Interpretation of Concept of ‘Membership’ Under Companies Act 2013

MEANING OF MEMBER:  As per Section 2(55) of Companies Act 2013 ‘member’, in relation to a company, means—

(i) 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, shall be entered as member in its register of members; (ii) 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;

(iii) Every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;

In general we can say that a person is said to be a member of the company if his name is entered in the registers of members by the company or as a beneficial owner in the records of depository.

METHODS OF BECOMING MEMBER:

• By subscribing memorandum: At the time of Incorporation, the persons who agree to purchase at least one share of the company.
• By allotment of shares: allotment of shares occurs when the company(issuer) issues shares initially either by way of Initial Public Offering or Further Public Offering.
• By transfer: transferee becomes a member of the company when the company registers such transfer and enters his name in register of members.
• By transmission:the person entitled for the shares of the deceased member will become the member of the company when his name gets entered in the register of members on providing notice of transmission to the company.
• By becoming beneficial owner: a person whose name is entered as beneficial owner in the records of the depository

NOTE: here “Beneficial owner” means a person who is entitled for the ultimate benefits.

• By estoppel: a person whose name was entered in the register of members and knowingly he does not apply for rectification of the same, becomes a member by estoppel (estopped from his own act)

SOME IMPORTANT POINTS TO BE NOTICED REGARDING MEMBERSHIP IN A COMPANY:

√ The term Shareholder is distinct from  the term Member

√ Minor can become member of a company (only for fully paid up shares)

√ A firm cannot become a member of a company as it does not carry a separate legal entity.

√ HUF cannot become a member of a company; however a KARTA can become a member in his individual capacity.

√ Subsidiary company cannot become a member of its holding company except 3 cases mentioned under section 19 of Companies Act 2013.

INTERPRETATION OF SECTION 19 OF THE ACT:

• Subsidiary company cannot hold shares of its holding company

Either by himself or

Through any of its nominees

EXCEPT

Holding shares as a legal Representative of a deceased member.

Holding shares as a trustee.

Was already a shareholder before being a subsidiary company.

NOTE: the subsidiary company who was already a shareholder before being a subsidiary company will not be entitled for any voting rights on his holding.

However, in case of Company limited by Guarantee or an Unlimited Company not having share capital:

• The reference to shares shall be constructed to the interest of members in whatever form.

CESSATION OF MEMBERSHIP

Meaning:  A member of a company ceases to be a member when his name is removed :

From the Register of members i.e. MGT-1    or

From the register of beneficial owners which is maintained by the Depository participant.

→ Ways of Cessation of MEMBERSHIP of a MEMBER:

(i) Transfer of shares by sale or otherwise:

IN CASE OF PHYSICAL MODE When a member delivers duly signed (executed) share Transfer Deed along with share certificate (SH-4) to the person he intends to transfer the share and his name got removed from the register of members of the company or from the registers of beneficial owner on Registration of transferee as member.

IN CASE OF DEMAT MODE (ELECTRONIC) In case of shares held in electronic mode when a member issues delivery instruction to his DP for transfer of shares and his name got removed from the registers of beneficial owner maintained by the depository.

(ii) Forfeiture of shares:

If a member does not pay the allotment money or any call due on shares held by him, then the company has a power to forfeit such shares after giving a proper notice of 14 days.

(iii) Sale of shares under lien:

A member on whose shares, company enforces its lien by way of sale of such shares, such member ceases to be a member on the date when his name got removed from the registers of members or from the Registers of Beneficial Owners. NOTE: A company can only exercise lien on the shares if such power is given under AOA (Articles of Association) of the company.

(iv) Death/Insolvency :

In case of death  of a member he ceases to be a member on removal of his name from the register of members or beneficial owners and enters the name of his nominee/ successor in his place in the registers. NOTE: The nominee/ successor shall follow the laid down procedure for the transmission of shares.

(v) Conversion of shares into share warrants/stocks:

A company can convert its fully paid up shares into stock or share warrants (if authorized by its Articles of Association), On such conversion the name of such members got struck from the registers and they cease to be a member of the company.

(vi) Buyback of shares:

Subject to the provisions of Section 68 of the Companies Act, 2018 and Articles of Association of the Company, those members who offer their shares to the company for sell in buy back, such members cease to be a member of the company on cancellation of such bought back shares.

 (viii) Dissolution/Winding up/Striking off the name of the Company:

In case of Dissolution/ striking off : if a company’s name is stuck off or it has been dissolved then the members of such company ceases to be members. In case of winding up of the company : on winding up the members ceases to be members  but remain liable as contributories and are entitled to claim share in the profits (if any).

Expulsion of Member

Q. Can a member be Expelled from the Company by inserting a clause to its MOA or AOA ?

No, A member cannot be Expelled because according to section 6 of Companies Act 2013 anything contained in MOA or AOA beyond the powers provided by Companies Act 2013, is void

According to Section 6 of the Companies Act, the Act overrides the memorandum and articles of association and any provision contained in these documents repugnant to the provisions of the Companies Act, is void.

However Section 235 is an Exception to this Rule that Members cannot be expelled.

CASE LAW : [ RE: MALINI BHARTI RAO CASE ]