Introduction to Membership in a Company

Membership in a company is a fundamental concept that distinguishes between the roles and rights of different participants within the corporate structure. While the terms ‘member’ and ‘shareholder’ are often used interchangeably, they carry distinct legal meanings. A shareholder is an individual or entity that owns shares in a company, representing a portion of the company’s capital. However, an individual does not attain the status of a member until their name is formally entered in the company’s Register of Members. This distinction is critical in corporate governance, as it determines who is entitled to exercise various rights, such as voting and receiving dividends.

Membership of a company refers to individuals or entities that hold shares in the company and have their names entered in the company’s register of members. Members (also known as shareholders) enjoy certain rights and responsibilities, including voting rights at general meetings, entitlement to dividends, and participation in the distribution of surplus assets upon winding up of the company.

The Companies Act, 2013, elaborates on this differentiation, with specific provisions addressing the conditions under which shareholders and members operate. For instance, a shareholder may acquire shares through purchase, inheritance, or other means, but will not be recognized as a member until their details are recorded in the company’s official register. This process ensures that the company has an accurate and up-to-date record of its members, who are vested with certain statutory rights and obligations.

An exception to this general rule is found in Section 244 of the Companies Act, 2013, where even shareholders are treated as members under specific circumstances. This provision underscores the flexibility of the legal framework in accommodating different scenarios within corporate operations.

In companies limited by guarantee and not having a share capital, the concept of membership is slightly different. Individuals who provide a guarantee become members once their names are entered in the Register of Members. These members do not hold shares but guarantee a specified amount in the event of the company winding up. This structure is often used by non-profit organizations, where the focus is not on capital contributions but on the members’ commitment to support the company’s objectives.

Enactments and Sections

Companies Act, 2013 (India)

The primary legislation governing company membership in India is the Companies Act, 2013. Key sections relevant to membership include:

• Section 2(55): Defines a member as:

1. The subscriber to the memorandum of the company who has agreed to become a member and whose name is entered in the company’s register of members.
2. Every other person who agrees in writing to become a member and whose name is entered in the register of members.
3. Every person holding shares of the company whose name is entered as a beneficial owner in the records of a depository.

• Section 3: Deals with the formation of a company, requiring a minimum number of members (2 for a private company, 7 for a public company, and 1 for a One Person Company).
• Section 88: Mandates the maintenance of a register of members, specifying the details to be recorded.
• Section 58: Outlines the right to transfer shares and the conditions under which such transfers can be registered.
• Section 59: Provides the remedy in case of refusal of registration of transfer or transmission by the company.

Companies Act, 2006 (UK)

For comparative purposes, relevant sections from the UK Companies Act, 2006 include:

• Section 112: States that the subscribers to the memorandum and every other person who agrees to become a member and whose name is entered in the register of members are members of the company.
• Section 113: Requires every company to keep a register of its members, detailing the particulars of each member.
• Section 123: Specifies the right to inspect the register of members and obtain copies.

Case Laws

India

1. Borland’s Trustee v. Steel Brothers & Co. Ltd. (1901) 1 Ch 279:

• This case established the principle that a member’s shares constitute property and the member has the right to transfer shares subject to the articles of association.

1. Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535:

• The Supreme Court of India held that members’ rights can be enforced through legal proceedings if the company acts outside its powers or in a manner detrimental to the interests of its members.

1. Dale and Carrington Investment Pvt. Ltd. v. P.K. Prathapan, (2005) 1 SCC 212:

• The court emphasized the fiduciary duties of directors towards the members and ruled that directors must act in the best interests of the company and its shareholders.

United Kingdom

1. Re: Smith and Fawcett Ltd. (1942) Ch 304:

• This case highlighted the discretionary power of directors in accepting new members and their obligation to act bona fide in the interests of the company.

1. Eley v. Positive Government Security Life Assurance Co Ltd. (1876) 1 Ex D 88:

• The court ruled that a person named in the articles of association as a solicitor was not a member merely by virtue of such mention and had to be entered in the register of members.

1. Hickman v. Kent or Romney Marsh Sheep-Breeders’ Association (1915) 1 Ch 881:

• Established that a member must abide by the company’s articles of association, and any dispute regarding membership must be resolved per the company’s internal mechanisms.

Key Points

1. Becoming a Member: One can become a member by subscribing to the memorandum, acquiring shares, or through transfer or transmission of shares. The member’s name must be entered in the register of members.
2. Rights of Members: Include voting rights, entitlement to dividends, and the right to receive copies of financial statements. Members also have the right to inspect statutory registers and documents.
3. Responsibilities of Members: Include contributing to the assets of the company in the event of winding up, adhering to the company’s articles of association, and complying with calls on shares if unpaid.
4. Transfer and Transmission of Shares: Governed by the company’s articles of association and relevant statutory provisions. Companies have the discretion to refuse registration of transfers based on prescribed conditions.
5. Legal Remedies: Members can approach courts or tribunals if their rights are infringed or if there is oppression or mismanagement by the company’s directors or other members.

Conclusion

Membership in a company is a fundamental aspect of corporate governance, ensuring that shareholders’ rights and responsibilities are clearly defined and protected. The statutory framework, coupled with judicial interpretations, provides a robust mechanism for the orderly conduct of corporate affairs and the protection of members’ interests.