Bank Officer’s Confederation v. Dhanalakshmi Bank Ltd

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Introduction

The term ‘member’ has been defined under Sec. 2(27) and Sec. 41 of the Companies Act, 1956. Under Sec. 2(27), the word ‘member’ is defined in a very comprehensive manner and in relation to a company includes every type of member but excludes a bearer of a share- warrant of a company issued under Sec. 114 of the Act. Under Sec. 41(1), ‘membership of company,’ subscribers to the company shall be deemed to have been members of the company and their names shall be entered in the register of members. Under Sec. 41(2), every other person agreeing in writing to become a member of the company and whose name is entered in the register of members shall be a member of the company. Thus, the first part of Sec. 41 deals with deemed membership [1] and the second part deals with persons other than subscribers to the memorandum of the company. [2]

Various complexities are associated with the definition of a ‘member’ under the Companies Act, especially under Sec. 41. Under Sec. 41, a ‘person’ can become a member of a company. The term ‘person’ has not been elaborated in the Companies Act. This has led to confusion as to who can become the member of a company.

Further, the Companies Act, 1956 confer rights, in most cases to members and not shareholders e.g. right to vote [3] , apply for winding up [4] , to get notice of annual general meeting [5] , to receive dividend [6] , to apply for investigation of company affairs [7] , to inspect and to form part of quorum. [8] There are, however, a number of case laws which suggest that the expression ‘member’, ‘shareholder’ and ‘holder of a share’ are used in the Act in the same sense. [9] This, has led to another complexity relating equating a ‘member’ with a ‘shareholder.’

Further, many sections like ‘winding up by court,’ [10] ‘Official Liquidator’ [11] and ‘Ordinary powers of court,’ [12] use the term ‘contributory’ synonymously with the term ‘member.’ [13] There is a need to define the difference between the two. Also, certain instances under Sec. 41(3), like rights of non-resident Global Depository Receipt holder needs clarification.

This project aims to answer the following research questions:

Who is eligible to become a member of a company?

Is there a difference between ‘shareholder’ and ‘member’ of a company?

What is the difference between a ‘member’ and a ‘contributory’?

Whether a non-resident holder of a Global Depository Receipt a ‘member’ under Sec. 41(3)?

Who Can Be A Member Of A Company

The term ‘person’ has been defined very liberally under the General Clauses Act, as including any company or association or body of individuals, whether incorporated or not. [14] A subscriber becomes automatic member on incorporation. This is necessary to create some confidence in the investing public. [15] Furthermore, their membership is beyond revocation. [16] Though a partnership firm can hold shares and be a shareholder, [17] it cannot be a member as such. [18]

A company can also be a member of another company, as long as it has the authority for investment in the shares of other companies in the company’s memorandum. Without such authority, the investment in the shares of other companies, is likely to be struck down as ultra vires. [19] There is, however, a prohibition on a subsidiary company being a member of the holding company. Any transfer or allotment of shares to that effect would be void. [20]

A firm, not being a ‘person’ cannot be registered as a member of a company except when the company is licensed under Sec. 25 of the Act. Companies having firms as registered members should take steps to rectify the position within a specified time, else, action can be taken under Sec. 150 (2) of the Companies Act, 1956. [21]

Although, it is a ‘person’ for the purposes of Income Tax, a Hindu Undivided Family (HUF) is not a juristic person per se. There is no legal bar on HUF to invest its money in shares of a company, and the Companies Act does not prohibit membership of HUF. Shares can be registered in the name of the Karta. [22]

Similarly, Trade Unions can also hold shares in its name and be a member of the company. [23]

A foreign national or a non-resident Indian may become a member of a company incorporated in India by complying with the requirements under the Foreign Exchange Management Act 1999 and the rules or regulations made there under.

Thus, with certain restriction, a large number of entities qualify to be a member of a company.

Distinguishing ‘Member’ From ‘Shareholder’

As explained above, there is a need to draw a distinction between a ‘member’ and a ‘shareholder’ or ‘holder of a share’ of a company, as both have different rights and liabilities attached to them.

In case of a company, limited by shares, members, as mentioned in the Register of members, may also be called shareholders of the company, as shares are allotted to them, and held by them in their own right. In such situation, the terms ‘members’ and ‘shareholder’ are interchangeably used. [24]

An unlimited company or a company limited by guarantee may not have a share capital. There are no shareholders in the company. Thus, a member may not be a shareholder. Such a company may regulate admission to membership by adopting rules and no one is termed as a ‘shareholder’ or ‘holder of a share’ in such company. [25]

Even in Companies with a share capital, a distinction is made between a member and a shareholder. A person may be a member and another be the shareholder of the company with regards to same set of shares. This distinction arises in the following situations:

Sale of shares: In case of sale of shares, till the transfer of shares is registered by the company in favour of other and his name entered into the Register of Members, the transferee remains a shareholder, but not member of the company. [26]

On death: In case of death of an existing shareholder, his/her legal heir becomes the shareholder. However, status of a member is acquired after his name is registered on the Register of Members. It had been held that a legal heir falls within the meaning of a member, but only after his name is entered into the Register of Members. [27]

Insolvency of shareholder: The shares of the insolvent shareholder are held by the Official Assignee, who holds them in his own right. Thus, no shares are held by the insolvent, and the person ceases to be the shareholder, but continues to be a member of the company. [28]

Ordinarily, a person holding share warrant is a shareholder but not considered a member of the company. An exception is provided under Sec. 115(5) as per which a bearer of a share warrant may be deemed to be a member in case the articles of association so provide for certain purposes as defined in the articles. [29]

A subscriber to the Memorandum of Association automatically becomes a member, even before actual allotment of shares. [30] Thus, till shares are allotted, the subscriber remains a member, but not a shareholder. However, an applicant who has failed to get himself on the register of members, cannot claim any right on the basis of the share certificates held by him. [31] The moment the shares are allotted and share certificate signed and the name entered in the Register of members, the allottee becomes the shareholder, irrespective of him receiving the shares or not. [32]

Entry in the Register of Members is an essential criterion under Sec. 41(1) and (2) for a person to be deemed as a member of the company. As per Andhra Pradesh High Court, a shareholder in whose favour share certificates are issued can exercise rights as member of the company, notwithstanding the omission of his name from the register. [33] Furthermore, a shareholder whose name is not entered in the Register of Members cannot be permitted to take advantage of his default to non-suit share holder. [34]

Under Sec. 41(2), an ‘agreement in writing’ necessary to become a member of the company. Entry of name of a person in the Register of Members, without their being any agreement on his part ‘in writing’ will be contrary to Sec. 41(2). His name cannot be permitted to remain on the register. In cases where no application in writing for an allotment was made, and allotment of shares were done by converting loans into shares, under an oral agreement, it was held that this was a non-compliance with the requirement of Sec. 41(2) and, therefore, the petitioner, whose loans was converted, had sufficient cause to seek rectification. [35] Further, this is a statutory requirement based on public policy and cannot be waived by investors. [36] The Company can be ordered to rectify the Register under Sec. 114(4)(a)(i). Courts have, however, held that an agreement in writing will be presumed where name of the person is mentioned in the Register of Members, and who has accepted the position of a member, and has acted accordingly. It is a rebuttable presumption by proof to the contrary. [37]

English Position: The English Act uses the phrase ‘agrees to become a member,’ instead of ‘agreement in writing’ qualification under Indian law. Indian position, earlier, was similar to English law, when un-amended Sec. 41(2) read as “every other person who agrees to become a member of the company.” After the amendment, the phrase ‘in writing’were incorporated, based on the report of the Companies Act Amendment Committee, as per which, the clause was being misused by companies. At time of liquidation, entries are made in the register of members of the names of persons who never applied for shares, in order to fasten liability on these persons as contributories. To avoid such contingency, it was suggested that the addition of the words `in writing’ after the word `agrees’ in section 41(2) should be done. [38] Assent to become a member and not a written contract between the person and the company is required for a person to become member under English law. [39]

Distinguishing Member from Contributory

The term’ contributory’ means every person liable to contribute to the assets of a company in the event of its being wound-up, and includes the holder of any shares which are fully paid-up. [40] Further, the expression ‘deemed contributories’ includes any person alleged to be a contributory.

Pursuant to this, members may be called upon, to contribute towards the assets of the company. Accordingly, they are called ‘contributories’. A member does not cease to be a member, merely because winding up has commenced and he has been called as a ‘contributory.’ He continues to be a member as long as the requirements of Sec. 41 read with Sec. 150 are complied with. On other words, it can be interpreted that till a person’s name continues to remain on the Register of members, he shall be a member. [41]

Terms ‘contributory’ and ‘member’ are not interchangeable, since under Sec. 428 while every member would be a contributory, the converse would not be true, unless the name of the contributory is entered into the Register of Members. [42]

Depository as Member

Sec.41(3) was introduced as a consequential amendment made by the Depositories Act, 1996. It provides a legal framework for establishment of depositories, to record ownership details in book entry form. Any person holding equity share capital of a company is deemed to be a member of the company, as long as his name is entered as beneficial owner in the records of the depository. [43] Thus, Entry in the records of a depository is deemed to be an entry in the Register of members.

A question arose, that whether a non-resident holder of Global Depository Receipts is a member of the issuing company within the meaning of Sec. 41 of the Act. Global Depository Receipts’ (GDRs) has been defined as “an instrument in the form a depository receipt or certificate (by whatever name it is called) created by the overseas depository bank outside India and issued to non resident investors against the issue of ordinary shares or foreign currency convertible bonds of issuing company” under the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 (“the Scheme”). The Ministry of Corporate Affairs issued Circular [44] wherein it clarified the question in negative.

As per the circular, since, holder of a GDR is neither the subscriber to the memorandum nor a holder of the shares, his name cannot be entered in the Register of Members under Sec. 41(1) and (2). Therefore, a holder of GDR cannot be called a member of the company. Furthermore, as per Sec. 41(3), a person holding a share capital of the company and whose name is entered as beneficial owner in the records of the depository, is deemed to be a member of the company. The overseas depository bank as mentioned in the ‘scheme,’ is not a depository under the Companies Act, 1956 or the Depository Act, 1996. It also does not hold the share capital, therefore, it cannot be deemed to be a member of the company.

A holder of global depository receipts may become a member of the company only on transfer/redemption of the GDR into underlying equity shares after following the procedure provided in the ‘Scheme’/provisions of the Companies Act, 1956.

Conclusion

There are many complexities associated with defining the term ‘member’ under the Companies Act. One of the main problems is to identify who are eligible to become a member. With certain restrictions, such as those mentioned under Sec. 42 of the Companies Act, anyone qualifying as a person under the General Clauses Act definition can become a member of the Company.

The terms ‘member’ and ‘shareholder’ have been used synonymously, creating uncertainty regarding status of both. There is a difference between a member and a shareholder. One of the main distinction is entry in the Register of Members. Further, shareholder had to agree ‘in writing’ to become a shareholder, else the allotment of shares, and the consequent membership is to be held void.

A member does not cease to be a member after commencing of winding up of a company, merely because he had been called as a contributory. All the members can be contributory, but all contributories may not be member of the company. Thus, both the terms cannot be used interchangeably. Further, non-resident holder of a Global Depository Receipt cannot be considered as a member of the company unless the receipt is redeemed into shares.