How to become a member of a company in India ?

Section 41 of the companies act 1956, defines a member as a person who has signed the memorandum of association and every other person who agrees in writing to become a member and whose name is entered in the register of members.

A person may become a member of the company in any following ways:

1. By subscribing to the memorandum of association.

2. By agreeing to take qualification shares.

3. By application and allotment.

4. By transfer of shares.

5. By transmission of shares.

6. By holding out as a member.

Membership by subscription:

Every subscriber to the memorandum of association is deemed to have agreed to become its member and on its registration must be put on the register of members. Two conditions are necessary to make such a person a member: (i) He will subscribe his name to the memorandum of association. (ii) The company must be registered under the companies act. In their case neither allotment of shares not registration of their names in the register of members is essential. He acquires as soon as the company is registered the full status of a member with all the rights and liabilities. A subscriber cannot repudiate his contract on the ground of misrepresentation or that he subscribed to the memorandum subject to certain reservations.

Membership by Qualification shares:

Directors of the company on delivering to the registrar written undertaking to take their qualification shares and to pay for them become members of the company, and they are in the same position as if they were subscribers to the memorandum. They are deemed to have become members automatically on the registration of the company.

Membership by application and allotment:

A person may become a member of a company by an application for shares subject to the formal acceptance by the company. The ordinary law of contracts applies to the agreement to take shares in a company. An application for share may be absolute or conditional. If it is absolute, a simple allotment and notice thereof to the applicant will constitute the agreement. If it is conditional, the allotment must be on the basis of the conditions specified. Where there is a conditional allotment of shares and an unconditional allotment, there is no contract constituted.

Membership by transfer:

The shares of a company are transferable but the mode of transfer is left to be decided by the articles of the company. A person may purchase shares and apply to the company to register him as a member. On transfer of shares duly affected the transferee becomes a member of the company.

Membership by Transmission:

On the death of a member his shares vest in his legal representatives. The legal representatives can sell the shares without being registered, but subject to the provisions of the articles he is entitled to be put on the register of members if he so chooses. The official assignee is likewise entitled to be a member in place of a shareholder who is adjudicated insolvent. This process of acquiring membership is known as transmission. It takes place on the death or insolvency of a member or if the member is a company on its going into liquidation. In these cases no instrument of transfer need be delivered to the company.

Membership by holding Out:

A person is deemed to be a member of the company who allows his name to appear in the register of members apart from any agreement to become a member, to be on the register of members or otherwise hold himself out or allows himself to be held out as a member. A person may not have applied for the shares but if he assents to his name being on the register, he is to be considered as a member of the company.

Who may be a member:

The general rule is that any person who is competent to contract may become a member. A contract to purchase shares is like any other contract and both the contacting parties must be competent to enter in to the contract. The provisions of the Indian contract act, 1872, regarding the persons who can contract would apply. The membership rights of some categories of persons are discussed below:

Minor:

A minor in India cannot be a member because a contract with a minor is absolutely void here. Neither a minor nor his legal guardian can be made responsible for the payment of calls. Under the English law a minor can be a member of the company because a contract with a minor is voidable and not void. A minor in India may apply for and receive an allotment of shares subject to a right to repudiate liability on them before or within a reasonable time after attaining full age.

Where a minor has been allotted shares and his name has been entered to the company’s register of members in ignorance of his minority, the company can remove his name when the fact of his minority comes to its knowledge. Similarly, the minor can also repudiate the allotment at any time during his minority. But the position will change after he attains the majority. He has the option to repudiate his liability on shares within a reasonable time. But where a minor received dividends on attaining majority, thereby intentionally permitting the company to believe him to be a shareholder, he would now be estopped from denying that he is a shareholder.

Company:

A company can become member of another company if so authorized by its articles subject to certain restrictions of section 372. But a company cannot be a member of itself. A company cannot purchase its own shares because it involves reduction of capital which is not permissible without the sanction of the court.

Subsidiary company:

A subsidiary company cannot be a member of its holding company. Any allotment or transfer of shares in a company to its subsidiary is void. This provision will not apply where the subsidiary acts as the legal representative of a deceased member of the holding company or as a trustee and the holding company is not beneficially interested under the trust.

Partnership Firm:

A partnership firm, being not a person in the eyes of law, cannot be a member of a company. However, a firm can purchase shares of a company in the individual names of its partners as joint shareholder.

Foreigners:

Foreigners can become members of companies registered in India but permission of the reserve bank of India has to be obtained for this purpose. The right of the foreigner as a member will be suspended if he becomes an alien enemy.

Fictitious Person:

A person who takes the shares in the name of a fictitious person becomes liable as a member. Besides, such a person can be punished for impersonation under section 68-A.

Termination of Membership

A person will cease to be a member of the company when his name is removed from the register of members. It may take place in any of the following ways:

1. When a person transfers his shares. In such a case the transferor ceases to be a member as soon as the transferee is registered but not before.

2. When his shares are validly forfeited by the company.

3. When a person makes a valid surrender of his shares of the company.

4. When a company sells the shares in exercise of its right of lien over them.

5. When he dies.

6. When he is declared insolvent and the official assignee either disclaims or transfers the shares.

7. When he repudiates the contract on the ground of false or misleading statement in the prospectus of the company.

8. When he is holding redeemable preference shares and such shares are redeemed.

9. When share-warrants are issued in exchange of fully paid-up shares and the articles do not recognize holders of share-warrants as members.

10. When the share are sold in execution of a decree of the court. When the company is wound-up. But he remains liable as a contributory.

Liability of Member:

The liability of the members of a company depends on the nature of a company. Every member of an unlimited company is liable in full for all the debts of the company contracted during the period of his membership. The liability of the members of a company limited by guarantee is limited to the amount he undertook to contribute to the assets of the company in the event of winding up. In the case of a company limited by shares, the liability of a member of a company is the amount, if any, unpaid on his shares. If his shares are fully paid, his liability is nil for all purposes.

All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company. In the case of the death of a shareholder, his estate remains liable in respect of his shares. In the case of transfer of shares, the transferee on being registered as a holder becomes liable to pay all money thereafter becoming payable in respect of the shares.

A shareholder is personally and severally liable ‘if the numbers of the shareholders are reduced below the statutory minimum and the company carries on business for more than six months. The effect of this provision would be to make such a company for practical purposes an unlimited company.

Register of members:

Every company under the act shall keep a register of its members. There is no form but the following particulars must appear in the register.

(a) The name, address, and occupation of each member.

(b) In the case of a company having a share capital, the shares held by each member with numbers and amount paid or considered to be paid on them.

(c) The date on which each member’s name was entered in the register.

(d) The date on which any person ceased to be a member; and

(e) If the shares have been converted into stock, and notice of conversion given to the registrar, it will show the amount of stock held by each member.

For default in complying with these provisions, the company and every officer of the company who is in default shall be liable to a fine up to Rs. 50 for every day during which the default continues.