WLC 33 CHAPTER 07 – MEMBERS

CHAPTER 7
MEMBERS AND SHAREHOLDERS
MEMBER [SECTION 41]
The members of a company consist of
1. The subscriber of the memorandum are deemed to have become members, and on the registration
of the company they must be entered as members in its register of members [Section 41(1)];
2. All other persons who have agreed to become members of the company and whose names are
entered in the register of members [Section 41(2)]. A person can agree to take shares of a company
either as the subscriber to the memorandum at the initial stage of its formation or in any of the following
manner: -
 By subscribing to its further or new shares;
 On transfer of its shares from an existing member;
 On acquisition or purchase of its shares (for example take over bid, renunciation of rights shares by
an existing member);
 On acquisition of its shares by devolution (for example, transmission of shares to legal heirs of a
deceased member, on insolvency, upon merger/amalgamation through court’s order);
 On conversion of convertible debentures or loans pursuant to the terms of issue of such debenture
or loan agreement respectively.
3. It must be noted here that vide Depositories Act 1996, a person may also become a member of a
company through the depository system. [Section 41(3)]
• The fundamental difference between the subscribers who agree to take shares at the
time of formation of the company and persons who agree to take shares later is that the former become
members immediately on incorporation of the company, that is they automatically become members. The
latter, though having agreed to take shares, become members only after their names are entered in the register
of members of the company.
MEMBER v. SHAREHOLDER
• In the case of a company limited by shares, the persons whose names are put on the
Register of members are the members of the members of the company. They may also be called shareholders
of the company as they have been allotted shares and are holding them in their own right. In such a situation,
the terms `member` and `shareholder` are interchangeably used to mean the same person.
• However, sometimes a distinction is maintained between a member and a shareholder
in the case of a company having a share capital.
1. Now, in the following three situation he will cease to be a shareholder, though he continues to be the member
of the company: -
a) On sale - X sells the shares to Y. He fills in a share transfer from and hands it over to Y. He also
gives the share certificate representing the shares to Y. In return for sale of shares, he receives
consideration from Y. X is no longer a shareholder as he has sold the shares and property in the
shares has passes to Y. But the name of X continues to be on the Register of member till the transfer
of shares is registered by the company in favour of Y.
b) On death - X dies and his property including shares is inherited by Y, his legal representative. X I no
longer the shareholder. He is not in existence to hold the shares. Y is holding the shares in his own
right and, therefore, can right be called the shareholder. But X continues to be the member as his
name still appears on the Register of members. However, as soon as Y gets his own name registered
in the Register of members, then X will cease to be a member.
c) On becoming insolvent - X becomes insolvent and his property, including shares, vests in the Official
Receiver of Official Assignee. The official Receiver or Assignee is holding the shares in his own right.
Therefore, X is no longer the shareholder, though he continues to be the member of the company.
2. Ordinarily, a person who is holding a share warrant is shareholder but he is not a member of the company as
his name is struck off the Register of members [Section 2(27) and section 115].
3. In the case of a company limited by guarantee having no share capital or an unlimited company having no
share capital, there will be only `members` but no `shareholder. `
CESSATION OF MEMBERSHIP
• A person may cease to be a member of a company
(i) by transferring his shares to another person.
(ii) by rescission of the contract of membership on the ground of misrepresentation or mistake.

LECTURES BY PROF. S N GHOSH

 WLC 34 CHAPTER 07 – MEMBERS

(iii) by his shares being sold by the company under some provision in its articles (e.g. for enforcing a lien),
and by the purchaser being registered as holder in his place;
(iv) by his shares being forfeited,
(v) by death;
(vi) He was holder of redeemable preference shares, which have now been redeemed by the company.
(vii) His shares are purchased either by the company itself under a buy-back scheme under Section 77A or
another member of the company or by the company itself by an order of Tribunal under section 402.
(viii) He has got share warrants issued in exchange for share certificates of fully paid up shares; and
(ix) On the commencement of winding-up (but he will be liable as a contributory and is also entitled to a share
in the surplus assets, if).
RIGHTS AND LIABILITIES OF A MEMBER/SHAREHOLDER
• The various rights of a member could be grouped under the following two categories:
RIGHTS LIABILITIES
Contractual – rights available to a member by virtue of the contract • Some of the important ones are stated hereunder:
with the company and any other members via the Memorandum and 1. If shares are not allotted for consideration other than cash, then a
Articles of Association member must pay the whole nominal value of his shares in cash.
Statutory: - (not exhaustive) 2. If a member is holding partly paid-up shares and the company
i. The right to vote at all meetings [Sec. 87]; goes into liquidation, then he becomes liable as contributory to
ii. The right to requisition an extraordinary general meeting of pay, if called upon to do so, towards the assets of the company
the company [Sec. 169]; [Sec. 429]. A contributory is generally a person who can be called
iii. The right to receive notice of a general meeting [Sec. 172]; upon to contribute money unpaid on the shares of the company in
iv. The right to appoint proxy and inspect proxy register [Sec. the event of liquidation of the company.
176]; 3. A person may be included in the 'B` list of contributories, as a
v. In the case of a body corporate which is a member, the right past member, and required to pay to the extent of the amount
to appoint a representative to attend a general meeting on its remaining unpaid on the shares, which he held within one year
behalf [Sec. 187]; prior to the commencement of winding up.
vi. To elect directors and thus to participate in the management 4. If the number of members falls below seven in the case of a
through them; public company, and below two in the case of a private company,
vii. To enjoy the profits of the company in the shape of and the company continues to carryon its business beyond six
dividends; months, every member who is aware of the reduced membership
viii. To apply to the court for relief in case of oppression and shall be liable for all those liabilities and debts contracted after the
mismanagement; expiry of six months from the date membership fell below the
ix. To apply to the court for winding-up of the company; and minimum [Sec. 45].
x. To share in the surplus on winding-up.
xi. To transfer shares subject to the provisions of the
Companies Act and the Articles of Association [Sec. 82].
xii. To inspect the Register of members and Register of
debenture-holders and get extracts therefrom [Sec. 163].
xiii. To obtain copies of Memorandum and Articles on request
and payment of the prescribed fee.
xiv. To obtain, on request, minutes of proceedings at general
meetings as also to inspect the minutes [Sec. 196].
xv. To apply to the court to have any variation of shareholders'
rights set aside [Sec. 106].
xvi. To participate in the removal of directors by passing an
ordinary resolution [Sec. 284].
xvii. To sue the company for enforcing his right against the
company in any appropriate capacity.
CONCEPT OF “BENEFICIAL OWNER” [SECTION 41(3)]
• By fiction of law, the Depository (NSDL/CDSL) is deemed to be a registered owner of the securities. The
name of the depository shall appear in the books of the issuer as registered owner of the securities. The actual
owner of the shares becomes `beneficial owner`.
• Any person whose name appears on the records of a depository and who holds equity share capital of a
company is deemed to be a member of the concerned company even if his name does not appear on the
register of members of the company maintained by the company.
• The register and index of beneficial owners maintained by depositories are deemed to be register and
index of members/debenture holders of the company, even though these are not maintained by the company.

LECTURES BY PROF. S N GHOSH