Wednesday, April 20, 2016

Membership in a Company - Acquisition and Termination, Rights and Liabilities

Membership in a Company
Who is a Member of Company?
The members of a company are the persons who collectively constitute the company as a corporate entity. Section 2(55) of the companies Act, 2013 defines a member as:
a)      The subscription to MOA 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.
b)      Every other person who agrees in writing to become a member of a company and whose name is entered in the register of members shall be a member.
c)       Every person holding equity share of a company and who name is entered ass beneficial owner in the records of the depository shall be deemed to be the member of the company.

Who can be a member in a company or Capacity of parties to become a member of a company:
Any person who is competent to contract may become the member of the company as per the provision of Memorandum and Articles of Association of the company. Provisions of the Companies Act, 2013 for various categories of person are given below:

1. Minor: If the company allots shares to a minor in ignorance of minority, following consequences shall follow:

a)      The minor shall not be liable to pay any calls remaining unpaid on the shares held by him.
b)      The guardian cannot be compelled to pay the calls due on the shares held by a minor.
c)       The minor can repudiate the allotment made to him. The company can repudiate the allotment made to the minor. The minor shall be entitled to receive back the money paid by him.
d)      On attaining majority, the minor does not automatically become a member in a company.
e)      If on attaining majority, the minor does anything which shows that he has accepted the membership, the minor shall be henceforth deemed to be a member.

2. Company: A company can become a member of any other company only if it is specifically authorized by the memorandum to purchase shares of any other company. A subsidiary company cannot become a member of its holding company (Sec. 19 of the Companies Act, 2013)
3. Co-operative Society and Society: A cooperative society is a legal person, and so it has power to hold property. Therefore, a cooperative society can become a member in a company. A society when registered under the Societies Registration Act, 1860 is a legal person, and so it can become a member in a company.

4. Trade union: A Trade Union registered under the Trade Unions Act, 1926 is legal person (i.e. a body corporate) capable of holding property. Therefore, a trade union can become a member in a company.
5. Partnership firm: A firm is not a legal person. It cannot hold property in its own name; the property is held in the name of the partners on behalf of the firm. Therefore, a firm cannot become a member in a company.  However, a partnership firm may become a member in a company licensed u/s 8 of the Companies Act, 2013.

6. HUF: Hindu Undivided Family (HUF) is not a separate legal person. Therefore, an HUF cannot become a member in a company in its own name.
7. Trust: A trust is not a separate legal person. Therefore, the shares cannot be allotted or transferred in the name of a trust.
8. Joint holders: Two or more persons may hold the shares in a company in their joint names.

9. Foreigner: A foreigner can become a member in a company by complying with the requirements of Foreign Exchange Management Act, 1999. In case a war breaks out with foreign country, the foreigner cannot enforce any right available to the members.
10. Government: CG or SG can become a member in a body corporate.
11. Insolvent: The shares of the insolvent vest in the official assignee or the official receiver, as the case may be. However, an insolvent continues as a member until his shares are sold by the official assignee or the official receiver, as the case may be. Until an insolvent discharged, he cannot become a member.

What are the modes of acquiring the Membership?
A person may become a member or shareholder of the company in any one of the following ways:-
a)      By subscribing to the Memorandum of Association: The subscriber to the Memorandum of a company are deemed to have agreed to become a member of the company and on the registration of the company their names are entered as members on the register of members
b)      By agreeing to take qualification Shares: According to the section 266 directors of the company on delivering to registrar a written undertaking to take their qualification shares and to pay for them become the members of the company and they are in same position as if they were subscribers to the Memorandum.
c)       By transfer of shares: Shares in a company are movable property and are transferable in the same way as provided in the Articles of the company. Thus one person possesses the right to transfer his shares to another person. On the registration of transfer the transferee becomes the member of the company.
d)      By application and allotment of shares: A person may become a member of a company by an application for shares to the formal acceptance by the company. On valid allotment, the name of the shareholder is entered in the register of members
e)      By succession: On the basis of the succession certificate the legal heirs of the deceased member/shareholder get the right to be a member of the company. The company on this basis enters their name in the register of members.
f)       By estoppel or acquiescence: A person who knowingly permits entering his name in the register of members, becomes a member by estoppel or acquiescence.

How is Membership terminated?
Termination of the membership: it can take place in two ways:-
a)      Voluntary termination (by act of the parties)
b)      Compulsory termination (by operation of law)
a) Voluntary/by act of the parties termination: A person ceases to be a member of a company by doing the following act:
Ø  By transfer of shares
Ø  By forfeiture of shares
Ø  By surrender of shares
Ø  By exercising lien by the company.
Ø  By issue of share warrants
Ø  By redemption of shares
Ø  By the buy back of shares by the company
Ø  By irregularity in allotment
Ø  By repudiating the contract on the ground of false or misleading statement in the prospectus of the company.
b) Compulsory/By operation of law termination: A person ceases to be a member by operation of law in the following cases:
Ø  By termination of shares
Ø  By insolvency of the person
Ø  By the order of court on acquiring shares
Ø  On winding up of a company
Ø  On the death of the person

Distinction between a member and a shareholder
Basis
Member
Shareholder
Registration
A registered shareholder is a member.
A registered member may not be a shareholder
Shares
A person may be a member without holding shares.
No person can be a shareholders without holding shareholders.
On the Death of member
A legal representative may not be a member until he applies for registration
The legal representative remains a shareholder though his name does not appear on the register
Share warrant
Holder of share warrant is not a member his name is struck off
A person who owns a share warrant is a shareholder
On subscription
A person who subscribes to the MOA immediately become the member
When the shares are allotted to the subscriber they become shareholder.
On the transfer
On the transfer of share the person remains the member till the time the  transfer is registered in the name of the transferee
A person who transfers his shares ceases to be a holder of shares from the date of transfer.
Necessity
Members are essential for a company.
Shareholders are not essential for every company.

Rights and Liabilities of a member
Rights of a member
1.       Right to obtain the share certificate from the company.
2.       Right to have his name entered in the register of members.
3.       Right to transfer his securities (subject to the restrictions contained in the articles and the Act.
4.       Right to receive the notice of general meetings, attend the general meetings and vote thereat.
5.       Right to receive the dividend, where a dividend is declared by the company.
6.       Right to apply to the Court seeking an injunction restraining the directors from paying dividend out of capitals.
7.       Right to inspect and obtain extracts and copies of the registers and indices of members, debenture-holders and other security holders, and annual returns.
8.       Right to obtain copies of Memorandum and Articles.
9.       First right to have the shares offered to him in case of further issue of shares.
10.   Right to apply to the Court to set aside any variation in the rights attached to any class of shares.
11.   Right to give a special notice so as to move a resolution requiring special notice.
12.   Right to receive a copy of special notice when special notice is served on the company.
13.   Right to obtain a copy of the minutes of the general meeting.
14.   Right to requisition an Extra-ordinary General meeting (EGM) of the company.
15.   Right to vote at a general meeting in respect of any matter requiring an ordinary resolution or a special resolution.
16.   Right to vote by means of electronic mode in respect of any matter requiring an ordinary resolution or a special resolution.
17.   Right to vote by postal ballot when a resolution is put to vote by the company by way of postal ballot.
18.   Right to obtain copies of profit and loss account, balance sheet, auditor’s report and other documents.
19.   Right to make an application to the Company Law Board seeking an order for calling the AGM.
20.   Right to make an application to the Company Law Board seeking an order for calling an EGM.
Liabilities of a Member
1.       Companies limited by shares: Companies limited by shares are the most common and may be a public company or a private company, where the liability of members of a company is limited to amount unpaid on the shares.
2.       Companies limited by guarantee: In this type of companies liability of members of a company is limited to a fixed amount which members undertake to contribute to the assets of company in the event of its being would up.

3.       Unlimited companies: Unlimited companies are those companies without limited liability. Section 3 specifically provides that any 7 or more persons (2 or more in case of a private company) may form an incorporated company, with or without limited liability. 

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