Modes of Acquisition of Membership in a Company

MODES OF ACQUISITION OF MEMBERSHIP IN A COMPANY

Introduction

A company is composed of and run by members. Members delegate their powers to the directors of the company who direct, order, control and manage the affairs of the company.

Sec 55 of Companies Act defines a member as

member”, in relation to a company, means—

  • 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;
  • 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;
  • every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository;

In all the above cases, two essential prerequisites are required to acquire a membership in the company,

  1. agreement to become a member;

 A person who is capable to enter into a contract in accordance to the provisions of The Indian Contract Act, 1872 has to be entered into an agreement.

2.  entry of the name of the person so agreeing, in the register of members of the company.

 

Both these conditions are cumulative. [Balkrishan Gupta v. Swadeshi Polytex Ltd. (1985) 58 Com Cases 563].

A public company must have minimum 7 members,

Private company must have minimum 2 members and

See also  Communication of Offer and Acceptance

One Person Company should comprise of 1 member.

Modes of Acquiring Membership

A person may acquire membership of a company;

  • by subscribing to the Memorandum of Association (deemed agreement); or
  • by agreeing in writing to become a member:
  • by making an application to the company for allotment of shares; or
  • by executing an instrument of transfer of shares as transferee; or
  • by consenting to the transfer of share of a deceased member in his name; or
  • by acquiescence or estoppel
  • by holding shares of a company and whose name is entered as beneficial owner in the records of a depository (Under the Depositories Act, 1996)

 

A. Subscribers to Memorandum

Memorandum means

‘Memorandum of Association’ originally framed or as altered from time to time in pursuance of any previous company law or of this Act 

  • Any person who subscribes his name to memorandum is deemed to be the member of the company and ipso facto becomes member on the incorporation of the company. In such a case the process of application or allotment of shares is not a mandate to become a member.
  • When a person signs memorandum for any number of shares, he has the absolute liability to take the bond of shares and no relief would be granted.

A subscriber cannot rescind a contract for the purchase of shares.
(In Re. Metal Constituents Co., (1902) 1.Ch. 707)

  • Subscribers shall become members of the company merely by the fact of subscription.

B.  Agreement in Writing

An application in writing and not a mere oral testimony would qualify as an agreement in writing by the person willing to become a member of company

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(Sree Ayyanar Mills and Spinning Ltd).

 By application and allotment

The general law of contract applies to this transaction. There is an offer to take                  and acceptance of this offer when the shares are allotted.

A person who applies to shares of the company ones he gets the shares allotted along with notice of allotment and his name is entered in the Register of Members.

By transfer of shares

The shares held by a member are movable property as per Transfer of Property Act, 1882 and Section 44 of the Companies Act 2013. Any interest or shares a person hold in the company can be transferred by the purview of Section 8 as authorized by the Articles of the Company.
Though, a case of restriction on transfer of shares has been imposed on private companies.

A person may become member of the company by acquiring shares from an existing member or by a transfer of shares in the register of members of the company.

Instrument of Transfer

  1. The instrument has to be executed by both the transferor or transferee or by any other person on their behalf
  2. The instrument of transfer is to be validated with the share certificate.
  3. The instrument of transfer must be duly stamped and dated as in the prescribed format.
  4. The transfer shall have the hold of shares unless the name of transferee is registered in the Register of Members

By transmission of shares

A person may also become member of a company by operation of law for which he has to succeed the estate of the deceased.

On death of a member of the company, the following categories hold a lien on his shares

  1. The survivor or survivors as the case may be in case of joint holders
  2. In absence of legal representatives, a nominee or nominees in case of a single holder
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Such a person who is entitled to the interest of the deceased is to make election.

In case of OPC, the nominee shall be entitled to the interest of the deceased.

No instrument of transfer is required in case of transmission.

If the legal member desires to be the registered member, the company can do so or in alternative he can request transfer of shares.

By acquiescence or estoppels

If the name of a person appears to be a member of the company, without sufficient cause, he is estopped from denying the membership in the company.
He can however escape the liability by removing his name from the registers as a prompt action.

C. Holding shares as beneficial owner in the company

The depository means a depository as defined in clause e of Sec 2(1) of Indian Depositories Act, 1996.
A person who holds shares in a company and the name is entered in the records of Depositories as a beneficial owner is deemed to be a member in the company.

As per the provisions of Sec 89 of Companies Act, 2013, a clear mark of distinction is to be made between registered owner and the beneficial owner if both are different persons by a declaration to be mandatorily stated by the beneficial owner in FORM BEN 1.

 

Author: Aathira Pillai,
Dr. D. Y. Patil College of Law, BLSLLB 4 th year

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