A company consists of members, though it has its own separate legal entity. The members of a company are the persons who constitute the company as a corporate body.
In the case of a company limited by shares, the shareholders are the members. The terms “members” and“shareholders” are usually used interchangeably, being synonymous, as there can be no membership except through the medium of shareholding. Thus, in general, every shareholder is a member and every member is a shareholder. However, there may be exceptions to this statement, a person may be a holder of shares by transfer but will not become its member until the transfer is registered in the books of the company in his favor and his name is entered in the register of members. Similarly, a member who has transferred his shares, though he does not hold any shares yet he continues to be a member of the company until the transfer is registered and his name is removed from the register of members maintained by the company.
In a company limited by guarantee, the persons who are liable under the guarantee clause in its Memorandum of Association(MOA) are members of the company.
In an unlimited company, the members are the persons who are liable to the company, each in proportion to the extent of their interests in the company, to contribute the sums necessary to discharge in full, the debts and liabilities of the company, in the event of its being wound-up.
The person desirous of becoming a member of a company must have the legal capacity of entering into an agreement in accordance with the provisions of the Indian Contract Act, 1972. Section 11 of the Indian Contract Act lays down that Every person is competent to contract who:
- is of the age of majority according to the law.
- is of sound mind.
- is not disqualified from contracting by any law.
Modes to become a member
(a) Subscribing to the Memorandum
In the case of a subscriber, no application or allotment is necessary to become a member. By his subscribing to the memorandum, he is deemed to have agreed to become a member and he becomes ipso facto member on the incorporation of the company and is liable for the shares he has subscribed.
(b) Agreement in Writing
(i) By an application and allotment
A person who applies for shares becomes a member when shares are allotted to him, a notice of allotment is issued to him and his name is entered on the register of members. There is an offer to take shares and acceptance of this offer when the shares are allotted. An Application may be absolute or conditional. If it is absolute, an allotment and its notice to the applicant will be sufficient acceptance. On the other hand, if the offer is conditional, the allotment must be made according to the condition as contained in the application. If there are conditional application and unconditional allotment, there is no contract.
(ii) By transfer of shares
A person can become a member of a company by acquiring its shares from an existing member and by getting his name entered in the register of members of the company.
(iii) By transmission of shares
A person may become a member of a company by operation of law if he succeeds to the estate of a deceased member. On the death of a member, his executor or the person who is entitled under the law to succeed to his estate gets the right to have the shares transmitted and registered in his name in the company’s register of members. No transfer deed is necessary in this case.
(iv) By Estoppel
A person is deemed to be a member of a company if he allows his name, without sufficient cause, to be on the register of members of the company or otherwise holds himself out or allows himself to be held out as a member. In such a case, he is stopped from denying his membership. He can, however, escape his liability by taking prompt action for having his name removed from the register of members on permissible grounds.
(c) Holding Shares as a Beneficial Owner in the Records of Depository.
Every person holding shares of the company and whose name is entered as a beneficial owner in the records of the depository shall be deemed to be a member of the concerned company.