Membership – Company Law Important Questions

Membership – Company Law Important Questions

Question 1.
Write a short note on the Rights of Dissentient Members. (December 2013) (4 marks)
Answer:

  1. Member’s rights are determined by the Companies Act, 2013 memorandum of association and articles of association of the company and the terms of issue of shares.
  2. Rights attached to a class of shares are known as “class rights”.
  3. Member’s rights relate to dividend, voting at member’s meetings, and return of capital. Preference shareholders may have rights to a fixed amount or a fixed rate of dividend or to the cumulative dividend.
  4. As per Section 48(2) Rights of Dissentient Members:
    Where the rights of any class of shares are varied, the holders of not less than 10% of the issued shares of that class can apply to the Tribunal to have the variation canceled.
  5. Where any such application is made to the Tribunal, the variation will not be effective unless and until it is confirmed by the Tribunal.
  6. The above application shall be made within 21 days after the date on which the consent was given for the resolution was passed.

Question 2.
All the shareholders of a company are members and all the members of a company are shareholders. Comment (December 2008) (5 marks)
Or
Every shareholder of a company is known as a member while every member may not be known as a shareholder. Comment (December 2019) (5 marks)
Answer:
The term ‘members’ and ‘shareholders’ are usually used interchangeably as there can be no membership except through the medium of shareholding. Thus, generally speaking, every shareholder is a member and every member is a shareholder.

However, they may be exceptions to this statement, which are explained below:

  1. In a company limited by guarantee, the persons who are liable under the guarantee clause in its memorandum of association are members of the company.
  2. 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.
  3. 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.
  4. 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.

Question 3.
In what manner membership In a company can be sought? (June 2009) (8 marks)
Answer:
As per Section 2(55) of the Companies Act, 2013, a person may acquire the membership of a company:
1. By subscribing to the Memorandum of Association; or

2. By agreeing in writing to become a member:

  • by making an application to the company for allotment of shares; or
  • by executing an instrument of transfer of shares as transferee; or
  • by consenting to the transfer of a share of a deceased member in his name; or
  • by acquiescence or estoppels.

3. By holding shares of a company and whose name is entered as a beneficial owner in the records of a depository (Under the Depositories Act, 1996) and

  • on his name being entered in the register of members of the company.
  • also, every such 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.

4. The person desirous of becoming a member of the 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 said Act lays down that, every person is competent to contract who:
(a) Is of the age of majority according to the law to which he is subject.
(b) Is of sound mind.
(c) Is not disqualified from contracting by any law to which he is subject.

Question 4.
Limited Liability Partnership can become a member of a Company incorporated under the provision of the Companies Act, 2013. Comment (June 2017) (5 marks)
Answer:
Subject to the Memorandum and Articles, any sui juris (a person who is competent to contract) except the company itself, can become a member

  • of a company.
  • Limited Liability Partnership, being an incorporated body under the statute, can become a member of a company.

Thus, a Limited Liability Partnership can become a member of a Company incorporated under the provision of the Companies Act, 2013.

Question 5.
Four types of persons, viz., a Section 8 Company, an insolvent individual, a Trade Union, and a Pawnee, apply for membership in your public limited company. Will you accept them as a member of your company? Why? (June 2010) (4 marks)
Answer:
1. Section 8 company:
A non-profit making company licensed under Section 8 of the Act, can become a member of another company if it is authorized by its Memorandum of Association to invest in shares of the other company

2. Insolvent as a member:
An insolvent may be a member of a company as long as he is on the register of members. He is entitled to vote, but he loses all beneficial interest in the shares and the company will pay dividends on his shares to the Official Assignee or Receiver. [Morgan v. Gray, (1953) All E.R. 213].

3. Trade Union as a member:
A trade union registered under the Trade Union Act can be registered as a member and can hold shares in a company in its own corporate name [All India Bank Officers Confederation v. Dhanlakshmi Bank Ltd., (1997) 90 Com Cases 225].

4. Pawnee:
A pawnee has no right to foreclosure since he never had absolute ownership at law and his equitable title cannot exceed what is specifically granted by law. In this sense, a pledge differs from a mortgage. In view of the above, a pawnee cannot be treated as the holder of the shares pledged in his favor, and the pawner continues to be a member and can exercise the rights of a member [Balakrishna Gupta v. Swadeshi Polytex Ltd., (1985) 58 Com Cases 563 (S.C.)].

Question 6.
Fortune Limited refused to enter the name of the minor son of a deceased member in the register of members on the ground that the minor cannot enter into a contract as per Section 11 of the Indian Contract Act, 1872. The shares are fully paid up. Comment on the decision of the company. (December 2009) (4 marks)
Answer:
1. A member who is not a sui juris e.g., a minor, is wholly incompetent to enter into a contract and as such cannot become a member of a company. Consequently, an agreement by a minor to take shares is void of ab-initio.

2. It has been held by the Company Law Board (replaced by the Tribunal under the Companies Act, 2013) that an agreement in writing for a minor to become a member may be signed on behalf of the minor by his lawful guardian and the registration of transfer of shares in the name of the minor, acting through his or her guardian, especially where the shares are fully paid cannot be refused on the ground of the transferee being a minor
[Miss Nandita Jain v. Benett Coleman and Co. Ltd., Appeal No. 27 of 1972 dated 17.2.78].

3. After attaining majority, the minor, if he does not want to be a member, must repudiate his liability on the shares on the ground of minority, and if he does so, the company can not plead estoppel on the ground of his having received dividends during his minority or that he had fraudulently misrepresented his age in his application for shares
[Sadiq Ali v. Jai Kishori, (1928) 30 Bom. L.R. 1346].

4. If shares are transferred to a minor, the transferor will remain liable for all future calls on such shares so long as they are held by the minor even if the transferor was ignorant of his minority. If the company knows of his minority it may refuse to register the transfer, unless the transfer was made through the guardian.

Thus, the decision of Fortune Limited refused to enter the name of the minor son of a deceased member in the register of members on the ground that the minor cannot enter into a contract as per Section 11 of the Indian Contract Act, 1872 is tenable in the eyes of the law.

Question 7.
John, who is a member of Alex Limited, is of unsound mind. Can the shareholder of unsound mind exercise his voting rights in respect of his membership in the said company? Give your advice. (June 2011) (4 marks)
Answer:
The person desirous of becoming a member of the 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 said Act lays down that, every person is competent to contract who:
(a) Is of the age of majority according to the law to which he is subject.
(b) Is of sound mind.
(c) Is not disqualified from contracting by any law to which he is subject To sum up, John, who is a member of Alex Limited, is of unsound mind and not competent to contract. Thus, no legal capacity of entering into an agreement in accordance with the provisions of the Indian Contract Act, 1972

Question 8.
Raheem, who is a member of Vivek Limited, a public company, has very recently become insolvent. Can Insolvent Rahees continue as a member of the company? (June 2011) (4 marks)
Answer:
Insolvent as a member:
An insolvent may be a member of a company as long as he is on the register of members. He is entitled to vote, but he loses all beneficial interest in the shares and the company will pay dividends on his shares to the Official Assignee or Receiver. [Morgan v. Gray, (1953) All E.R. 213].

Thus, Rahees who is a member of Vivek Limited, a public company, has very recently become insolvent can continue as a member of the company as long as he is on the register of members. As per the above-discussed decided case law, Rahees is entitled to vote, but he loses all beneficial interest in the shares, and the company will pay dividends on his shares to the Official Assignee or Receive.

A person ceases to be a “Member”

Question 9.
Explain when a person ceases to be a member of a company. (December 2010) (8 marks)
Answer:
A person ceases to be a member of a company when his name is removed from its register of members, which may occur in any of the following situations:
(a) He transfers his shares to another person, the transfer is registered by the company and his name is removed from the register of members;
(b) His shares are forfeited;
(c) His shares are sold by the company to enforce a lien;
(d) He dies; (his estate, however, remains liable for calls);
(e) He is adjudged insolvent and the Official Assignee disclaims his shares;
(f) His redeemable preference shares are redeemed;
(g) He rescinds the contract of membership on the ground of fraud or misrepresentation or a genuine mistake;
(h) His shares are purchased either by another member or by the company itself under an order of the Tribunal under Section 242 of the Companies Act, 2013;
(i) The member is a company that is being wound-up in India, and the liquidator disclaims the shares;
(j) The company is wound up; or

Though one ceases to be a member, he remains liable as a contributory and is also entitled to share in the surplus, if any.

Question 10.
Thrive Limited is a public limited company, incorporated under the Companies Act, 2013. The Board of directors of the said company has recently decided to enlist an article in its article of association-related relating to expulsion of a member by a Board of directors of the company where the directors were of the view that the activities or conduct of such a member was detrimental to the interest of the company. Is the board’s decision valid in the eye of the law? (June 2011) (4 marks)
Answer:
1. According to Section 6 of the Companies Act, 2013, the Act overrides the Memorandum and Articles of Association, and any provision contained in these documents repugnant to the provisions of the Companies Act, is void.

2. The Department of Company Affairs (now MCA) has, therefore, clarified that any assumption of the powers by the Board of Directors to expel a member by alteration of Articles of Association shall be illegal and void.

3. The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Com Cases 1 has laid down the law as to the conditions on the basis of which directors could refuse a person to be admitted as a member of the company. The principles laid down by the Supreme Court in this case, even though pertaining to the refusal by a company to the admission of a person as a member of the company, are applicable even with greater force to a case of expulsion of an existing member.

As, under Article 141 of the Constitution, the law declared by the Supreme Court is binding on all courts within the territory of India, any provision pertaining to the expulsion of a member by the management of a company which is against the law as laid down by the Supreme Court will be illegal and ultra vires.

4. Thus, In the light of the aforesaid position, it is clarified that the assumption by the Board of directors of a company of any power to expel a member by amending its articles of association is illegal and void.

Question 11.
Mohan applied for 4,000 shares in a company but no allotment was made to him. Subsequently, 4,000 shares were transferred to him without his request and his name was entered in the register of members. Mohan knew it but took no step for the rectification of the members. Subsequently, the company went into liquidation and he was held liable as a contributory. Now Mohan wants to apply to the court for rectification of the register of members. Can he do so? Explain. (December 2012) (4 marks)
Answer:
When a person knows that his name is included in the register of shareholders and he stands by and allows his name to remain, he is holding out to the public that he is a shareholder and thereby he loses his right to have his name removed. \Re. M.F.R.D. Cru; A.I.R. 1939 Madras 803]

Thus, Mohan’s application will be refused by the Court.

Question 12.
ABC & Company, a partnership firm applied for shares in XYZ Limited. The company allotted the shares required by the partnership firm. In the given context, what are the liability of partners and the partnership firm? (December 2013) (4 marks)
Answer:
1. A partnership firm is not a legal person and as such, it cannot, in its own name, become a member of a company except in a company registered under Section 8 of the Companies Act, 2013.

2. In the given case, ABC & Company, a partnership firm applied for shares in XYZ Limited, and the company allotted the shares required by the partnership firm is invalid and void.
Thus, there is no question of liability arises for partners and the partnership firm.

Question 13.
A member of an incorporated company becomes insolvent. He claimed the right to vote and receive dividends from the company. Referring to the provisions of the Companies Act, 2013 discuss whether his claim is valid. (December 2018) (3 marks)
Answer:

  1. An insolvent may be a member of a company as long as he is on the register of members.
  2. An insolvent is entitled to vote, but he loses all beneficial interest in the shares and the company will pay dividends on his shares to the official assignee or receiver.
  3. In the given case, A member of an incorporated company becomes insolvent. He claimed the right to vote and receive dividends from the company. As per the above-discussed provisions of the Companies Act, 2013, the claim of members to vote is valid, and the right to receive dividends from the Company is not valid.

CS Executive Company Law Questions and Answers

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