Modes of acquiring membership in the company – A quick recap

A company consists of members, though it has its own separate legal entity, and it is these members that constitute the whole company as a corporate entity.

But who actually is a Member?

As per Section 2(55) of Companies Act of 2013, member in relation to a company means:

-The subscribers to the memorandum of a company who 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,

-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,

-Every person holding shares of a 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 concerned company.

Therefore, before acquiring membership, two important elements are essential, and they are, a) Agreement to become a member, and b) entry of name of such person in register of members of the company. And in addition to above two terms, a person has to have the legal capacity of entering into a contract with company, and the same can be identified by looking into Section 11 of Indian Contract Act of 1972.

Now let’s discuss the modes of acquiring membership in brief:

1.By subscribing to Memorandum of Association:

In the case of a subscriber, no application or allotment is necessary to become a member. By virtue of his subscribing to the memorandum, he is deemed to have agreed to become a member and he becomes ipso facto member on the incorporation of the company and is liable for the shares he has subscribed.

In accordance with the provisions of Section 10(2) of the Act, all monies payable by any member to the company under the memorandum or articles shall be debt due from him to the company. Further, a subscriber to the memorandum must pay for his shares in cash even if the promoters have promised him the shares for services rendered in connection with the promotion of the company. Again, he must take the shares directly from the company, and not through transfer from other member(s). When a person signs a memorandum for any number of shares he becomes absolutely bound to take those shares and no delay will relieve him from that liability unless he fulfils the obligation. His liability remains right up to the time when the company goes into liquidation and he is bound to bring the money for which he is liable to pay to the creditors of the company.

2.By Agreement in Writing:

-By application and allotment: A person who applies for shares becomes a member when shares are allotted to him, a notice of allotment is issued to him and his name is entered on the register of members. The general law of contract applies to this transaction. There is an offer to take shares and acceptance of this offer when the shares are allotted. An application for shares may be absolute or conditional. If it is absolute, an allotment and its notice to the applicant will be sufficient acceptance. On the other hand, if the offer is conditional, the allotment must be made according to be condition as contained in the application.

-By transfer of Shares: Shares in a company are movable property as provided in Section 44 of the Act and are transferable in the manner as provided in the articles of the company and as provided in Section 56 of the Companies Act, 2013. A person can become a member by acquiring shares from an existing member and by having the transfer of shares registered in the books of the company, i.e. by getting his name entered in the register of members of the company.

-By Transmission of shares: A person may become a member of a company by operation of law i.e. if he succeeds to the estate of a deceased member. 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 and registered in his name in the company’s register of members. No instrument of transfer is necessary in this case. If the legal representative of deceased member desires to be registered as a member in place of the deceased member, the company shall do so or in the alternative he may request the company to transfer the shares in the name of another person of his choice.

-By Estoppels: A person is deemed to be a member of a company if he allows his name, without sufficient cause, to be on the register of members of the company or otherwise holds himself out or allows himself to be held out as a member. In such a case, he is estopped from denying his membership.

3.By holding shares as beneficial owner in depository records:

Every person holding shares of the company and whose name is entered as a beneficial owner in the records of the depository shall be deemed to be a member of the concerned company.

Note: The above-mentioned points are Ad Verbatim as per the same given under relevant provisions/ rules of Companies Act, 2013 r/w Rules of 2014.

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Disclaimer: – The entire contents of this document have been prepared on the basis of relevant provisions and rules and as per the information existing at the time of the preparation, and the views expressed here are personal in nature. Although care has been taken to ensure the accuracy, completeness and reliability of the information provided, I assume no responsibility therefore. Users of this information are expected to refer to the relevant existing provisions of applicable Laws. The user of the information agrees that the information is not a professional advice and is subject to change without notice. I assume no responsibility for the consequences of use of such information.