (P) Ltd v. Kshetra Mohan Saha, AIR 1968 Cal 572.

Bajaj Auto v. N.K. Firodia [1971] Comp Cas 338

iv
Chapter-I
Research Methodology

Research Problem
The rationale of this project report is to develop an insight into the concept of membership in
a company so as to understand in a better way the functioning of the company.

Scope and Objective


The scope of the study is limited to the provisions of the Companies Act, 2013 relating to
membership. Reference is also drawn from the 1956 Act wherever necessary.
Review of Literature
The researcher has relied mainly on two books for this project report. The first book is
‘Company Law and Practice’ (20thEdition) authored by Dr. G.K. Kapoor and Sanjay Dhamija
and published by Taxmann Publications. Chapter 11 of the book relates to membership. The
provisions are given in a comprehensive, simple and lucid manner, which made
understanding the absolute basics easier. However, the book lacks detail in certain parts such
as the liability of members. The second book is ‘Company Law’ (16th Edition) authored by
Dr. Avtar Singh by Eastern Book Company. Chapter 9 of the book deals with the concept of
membership. This books provides an in-depth analysis of the theoretical aspect and is much
more detailed in describing the legal compliances of members.
Hypothesis
The expression ‘member’ is synonymous with ‘shareholder’.
Research Questions
 Who is a member in a company and what are the modes of acquisition of
membership?
 What are the rights and duties of members?
 What is the difference between a member and a shareholder?
Method of Study
This project report is doctrinal in nature. Secondary sources of data such as books, journals
and websites have been relied upon. Authorities have been cited in a uniform format,
wherever required. Case Laws have also been relied on.

1
II. Definition of Member
The real definition is to be found in the provisions of Section 2(55) and here the emphasis
in both the sub-sections is entry in the register of members. Here is what the section lays
down:
According to Section 2(55) “member” in relation to a company means:
i.
ii. the subscriber to the memorandum of the company who shall be deemed to have
agreed to become member of the company and, on its registration, is to be entered
as member in the register of members;
iii. every other person who agrees in writing to become a member of the company and
whose name is entered register of members;
iv. every person holding shares of the company and whose name is entered as a
beneficial owner in the records of a depository.

In reference to the subscribers of the memorandum, the section ordains that they shall be
entered as members in the register of members or registration of the company and in
reference to others the section prescribes that there should be an application in writing1 and
the name should be there in the register of members. The words “agreed in writing” were
brought in by the amendment of 1960 so as to prevent in the circumstances of our country a
person being surprised by the presence of his name in the register and then facing the burden
of a prima facie evidence and leading evidence to show that he never agreed to be a member.
In either case, the section requires as a condition of membership that the name of the person
in question is there in the register of members. But even so the courts have ruled that a person
may be regarded as a member if he has acquired the right of membership though his name is
not in the register2 and a person whose name is in the register may not be regarded as a
member if he did not agree to be a member in writing or is not accepting his position as
such.3
Shares can be held jointly. The principles relating to rights and liabilities under joint
promises would apply. Where one joint holder died and the shares were registered in the

1
Vijay Kumar Narang v. Prakash Coach Builders (P) Ltd, (2005) 128 Comp Cas 976 (CLB)
2
N Satyapradas Rao v. Venuparmula Lakshmi Narasimha Sastry (1988) 64 Comp Cas 492 (AP)
3
Shri Balaji Textile Mills (P) Ltd v. Ashok Kavle, (1989) 66 Comp Cas 654 (Ker)

2
name of the surviving joint holder, that was held to be justified though the legal heirs were
claiming registration in the name.4
The Depositories Act provides that a person holding an equity share capital of a company
and whose name is entered as a beneficial owner in the records of the depository is a member
of the company. Holding equity shares through a depository constitutes the holder into a
member5

III. Modes of Acquiring Membership


A person may acquire membership in a company using any one of the following modes or
ways of acquisition:
1. By subscribing to memorandum [S. 2(55)(i)]. –In the first place, Section 2(55)(i) of
the Act provides that the subscribers of the memorandum of association shall be
deemed to have agreed to become the members of the company, and on its
registration shall be entered as members in the register of members. Accordingly, it
was held in Official Liquidator v. Suleman Bhai Kachhi6that: The subscriber of the
memorandum is to be treated as having become a member by the very fact of
subscription. Neither application form, nor allotment of, shares is necessary. Even an
absence in the register of members cannot deprive him of his status. He acquires, as
soon as the company is registered, the full status of a member with all the rights and
liabilities. The facts were that one S has subscribed the memorandum of a company
for 200 shares. The company was duly registered, but he ultimately took only 20
shares. He was held liable in the winding up of the company to pay for all the 200
shares although they were, in fact, never allotted to him.7
The 2013 Companies Act has dropped the provision of Qualification shares.
2. By allotment. – A person may become a shareholder by agreeing in writing to take
shares in the company by allotment.
3. By transfer. – A person may purchase shares of a company in the open market and
then apply to the company to register him as a member. Section 2(55) which defines
“member” says that it includes the subscribers to the memorandum of a company and
every other person who agrees in writing to become a member of the company and

4
Jayalakshmi Acharya v. Kal Electronics and Consultants (P) Ltd, (1997) 90 Comp Cas 200 (CLB); Kamla V
Pai v. Esso Standard Refining Co (P) Ltd, (1997) 3 Comp LJ 138 (CLB)
5
Section 2(55), Companies Act, 2013
6
AIR 1955 Madhya Bharat 166.
7
London Hamburgh and Continental Exchange Bank, re, (1867) LR 2 Ch App 427

3
whose name in entered in its register of members. Thus, it requires two things: (a) an
agreement in writing to become a member and (b) an entry in the register.8

4. By transmission [S.56]. - On the death of a member, his executor or the person who is
entitled under the law to succeed to his estate gets the right to have the shares
transmitted to his name in the company’s register of members. Transmission is
different from transfer. Section 56(2) which lays down the formalities of transfer
specially provides that nothing in the section shall prejudice the power of the
company to register as a shareholder any person to whom the right to any shares has
been transmitted by operation of law.9 It follows that an instrument of transfer is not
necessary. No formalities like transfer deed, execution, attestation and stamp duty are
needed. Legal heirs as shown by the succession certificate are aggrieved persons
entitled to seek relief against refusal. 10 Provisions relating to the formalities of
transmission are generally found in the company’s articles. Clauses 23 to 27 of
Schedule I contain such provisions.

5. By estoppel/holding out. – This arises when a person holds himself out as a member
or knowingly allows his name to remain in 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 to Tribunal
for rectification of register of members under section 59 for removal of his name from
the register.
It is important to note that such a person whose name has been wrongly entered in the
Register of Members, does not become liable as a member unless either he agrees in
writing to become a member of the company or he has in fact accepted the position
and acted as a member. A person cannot be deemed to have become a member by
means of ‘estoppel’ simply because his name is entered wrongly in the ‘Register’.

8
Lalithamba Bai v. Harrisons Malayalam Ltd, (1988) 63 Comp Cas 662
9
Margaret T Desor v. Worldwide Agencies (P) Ltd (1989) 66 Comp Cas 5 (Del)
10
Kamlabai v. Vithal Prasad Co (P) Ltd, (1993) 77 Comp Cas 231 (Kant)

4
IV. 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 as
follows:
Minor. – Every person who is competent to contract may become a member. A minor and
a person of unsound mind, being incompetent to contract, cannot be members of a
company.11 A minor may be allotted shares. His name may remain on a company’s register of
members, but during minority, he incurs no liability. On attaining majority and becoming
aware of the presence of his name in the register of members, the minor has the option to
repudiate his shares within a reasonable time. Where he does not do so, he may safely be
taken to have accepted his position. His liability as a shareholder commences.12

Others disqualified. – Other disqualified would include, for example, persons of unsound
mind and insolvents. The position of a person of unsound mind is akin to that of a minor. So
far as an insolvent is concerned, if he was a member before, his name can remain in the
register notwithstanding his insolvency, unless the articles provide otherwise. The changes
which occur under insolvency laws as to his position as a shareholder are only with these that
the beneficial interest in the shares would be vested in his assignee, who would also control
voting rights. In all other respects he can exercise the normal membership rights, for
example, the right of instituting a minority action for redressing corporate wrongs.13

Company as member.- A company, being a legal person, may become the member of
another company. But a company can invest money in another company only if is so
authorized by its memorandum of association.
A company cannot, however, buy its own shares, except in a limited manner permitted by
Sections 67, 68 and 70. Similarly, subject to a few exceptions given in Section 19, a company
cannot buy shares of its holding company. Restrictions on inter-corporate investments are
stated in Section 186.

11
Sections 10-11, Indian Contract Act, 1872.
12
Fazullbhoy Jaffar v. Credit Bank of India Ltd AIR 1914 Bom 128
13
Morgan v. Gray. 1953 Ch 83

5
Trade Union. – A trade union registered under the Trade Unions Act, 1926 can be
registered as a member and can hold shares in a company in its own corporate name.14

Partnership. – A partnership firm, not being a person, cannot buy shares in its own name.
It may buy shares as a part of the assets of the firm, though they will have to be held in the
name of individual partners. A firm may be a member of any association or company
licensed under Section 8 as a charitable institution, but it shall cease to be a member on its
dissolution.15
A foreigner. – As per Law of Contract, a foreigner can enter intro contracts and, therefore
can purchase shares in a company but this is subject to the provisions of Foreign Exchange
Management Act, 1999.
When the country, of which the foreigner is resident, is at war with India, the foreigner
becomes an alien enemy and, therefore, his power of voting and his rights to receive notices
are suspended during the war period.

Receiver/Official Liquidator.- Receiver, official liquidator or administrator normally


cannot be members because the shares do not vest in them.

Public Office. – There is no provision in the Companies Act, 2013 that the shares in a
company may be held in the name of a public office. Section 2(55) provides how a ‘person’
becomes a member. The term ‘person’ has been held to include, among others, a corporation
sole. Thus, a public office cannot be a member of a company unless it is a corporation sole
such as Administrator-General constituted as a corporation sole by the Administrators’
General Act, 1963.

Societies. – A society is treated as a person having separate legal entity apart from
members constituting it and thereby is capable of becoming a member a member of a
company under Section 2(55) of the Companies Act.

A person may cease to be a member by transfer, death, forfeiture, surrender, on winding


up of the company and otherwise in accordance with the provisions of the company’s articles
of association.

14
All India Bank Officers Confederation v. Dhanalakshmi Bank Ltd, (1997) 90 Comp Cas 225
15
Section 8(3), Companies Act, 2013.

6
V. Legal Compliances Relating to Membership

Rights of a member
A shareholder of a company has two kinds of rights, (i) individual rights and (ii) corporate
rights. Every shareholder can enforce his individual rights singly but corporate rights have to
be enforced by the majority.16
However, individual and corporate membership rights may not
be mutually exclusive, Where the same transaction infringes both individual and corporate
membership rights, one composite action can be brought.
The dividing line between personal and
corporate right is very thin and the court will probably be inclined to treat a right as a
‘personal right’ only if he has a ‘special interest’ distinct from the general interest which
other members have in the company complying with the terms and condition of the Act, the
Memorandum and the Articles of association.
In case of infringement of a personal right, a member
may sue a wrongdoer and the company in his own name. But for infringement of his
corporate right, the action should be brought in the name of the company. The company
should be the plaintiff and the wrongdoers should be made the defendants.
The various rights of a member could be grouped under the following two categories:
(a) Contractual or otherwise; and
(b) Statutory.

Contractual and other Rights


A member by virtue of the contract with the company and any other members via the
Memorandum and Articles is entitled to have his name on the Register of members, to vote at
the meeting of member, to receive dividends when declared, to exercise the right of pre-
emption, return of capital on winding-up or on reduction of share capital of the company.
As a member he also has certain other rights which may
or may not arise out of contract. In exercise of such rights he is entitled to bring action to
restrain the company from doing an ultra vires act, to attend and take part in the proceedings
of meetings of the company and to move amendments.

16
Suresh Chandra Marwaha v. Lauls (P) Ltd. [1978] 48 Comp Cas 110 (Punj. & Har.)

7
Statutory Rights
A person who is a member of a company has many rights under the Act. 17 Some of them
are :
i. The right to vote at all meetings [S.47];
ii. The right to requisition an extraordinary general meeting of the company [S.100];
iii. The right to receive notice of a general meeting [S.101];
iv. The right to appoint proxy and inspect proxy register [S.105];
v. 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 [S.113]; and
vi. The right to require the company to circulate resolutions [S.111];
vii. To have the certificate of shares held ready for delivery to him within two months
from the date of allotment [S.56].
viii. To transfer shares subject to the provisions of the Act and the Articles of
Association [S.44].
ix. To inspect the Register of members and Register of debenture-holders and get
extracts therefrom [S.94].
x. To obtain, on request, minutes of proceedings at general meetings as also to
inspect the minutes [S.119].
xi. To apply to the Tribunal to have any variation of shareholder’s rights set aside
[S.48].
xii. To participate in the removal of directors by passing an ordinary resolution
[S.169].

Duties and Liability of Members

Liability of members depends on the nature of the company. If the company is registered
with unlimited liability, every member is liable in full for all the debts of the company
contracted during the period of his membership. Where the company is limited by guarantee,
each member will be bound to contribute in the event of winding up a sum of money
specified in the liability clause of the memorandum of association. 18 Most companies are,

17
Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 58 Comp Cas 563 (SC)
18
Stadmed (P) Ltd v. Kshetra Mohan Saha, AIR 1968 Cal 572.

8
however, incorporated with the liability of the members limited by shares. Each member is
bound to contribute the full nominal value of his shares and his liability ends here.
A member is subject to certain lialbilites and obligations either under the Act or by the
Articles of Association. Some of the important ones are stated hereunder:
1. If shares are not allotted for consideration other than cash, then a member must pay
the whole nominal value of his shares in cash.
2. If a member is holding partly paid-up shares and the company goes into liquidation,
then he becomes liable as contributory to pay, if called upon to do so, towards the
assets of the company.19 A contributory is generally a person who can be called upon
to contribute money unpaid on the shares of the company in the event of liquidation
of the company. However, in the lust of contributories, names of persons who hold
fully paid-up shares are also included though they are not liable to contribute but shall
have rights of a contributory.
3. A person may be included in the ‘B’ list of contributories, as a past member, and
required to pay to the extent of the amount remaining unpaid on the shares which he
held within one year prior to the commencement of winding-up if:
(i) on the commencement of winding up, debts exist which were incurred while
he was a member, and
(ii) the contributories to the ‘A’ list (the present members) are not able to satisfy
the contribution required from them in respect of their shares.
4. A member is bound to the company by all the covenants of the Articles of association,
e.g., a company may have a paramount lien on a member’s shares for any amount due
from him to the company.
5. In the case of a company limited by guarantee, which each member may be called
upon to contribute
 To the assets of the company in the event in the event of its being wound-up while
he is a member or within one year after he ceases to be a member, for payment of
the debts and liabilities of the company or of such debts and liabilities as may
have been contracted before he ceases to be a member, as the case may be; and
 To the costs, charges and expenses of winding-up and for adjustments of the
rights of the contributories among themselves.20

19
Section 2(26), Companies Act, 2013
20
Section 4(1)(d)(ii), Companies Act, 2013

9
VI. Expulsion of a Member

It cannot be denied that there are certain members who, by creating various kinds of troubles
for the management, try to wrest undue advantage for themselves. Can such members be
expelled? The Department of Company Affairs following the judgment in the case of Bajaj
Auto v. N.K. Firodia21 has expressed the view that the company cannot by amending the
Articles of association give itself a power to expel a member. Such an amendment of the
Articles of association is opposed to the fundamental principles of the Companies
jurisprudence and is ultra vires the company. Such a provision is repugnant to the various
provisions in the Act pertaining to the rights of a member in a public limited company and
cuts across the scheme of the Act as it has the effect of rendering nugatory the powers of the
Central Government (now Tribunal) under Section 111 [Now Section 58] of the Act and the
powers of the Courts (Now Tribunal) under Section 107 [Now Section 48] and Section 395
[Now Section 235] of the Act and is, therefore void by the operation of the provisions of
Section 9 [Now Section 6] of the Act.

VII. Member v. 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. 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 a member and a shareholder in the case of a
company having a share capital. In other words, as regards the same set of shares one person
is a member and another is the shareholder of the company. A person may cease to be a
shareholder while being a member in circumstances of death, insolvency or sale. A person
who subscribes to the memorandum immedialtely becomesa member even though no shares
are allotted to him. In the case of a company limited by guarantee having no share capital or
an unlimited company having no share capital there will only be ‘members’ but no
‘shareholders’

21
[1971] Comp Cas 338

10
Conclusion
It can be concluded that the members of a company form an important part because even
though the company has its own separate legal entity distinct from its members, it cannot
exist without them as they form the human agency necessary for its operations.

We came across a few exceptional cases where a shareholder may not necessarily be a
member and a member may not necessarily be a shareholder. Thus, the hypothesis partly
stands.
A “shareholder” denotes a person who holds or owns the shares. On the other hand, a
“member” denotes a person whose name appears on the Register of Members. For all
practical purposes the words “shareholder” and “member” are used interchangeably because
in the normal course a shareholder will also be a member and a member will also be a
shareholder. But if looked at from a closer angle, we may come across a few exceptional
cases where a shareholder may not necessarily be a member and a member may not neces-
sarily be a shareholder.

11

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