Modes of Acquiring Membership, Rights & Duties - Members & Shareholders, Company Law | Company Law - B Com PDF Download

Modes of Acquiring Membership

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

1. Membership by Subscribing to Memorandum 

All the subscribers to the memorandum are deemed to have agreed to become members of the company and on the registration of the company their names are automatically entered as members in the company's register of members. Thus, the signatories to the memorandum become members of the company simply by reason of their having signed the memorandum. Neither an application form nor allotment of shares is necessary for becoming a member in their case. A person who signs the memorandum enters into a contract with the company to take the number of shares written opposite his name and be cannot repudiate his contract on the ground of misrepresentation.

In the case of Metal Constituents Co., (1902) 1.Ch. 707, a subscriber agreed to take 350 shares. Then, he wanted to rescind the contract on the ground of misrepresentation on the part of the promoters. Held that the subscriber by signing the Memorandum becomes liable to other members in the company brought into existence by his own act. So he can not rescind the contract.

2. Membership by Qualification shares

Before a person can be appointed a director of a public company, he must take, or sign an undertaking to take and pay for the qualification shares. He thus becomes a member and is in the same position as a subscriber to the memorandum of the company is.

3. Membership by Application and Allotment

A person may become a member of a company by an application for shares subject to formal acceptance by the company. The ordinary law of contracts applies to the agreement to take shares in a company. An application for shares 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 made on the basis of the conditions specified. Where there is a conditional application for shares and an unconditional allotment, there is no contract constituted.

R agreed to take shares in a company provided he was appointed local manager of the company. Shares were allotted to him but he was not given the appointment. R refused to take the shares. It was held that R was not a member as his application was conditional and allotment was unconditional. [Roger's case (1868) L.R. 3Ch. 633].

4. Membership by Transfer

Where a transfer of share is made and the transfer is registered with the company, the transferee becomes entitled to be placed on the company's register of members in the place of the transferor in respect of the shares so transferred.

5. Membership by Transmission

On the death of a member his shares rest with his legal representative. The legal representative is entitled to be registered as the holder of the shares and to get his name entered as member in the register of members provided there is no provision in the articles of the company and for the purpose no instrument of transfer is required to be delivered by him to the company.

If a company unduly refuses to accept a transmission, the same remedies are available to the legal representative as in the case of transfer.

In the case of Indian Chemical Products V. State of Orissa, AIR (1967) SC 253, by devolution, the state of Orissa had become entitled to the shares of the Maharajas. But the company refused to register the shares in the name of state's representative. It was held that the company was bound to register the shares in favour of the state's representative because it was a case of transmission. And the state became entitled to the shares due to the operation of law.

6. Membership by Estoppel

If a person holds himself out in writing or allows his name to be on the register of members, he is deemed to be a member of the company. Thus if a persons's name is improperly placed on the register of members, and he knows and assents to it, he cannot afterwards say that he is not a member. Estoppel is simply a rule of evidence which prevents a person from denying the legal implications of his conduct.

Duties and Liabilities of Members

Duties

It is the duty of a shareholder :

(a) As a subscriber of the memorandum, to take the share written opposite his name direct from the company and pay for them ;

(b) To take shares when they are duly allotted to him and pay for them according to the terms of issue of the shares ;

(c) To pay all valid calls as and when they are made;

(d) To abide by the decisions of the majority of members unless the majority acts vindictively, oppressively, mala fide or fraudulently;

(e) To contribute to the asset of the company when it goes into liquidation.

Liability

The liability of the members of a company depends upon the nature of the company.

Company limited by shares. In the case of a company limited by shares, the liability of a member of company is the amount, if any unpaid on his shares. If his shares are fully paid, his liability is nil for all purposes.

Company limited by guarantee. The liability of the members of a company limited by guarantee is limited to the amount they undertook to contribute to the assets of the company in the event of winding up.

Company with unlimited liability. Every member of an unlimited company is liable in full for all debts contracted by the company during the period he was a member.

Rights of Members

When a person becomes a member of a company he is entitled to exercise all the rights of a member until he ceases to be a member in accordance with the provisions of the Act. The rights of a member can be classified under the following heads :

(A) Statutory Rights

Statutory rights are those which are given to the members by the statute, i.e. the Companies Act, 1956. No document of the company can take away or modify such rights. Such rights, for example, are :

1. Right to receive copies of the Balance Sheet and Profit and Loss Account of the company along with the auditor's report.
2. Right to obtain a copy of the contract for the appointment of managing directors/managers of the company.
3. Right to receive notice of the general meetings of the company.
4. Right to get the copies of the Memorandum and the Articles of the company on payment of the prescribed fees.
5. Right to inspect the register of members, and debentureholders and index registers, annual returns etc. and get copies thereof on payment of the prescribed fee.
6. Right to inspect the debenture trust deed and get copies thereof on payment of the prescribed fees.
7. Right to inspect the register of charges and get copies thereof on payment of the prescribed fees.
8. Right to receive a copy of the statutory report.
9. Right to apply to the Central Government to call the annual general meeting when default is made by the company in holding annual general meeting (AGM).
10. Right to attend the AGM.
11. Right to appoint a proxy to attend the AGM and vote in his place and right to inspect the proxy register.
12. Right to receive a share certificate in respect of his share holding and a certificate of stock within a prescribed time.
13. Right to transfer shares.
14. Right to receive dividend when declared by the company.
15. Preemptive right i.e. right to have the rights shares on any further issue of shares.
16. Right of participation in the appointment the directors who are to retire by rotation by taking part in the AGM.
17. Right of participation in appointing the auditors and fixing their remuneration.
18. Right to have a share in the surplus of assets, if any, on the winding up of the company.
19. Right of dissident shareholders to apply to the court to have any variation of their rights cancelled.
20. Right to have notice of any resolution requiring a special notice in the meeting.
21. Right to inspect the shareholders' minutes book and get copies thereof on payment of the prescribed fees.

(B) Documentary Rights 

There rights are the rights given by the two basic documents i.e. memorandum of association and articles of association. The company may also give certain rights to its members by expressly providing for them in the memorandum or the articles of the company.

(C) Legal Rights

These rights are given to members under general law. For example, a person who has taken shares of a company on the faith of a misleading prospectus can avoid the contract and claim damages under the general law.