Understanding Membership Dynamics: Companies Act Insights

In the realm of company law and corporate governance, a "member" typically refers to an individual or entity that holds shares in a company. These members, also known as shareholders, indeed represent the true owners of a company. Their collective ownership gives rise to the corporate entity itself. Initially, those who subscribe to the Memorandum of Association (MOA) during the company's formation are considered members. Additionally, membership in a company can be obtained through various means such as share allotment, transfer, or transmission.

Members or shareholders enjoy specific rights within the company, both individually and collectively. These rights are derived from the membership contract between the company and its members, as well as from general laws governing corporate entities. These rights can encompass a range of privileges, such as voting rights, dividends, the right to attend and participate in meetings, information access, and more, which are crucial aspects of corporate governance and shareholder empowerment.

In general, shareholders are members, and conversely, members are shareholders. However, there may be exceptions to this statement, e.g., a person may be a holder of share(s) by transfer but will not become its member until the transfer is registered in the books of the company in his favour and his name is entered in the register of members. Similarly, a member who has transferred his shares, though he does not hold any shares yet he continues to be member of the company until the transfer is registered and his name is removed from the register of members maintained by the company under Section 88 of the Companies Act, 2013.

In case of a company limited by guarantee, the individuals who are liable under the guarantee clause specified in its MOA are considered members of the company. On the other hand, in an unlimited company, the members are the persons who are liable to the company, each in proportion to the extent of their interests in the company, to contribute the sums necessary to discharge in full, the debts and liabilities of the company, in the event of its being wound-up.

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

1. 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;

2. 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;

3. 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.

Thus, there are two important elements which must be present before a person can acquire membership of a company viz., (i) agreement to become a member; and (ii) entry of the name of the person so agreeing, in the register of members of the company. Both these conditions are cumulative.

Who can be a member of a Company:

The eligibility to become a member of a company, subject to the company's Memorandum and Articles of Association, generally extends to any individual or entity with legal capacity. However, there are specific considerations related to certain organizations or individuals:

Company as a member of another company: A company being a legal entity itself has the capacity to contract and can consequently become a member of another company if authorized by its MOA to invest in the shares of that company or any other company. A subsidiary company cannot become a member of its holding company. However, in some exceptional cases it can hold shares. Further, a company cannot become a member of itself.

Partnership firm: A partnership firm is not a legal person and as such it cannot, in its own name, become a member of a company except in company registered u/s 8 of Act.

Limited Liability Partnership (LLP): LLP being an incorporated body under Limited Liability Partnership Act, 2008 can become a member of a company.

Section 8 company: A non-profit making company licensed under Section 8 of the Act, can become a member of another company if it is authorized by its MOA to invest into shares of the other company.

Foreigners as members: A foreigner may take shares in an Indian company and become a member subject to the provisions of the Foreign Exchange Management Act, 1999, but in the event of war with his/her country, he/she becomes an alien enemy and his/her power of voting and rights to receive notices gets suspended.

Minor as member: A minor is incompetent to enter into a contract and as such cannot become a member of a company. Consequently, an agreement by a minor to take shares is also invalid. However, in certain cases, the Company Law Board have allowed a lawful guardian to sign an agreement on behalf of the minor, particularly when the shares are fully paid. In such situations, the registration of transfer of shares in the name of a minor, acted upon by their guardian, especially when the shares are fully paid, might be accepted despite the transferee being a minor. This allowance is made on the basis that the interests of the minor are safeguarded and the shares are fully paid, thereby mitigating any risk or financial liability on the minor.

Insolvent as member: An insolvent may be a member of a company as long as he is on the register of members. He is entitled to vote, but he loses all beneficial interest in the shares and company will pay dividend on his shares to the Official Assignee or Receiver.

HUF as member: Hindu Undivided Family (HUF) is not considered a juristic person in the sense that it does not have independent legal recognition distinct from its members, but it is treated as a separate entity for taxation purposes under the Income-tax Act, 1961 in India. HUF is represented by its Karta. There is no legal bar on HUF to invest its money in shares and securities and the Companies Act does not prohibit membership of HUF. In such cases, the shares are held by the Karta in their capacity as the representative of the HUF.

Pawnee: A pawnee has no right of foreclosure since he never had the absolute ownership at law and his equitable title cannot exceed what is specifically granted by law. In this sense, a pledge differs from a mortgage. In view of the above, a pawnee cannot be treated as the holder of the shares pledged in his favour, and the pawner continues to be a member and can exercise the rights of a member.

Receiver: A receiver whose name is not entered in the register of members cannot exercise any of the membership rights attached to a share unless in a proceeding to which company is a party and an order is made therein. Mere appointment of a receiver in relation to certain shares of a company does not automatically deprive the holder of those shares, whose name is duly entered in the register of members of the company, of their right to vote at the company's meetings.

Society as a member: A society registered under the Societies Registration Act, 1860 should not be deemed to be a ‘body corporate’, although such a society can be treated as a ‘person’ having separate legal entity apart from the members constituting it and thereby capable of becoming a member of a company.

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

Understanding membership eligibility under the Companies Act involves considering legal capacity, specific provisions within the Act, and adherence to regulations governing different types of entities seeking membership in a company.