Definition of Member (Section 2(55))

In the context of a company, a "member" is a person who constitutes the company as a corporate entity. The members are the owners of the company, and their names are legally recorded in the company's statutory books. The collective body of members forms the company.

The term "member" is formally defined under Section 2(55) of the Companies Act, 2013. According to this section, a 'member', in relation to a company, means:

1. The subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as a member in its register of members;
2. Every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; and
3. Every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

Person agreeing to become a member and whose name is entered in the Register of Members

From the legal definition, two fundamental conditions must be met for a person to be considered a member of a company:

1. Agreement to become a member: There must be an agreement (express or implied) by the person to become a member. This agreement can be made in several ways:
   • By subscribing to the Memorandum of Association (MOA) during the company's incorporation.
   • By applying for and being allotted shares by the company.
   • By purchasing shares from an existing member (transfer) and lodging the instrument of transfer with the company.
   • By acquiring shares through operation of law, such as inheritance (transmission).
2. Entry in the Register of Members: The person's name must be entered in the company's statutory Register of Members. This is the conclusive step. A person may have agreed to take shares, but they do not attain the legal status of a member until their name is formally entered into this register.

The only exception is for the subscribers to the MOA, who are deemed to be members automatically upon the company's incorporation, even before their names are formally entered in the register.

For shares held in electronic (dematerialized) form, the person whose name is recorded as the beneficial owner in the records of the depository (like NSDL or CDSL) is treated as the member.

Distinction between Member and Shareholder

The terms "member" and "shareholder" are often used interchangeably, and in the case of a company limited by shares, they generally refer to the same person. A shareholder is a person who holds shares in the company, and a member is a person whose name is on the Register of Members. However, there are specific legal situations where a person can be a member without being a shareholder, and vice versa. Therefore, the two terms are not always synonymous.

Situations Illustrating the Distinction:

A person may be a MEMBER but not a SHAREHOLDER in the following cases:

• Company Limited by Guarantee: In a company limited by guarantee having no share capital (e.g., non-profit organizations), there are members who have undertaken to contribute a certain sum upon winding up, but there are no shareholders.
• Subscribers to MOA: The subscribers to the MOA become members the moment the company is incorporated, even before any shares are formally allotted to them. For this brief period, they are members but not yet shareholders.
• Transferor of Shares: After a member has sold their shares, they remain the legal member until the transferee's (buyer's) name is entered in the Register of Members. During this interval, the transferor is a member but not a beneficial shareholder.

A person may be a SHAREHOLDER but not a MEMBER in the following cases:

• Holder of a Share Warrant: A share warrant is a bearer document, and the holder of the warrant is a shareholder. However, the company strikes the original member's name off the register upon issuing the warrant, so the holder of the warrant is not a member. (Note: Share warrants are no longer permitted under the Companies Act, 2013).
• Transferee of Shares: A person who has purchased shares but whose name has not yet been registered in the Register of Members is a shareholder in the equitable sense but is not a legal member of the company.
• Legal Representative of a Deceased Member: Upon the death of a member, their legal representative (e.g., an heir) becomes the shareholder by transmission. However, they do not become a member until they apply to the company and their name is entered in the Register of Members.

Register of Members

The Register of Members is a statutory register that every company is required to maintain under Section 88 of the Companies Act, 2013. It is one of the most important statutory books of a company as it serves as prima facie (at first sight) evidence of the ownership of the company. The name, address, and other details of every member are recorded in this register.

The company is legally bound to treat the persons whose names appear in this register as the members of the company and to grant them all the associated rights, such as the right to vote, receive dividends, and get notices of meetings.

Contents of the Register

The Register of Members must contain the following particulars for each member:

• Name, address, and occupation (if any).
• Email address, Permanent Account Number (PAN), Corporate Identity Number (CIN) or Unique Identification Number (UIN), if any.
• Father's/Mother's/Spouse's name and Nationality.
• The shares held by each member, distinguishing each share by its number, and the amount paid or agreed to be considered as paid on those shares.
• The date on which each person was entered in the register as a member.
• The date on which any person ceased to be a member.

If a company has more than fifty members, it must also maintain an index of the names in the register.

Location and Inspection

The Register of Members must be kept at the registered office of the company. It can be kept at another place within the same city, town, or village where the registered office is located, but only if a special resolution is passed by the company to this effect.

The register is a public document and is open for inspection during business hours by:

• Any member, free of charge.
• Any other person, on payment of a prescribed fee.

This right of inspection ensures transparency in the ownership and management of the company.

Right to attend and vote at meetings

The right to participate in the decision-making process of the company is the most fundamental right of a member. This is primarily exercised by attending and voting at the general meetings of the company, where key decisions regarding its management and future are made. This right is a cornerstone of corporate democracy.

Right to Receive Notice (Section 101)

To exercise the right to attend a meeting, a member must first be informed about it. Section 101 of the Companies Act, 2013, mandates that a clear notice of at least 21 days must be given to every member for a general meeting. This notice must specify the place, day, date, and hour of the meeting and must contain a statement of the business to be transacted.

Right to Attend and Speak

Every member of the company has the right to attend the general meetings (Annual General Meeting or Extraordinary General Meeting) either in person or through a proxy. They have the right to speak and participate in the discussions on the matters being considered at the meeting.

Right to Vote (Section 47)

The right to vote is the member's tool to influence the company's management. According to Section 47:

• Every member holding equity share capital has a right to vote on every resolution placed before the company.
• The voting right on a poll shall be in proportion to the member's share in the paid-up equity share capital of the company. This embodies the principle of "one share, one vote".
• Preference shareholders generally have a right to vote only on resolutions that directly affect their rights.

Right to Appoint a Proxy (Section 105)

If a member is unable to attend a meeting in person, they have a statutory right to appoint another person to attend and vote on their behalf. This appointed person is known as a proxy.

• A proxy need not be a member of the company.
• A proxy has the right to vote but does not have the right to speak at the meeting.
• A member of a company not having share capital cannot appoint a proxy unless the articles provide for it.

Right to receive dividends

A dividend is a portion of the company's profits that is distributed to its shareholders. The right to receive a share in the company's profits is a primary incentive for investing in a company. However, this right is not absolute and is subject to the company's financial performance and the decisions of its management and members.

Declaration and Payment of Dividend

• Directors' Recommendation: The process begins with the Board of Directors assessing the company's profits and recommending a rate of dividend.
• Shareholders' Declaration: The dividend is then formally declared by the members at the Annual General Meeting (AGM). The members can declare a lower rate of dividend than what is recommended by the Board, but they cannot declare a higher rate.
• Dividend as a Debt: Once a dividend is declared, it becomes a statutory debt owed by the company to its shareholders. The company is legally bound to pay it.
• Time Limit for Payment (Section 127): A declared dividend must be paid to the entitled shareholders within 30 days from the date of declaration. Failure to do so attracts penalties for the company and its directors.

Interim vs. Final Dividend

• Final Dividend: This is the dividend recommended by the Board and declared by the members at the AGM after the final accounts for the financial year are prepared.
• Interim Dividend: This is a dividend declared by the Board of Directors *between* two AGMs, i.e., during the financial year, out of the current year's profits.

Right to inspect registers and minutes

To ensure transparency and hold the management accountable, the Companies Act, 2013, grants members the right to inspect various statutory registers and records of the company. This right allows members to stay informed about the company's membership, management, and key decisions.

Key Documents for Inspection

Members have the right to inspect the following, among others, during business hours, generally free of charge:

• Register of Members (Section 88): To see who the other members of the company are.
• Minutes of General Meetings (Section 119): To get a record of the decisions taken and proceedings of all general meetings.
• Register of Directors and Key Managerial Personnel (KMP) (Section 170): To know the details of the company's top management and their shareholding.
• Register of Charges (Section 85): To see the details of loans and mortgages taken by the company on its assets.
• Audited Financial Statements and Reports: Members have a right to receive a copy of the financial statements, Board's report, and auditor's report before the AGM (Section 136).

This right of inspection empowers members to monitor the company's affairs and is a crucial tool for corporate governance.

Right to receive copy of MOA and AOA

The Memorandum of Association (MOA) and Articles of Association (AOA) are the constitutional documents of the company. The MOA defines its objectives and powers, while the AOA contains the rules for its internal management. Every member has a fundamental right to know the contents of these documents that govern the company and their relationship with it.

Statutory Right under Section 17

Section 17 of the Companies Act, 2013, provides that every company shall, on being so requested by a member, send to them a copy of the MOA and AOA within seven days of the request, on payment of a prescribed fee.

This ensures that every member can have a personal copy of the company's constitution for their reference, helping them understand their rights, the company's scope of operations, and the rules of its governance.

Pre-emptive rights (Section 62)

This is a significant financial right that protects existing shareholders from the dilution of their ownership stake in the company. It is also known as the "right of first refusal".

Section 62 of the Companies Act, 2013, mandates that whenever a company proposes to increase its subscribed capital by a further issue of shares, it must first offer these shares to its existing equity shareholders. This type of issue is called a "Rights Issue".

Key Features of Pre-emptive Rights

• Pro-rata Basis: The new shares must be offered to existing equity shareholders in proportion to the number of shares they already hold.
• Purpose: This right ensures that the existing shareholders' percentage of ownership and voting power in the company is not reduced ("diluted") by the issuance of new shares to outsiders.
• Notice of Offer: The offer must be made by a notice specifying the number of shares offered and giving the member a period of not less than 15 days and not more than 30 days to accept the offer.
• Right of Renunciation: The notice must also state that the shareholder has the right to renounce (give up) the offer, in whole or in part, in favour of any other person.

If a shareholder does not accept the offer within the given time, it is deemed to have been declined, and the Board of Directors can then dispose of those shares in a manner that is not dis-advantageous to the shareholders and the company.

Right to sue the company (Derivative Action)

Ordinarily, if a wrong is done to the company, the proper plaintiff to sue the wrongdoer is the company itself, not an individual shareholder. This is known as the rule of majority supremacy, or the Rule in Foss v. Harbottle. The logic is that the company is a separate legal person, and the courts will not interfere in its internal management if the majority of members approve an action.

However, this rule is not absolute. To protect minority shareholders from exploitation by a fraudulent majority, the law provides certain exceptions, allowing a minority shareholder to bring a lawsuit. This is known as a "derivative action".

Exceptions to the Rule in Foss v. Harbottle

A minority shareholder can sue on behalf of the company in the following circumstances:

1. Ultra Vires Acts: When the company or its directors are doing something that is beyond the powers given in the company's MOA. Such acts are void and cannot be ratified even by a unanimous vote.
2. Fraud on the Minority: When the majority uses its voting power to commit a fraud against the minority. For example, if the directors (who are also majority shareholders) sell the company's property to themselves at a price far below the market value.
3. Acts Requiring a Special Majority: When an action requires a special resolution (75% majority) but is passed with only a simple majority.
4. Infringement of Personal Rights: When a member's own individual rights are violated, such as the right to vote or the right to receive a declared dividend. In this case, the member sues in their personal capacity, not on behalf of the company.

In India, besides the common law derivative action, shareholders have powerful statutory remedies for Oppression and Mismanagement under Sections 241-244 of the Companies Act, providing a more direct route to approach the National Company Law Tribunal (NCLT) for relief.

Limited Liability

The principle of limited liability is the most significant advantage of the corporate form of business and a cornerstone of modern company law. It means that the liability of a member (shareholder) for the debts of the company is limited to a specified amount. This encourages investment by protecting the personal assets of the members from the company's creditors.

There are two main types of limited liability companies:

1. Liability Limited by Shares

This is the most common form of a limited company. In a company limited by shares, the liability of a member is strictly limited to the nominal value of the shares they hold. If a member has already paid the full face value of their shares, their liability is zero. If they have only paid a part of the face value, their liability is limited to the remaining unpaid amount.

2. Liability Limited by Guarantee

This type of company is typically formed for non-profit purposes, such as promoting art, science, commerce, or charity. In a company limited by guarantee, each member gives a "guarantee" to contribute a specified amount of money to the assets of the company in the event of its being wound up. This amount is specified in the Liability Clause of the company's Memorandum of Association (MOA).

The liability of the members is limited to the amount they have guaranteed. They cannot be called upon to contribute this amount during the lifetime of the company; the liability only arises when the company is being liquidated and its assets are insufficient to pay off its debts.

Unlimited Liability

While limited liability is the norm, the Companies Act, 2013, also provides for the formation of companies where the liability of members is not limited.

In Case of Unlimited Companies

An unlimited company, as defined under Section 2(92), is a company where there is no limit on the liability of its members. In such a company, the members are personally liable for the debts of the company without any limit. If the company's assets are insufficient to pay off its liabilities upon winding up, the creditors can claim the deficit from the personal property of the members.

This structure is similar to a partnership firm in terms of liability, but the entity still enjoys the benefits of a separate legal personality and perpetual succession. Unlimited companies are rare due to the high risk they pose to their members.

When Limited Liability Becomes Unlimited

Even in a limited company, there are certain exceptional circumstances under which the protective veil of limited liability can be lifted, and the members' liability can become unlimited. These include:

1. Reduction in the Number of Members (Section 3A): If the number of members in a public company falls below seven, or in a private company falls below two, and the company carries on business for more than six months while the number is so reduced, every person who is a member during that time (after the six months) and is aware of the fact, becomes severally liable for the payment of the whole debts of the company contracted during that time.
2. Fraudulent Conduct of Business (Section 339): If during the course of winding up, it appears that any business of the company has been carried on with the intent to defraud creditors or for any fraudulent purpose, the National Company Law Tribunal (NCLT) may declare that any persons who were knowingly parties to the carrying on of the business in such a manner shall be personally responsible, without any limitation of liability, for all or any of the debts of the company.
3. Furnishing False Information at Incorporation (Section 7(6)): If a company has been formed by furnishing false information, the NCLT can declare the liability of the members to be unlimited.

Contributory (Section 2(26))

The term "contributory" is relevant primarily during the winding up or liquidation of a company. It refers to the persons who are liable to contribute to the assets of the company in the event of it being wound up.

Section 2(26) of the Companies Act, 2013 defines a 'contributory' as "a person liable to contribute towards the assets of the company in the event of its being wound up".

The list of contributories is prepared by the liquidator during the winding-up process. It primarily includes the present and past members of the company.

Liability during Winding Up

The liability of members as contributories during winding up is governed by Section 285 of the Act. The key principles are:

Liability of Present Members (A-List Contributories)

Every present member of the company is liable to contribute to the assets of the company. In a company limited by shares, this contribution is limited to the amount, if any, that remains unpaid on the shares held by them. Once a member has fully paid for their shares, they have no further liability.

Liability of Past Members (B-List Contributories)

A past member (a person who ceased to be a member within one year prior to the commencement of winding up) can also be called upon to contribute. However, their liability is secondary and subject to the following strict conditions:

• A past member is liable to contribute only if the present members are unable to satisfy the contributions required from them.
• A past member is liable only for those debts and liabilities of the company that were contracted before they ceased to be a member.
• The liability of a past member is also capped at the amount that was unpaid on the shares they held when they were a member.

In essence, the role of a contributory is to pay their share of the shortfall, up to the limit of their liability, so that the company's debts can be settled during the liquidation process.