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MEMBERS
QUESTION BANK
Q.1 Define the term “Shareholder” and “Member” of a company.
Q.2 State the various modes in which person may become a member of company.
Q.3. Define the term ‘shareholder’ and ‘member’ and state the circumstances as to how a person may cease to be a member?
Q. 4. Explain in detail modes of acquiring membership and collective membership rights.
SHORT NOTES
(1) Shareholders.
(2) Members.
SYNOPSIS
I. Concept and Distinction: Member vs. Shareholder
1. The Requirement of Inscription:
2. The Transferee Example:
II. Statutory Definition of a Member (Section 2(55))
- Subscribers to the Memorandum:
- Written Agreement and Inscription:
- The Electronic/Demat Record:
III. Modes of Acquiring Membership
1. By Subscribing to the Memorandum of Association
2. By Application and Allotment
3. By Holding Qualification Shares
4. By Open Market Purchase
5. By Transfer
6. By Transmission
7. By Acquiescence and Estoppel (Member by Holding Out)
IV. Legal Capacity for Membership
V. Cessation of Membership
VI. Register of Members (Section 88)
VII. Financial Enforcement: Calls on Shares
- Board Authority:
- Uniformity (Section 49):
- Certainty of Notice:
- Good Faith (Bona Fide Purpose):
- Articles Compliance:
PART VIII: Supplementary Capital Notes
1. Forfeiture of Shares for Non-Payment
i. The Mandatory Notice:
ii. Nature of the Power:
2. Surrender of Shares
3. Paramount Lien on Shares
I. Concept and Distinction: Member vs. Shareholder
While the terms "member" and "shareholder" are frequently used interchangeably in corporate prose, they are not completely synonymous in corporate law.
1. The Requirement of Inscription: A person may hold equity shares (making them a shareholder), but they do not achieve the legal status of a member until their name is formally entered into the company's statutory Register of Members or recognized in the electronic ledger of a depository.
2. The Transferee Example: When shares are sold, the buyer (transferee) becomes a shareholder the moment they receive the physical shares and a signed transfer deed. However, they are not a member and cannot exercise voting rights until the company registers the transfer and lists their name in the member registry.
II. Statutory Definition of a Member (Section 2(55))
Under Section 2(55) of the Companies Act, 2013, a "member" means:
1. Subscribers to the Memorandum: The individuals who sign the MoA during formation. They are legally deemed to have agreed to become members and must be entered into the register immediately upon incorporation without requiring a formal application or allotment process.
2. Written Agreement and Inscription: Every other person who agrees in writing to become a member of the company and whose name is entered in its Register of Members.
3. The Electronic/Demat Record: Every person holding equity shares of a company whose name is entered as a beneficial owner in the electronic records of a registered Depository (under the Depositories Act, 1996).
III. Modes of Acquiring Membership
A person can acquire the status of a member through seven recognized statutory methods:
1. By Subscribing to the Memorandum of Association
Subscribers become members ipso facto (by the fact itself) the moment the Certificate of Incorporation is issued.
Case Law: Official Liquidator v. Suleman Bhai, AIR 1955 MB 166
Ruling: The court held that as soon as the Memorandum of Association is registered, the subscribers instantly acquire the status of members. They assume all matching statutory rights and liabilities, and the company cannot escape its obligations by failing to enter their names in the physical register.
2. By Application and Allotment
An investor submits a written share application (an offer). If the Board of Directors accepts the application and allots the shares (acceptance), the investor’s name is entered into the registry, completing the acquisition of membership.
3. By Holding Qualification Shares
Historically, directors of public companies were required by a company's Articles to buy a minimum number of shares, known as "qualification shares," to ensure they had a financial stake in the business. Signing an undertaking to take these shares creates a statutory agreement to maintain membership.
4. By Open Market Purchase
An investor can purchase outstanding shares on a recognized stock exchange through a stockbroker. Once the electronic clearing house updates the records, membership vests automatically via the Depository system.
5. By Transfer
Acquired when an existing member executes a standard Securities Transfer Form (Form SH-4) to pass their shares to a buyer. The membership transfers completely once the Board approves the document and inserts the buyer’s name into the Register of Members.
6. By Transmission
Transmission is an involuntary, operational shift of law that occurs when a member dies or is declared insolvent. Legal title to the shares passes automatically to the legal heir, executor, or official assignee. The successor becomes a member by presenting a succession certificate or probate copy, without needing a formal transfer deed or paying stamp duty.
7. By Acquiescence and Estoppel (Member by Holding Out)
If an individual knowingly allows their name to be listed on a company's Register of Members, or holds themselves out to the public as a member, they are barred by the doctrine of estoppel from later denying that status. If the company enters liquidation, they will be held liable as a "contributory" to clear outstanding corporate debts.
IV. Legal Capacity for Membership
The general rule is that any natural or juristic person competent to contract can become a company member, but specific restrictions apply across different categories. Minors generally cannot become members because their contracts are void from the beginning (void ab initio), though they may acquire fully paid-up shares via a guardian through gifts or inheritance. Companies, as separate legal entities, can hold shares in other corporations if authorized by their Memorandum of Association, but a subsidiary is strictly barred from holding shares in its parent company. Partnership firms, lacking a distinct legal personality, cannot hold shares in the firm’s name and must instead have partners hold them jointly as individuals, except in the case of non-profit Section 8 companies. Lastly, persons of unsound mind lack the capacity to contract, making any direct share application void, meaning shares must be held on their behalf by a legally appointed guardian.
V. Cessation of Membership
A citizen ceases to be a member of a company when their name is removed from the Register of Members through any of the following operational events:
1. Transfer: When the company registers a transfer deed naming a new buyer.
2. Forfeiture: When the company cancels a member's shares due to a continuous failure to pay statutory calls.
3. Surrender: When a member voluntarily returns their partly paid-up shares to the company to avoid a forced forfeiture. (The Board can only accept a surrender under circumstances where a valid forfeiture would otherwise be justified).
4. Death: The individual's membership terminates on their demise, and their estate remains liable until the heir completes the transmission process.
5. Rescission: When a court orders the cancellation of an allotment contract because the investor was induced to buy shares through misrepresentations in a prospectus.
VI. Register of Members (Section 88)
Every registered company is statutory required to maintain a Register of Members at its registered office. Under Section 88, this registry must contain:
1. The full name, address, occupation, and Permanent Account Number (PAN)/Unique ID of each member;
2. The distinct number of shares held by each member, alongside the exact amount paid on those shares;
3. The exact date the person was entered as a member;
4. The exact date the person ceased to be a member.
VII. Financial Enforcement: Calls on Shares
When an investor buys a share with a face value of 100, the company may initially require them to pay only a portion (e.g., 40 on application and allotment). The remaining 60 represents uncalled capital. A call is an official demand made by the company requiring the shareholder to pay all or part of that remaining balance.
Mandatory Requisites of a Valid Call:
1. Board Authority: The call must be authorized by a resolution passed by a properly appointed and qualified Board of Directors during a valid meeting with a proper quorum. The Board cannot delegate this discretionary power to a manager or external official.
2. Uniformity (Section 49): Calls must be made on a uniform basis across all shares within the same class. The company cannot discriminate or demand higher call payments from a specific group of shareholders within a class.
3. Certainty of Notice: The call notice must clearly state the exact amount due, the due date for payment, and the specific bank or venue where the payment must be made.
Precedent: In In re Cawley & Co., (1889) 42 Ch D 209, a call was ruled invalid because the underlying board resolution failed to specify a definitive date for payment. The court noted that while the call was void, the company could fix the error by passing a subsequent resolution with a clear date and issuing a new notice.
4. Good Faith (Bona Fide Purpose): The power to make calls must be used in good faith for the financial benefit of the company, not to satisfy a personal grudge or clear the debts of specific directors.
5. Articles Compliance: The call must strictly follow the procedural rules, timelines, and limits outlined in the company’s Articles of Association (AoA) (such as the standard rules found in Table F of Schedule I).
PART VIII: Supplementary Capital Notes
1. Forfeiture of Shares for Non-Payment
If a member fails to pay a valid call on or before the designated due date, the company can forfeit their shares. This operates as a strict penal enforcement mechanism:
i. The Mandatory Notice: Before declaring a forfeiture, the company must serve a formal warning notice on the defaulting member. This notice must give them an additional window of at least 14 days to clear the debt, calculate any accumulated interest, and state clearly that a failure to pay will result in the forfeiture of the shares.
ii. Nature of the Power: The power to forfeit shares must be executed strictly in accordance with the Articles and used in good faith for the benefit of the company. A defective notice or procedural error will render the entire forfeiture void. Once forfeited, the shares become the property of the company and can be re-sold or re-allotted to a new buyer.
2. Surrender of Shares
A surrender occurs when a shareholder voluntarily gives their shares back to the company because they are unable to pay upcoming calls. To prevent abuse, courts treat a surrender as a variation of forfeiture. The Board can only accept a voluntary surrender if the shareholder is facing an imminent, valid forfeiture for non-payment. A surrender cannot be used to help a wealthy shareholder escape their financial liabilities to the company.
3. Paramount Lien on Shares
A lien is a statutory right that gives a company a security charge over a member's shares to cover any outstanding debts or financial liabilities the member owes the company.
While a company does not have an automatic common law lien, public companies typically include a clause in their Articles of Association (matching Table F) giving the company a first and paramount lien on all shares (other than fully paid-up shares) held by a member.
If the member defaults on a debt owed to the company, the lien empowers the Board of Directors to sell the shares on the open market after providing a 14-day written notice, using the proceeds to clear the member's outstanding debt.