Member of the Company under the Companies Act

This article first deals with the company at large and the people involved in a company. Further, it talks about the members of the company and the manner through which a person can become a member of the company. It also deals with the role of directors in a company and the qualifications to become a director in a company in India. Lastly, this article helps in explaining the difference between director and member of a company by analyzing their roles, powers and duties.
Estimated Reading Time: 14 minutes

Introduction

This article first deals with the company at large and the people involved in a company. Further, it talks about the member of the company and the manner through which a person can become a member of the company. It also deals with the role of directors in a company and the qualifications to become a director in a company in India. Lastly, this article helps in explaining the difference between director and member of a company by analyzing their roles, powers and duties.

Company in India

A company is an artificial person and it can act on its own name. But for acting in any manner it needs a natural person who can act on its behalf. The act done by such individual within his legal capacity binds the company as well. In India, a company is regulated by the Companies Act, 2013 (hereinafter referred as ‘the Act’). A company is a legal entity which is formed to pursue some business for which it enters into transactions with various individuals. A company needs assistance from its human resources to perform in the best manner possible.

Human capital involves the knowledge and skills of an individual that the company can use to promote its objectives. Truth be told, it takes human capital to make other types of capital function properly. Human capital puts other capital into action. While a machine may take out the need of many production workers to make stuff, regardless it needs human capital to design and construct the machine.

Member of the company

Section 2(55) of the Act defines the term member. In standard business use, the term ‘Member’ indicates an individual who holds shares in a company. The members or the shareholders are the genuine owners of a company. They all  establish the company as a corporate body. The members have the final say in the matters relating to the appointment and removal of the directors, auditors and other managerial staff. The general body of members is entrusted with the power to supervise and control the power of the Board of Directors. By definition, the expression “Member” in connection to a company implies one who has consented to turn into the member of the company by entering his name into the ‘Register of Members’. A person is considered as the member of a company when he/she gives his/her assent to be a member of the company in writing and only purchase shares according to his membership. The name of the member of the company is entered as ‘Beneficial owner in the record of depository’.

To gain the membership of the company, the accompanying two components must be displayed:

  1. An agreement to turn into a member.
  2. The entry of the name of the individual so agreeing, in the Register of members of the company.

The enlisted individual ought to be a fit for getting into an agreement with the company. However, a carrier of share warrant isn’t a member of the company.

The different modes through which a person can acquire membership in a company are:

  1. By getting their name entered in the Memorandum of Association (hereinafter referred to as ‘MOA’). The person who subscribe their name in the MOA and get their name registered in the Register of Company (hereinafter referred to as ‘the Register’).
  2. A person can become a member of a company by agreeing to become a member in writing and entering his/her name in the Register.
  3. A person can become a member by acquiring qualification shares. Qualification shares are the shares that have to be acquired by an individual to hold any office. In other words, it is the obligatory shares that are to be owned by a particular person.
  4. A person can hold membership by purchasing shares in the company. When a person applies for the purchase of shares and such shares are allotted to that person, then he/she becomes a member by virtue of that.
  5. A person can become a member if shares are transferred to him/her. Transfer of shares is allowed in a company and one person can transfer shares owned by him to another, which makes another person the shareholder of the company. When shares are transferred to a person, such person’s name is entered in the Register. Transfer of shares can take place only by the act of parties.
  6. Membership can also be acquired by the transmission of shares. Transmission of share is enforced by the application of the law. Transmission takes place when a person dies. In such a case, the shares owned by such a person passes on to their legal heirs who can either retain the shares with them or become a member or can sell the shares to another person.
  7. If a person becomes a beneficiary shareholder by the virtue of the Depositories Act, 1996.
  8. A person can also become a member of a company by estoppel. This mode of membership comes into play when a person was mistaken as a member of a company and even after coming to know about such a mistake, he/she does not make any amendments. In such a case, he will become a member by estoppel as due to his/her act he/she is presumed as a member.

The law explicitly does not provide any disqualification for any person to be a member. The only idea which is provided is that the person concerned must be capable of entering into a contract. The reason is self-evident. Buying in for shares is fundamentally an agreement between the company and the investor. Be that as it may, the MOA or Articles of Association (hereinafter referred as ‘AOA’) may force certain limitations or control certain persons from getting membership in a company. Without any express arrangement in regards to the limit of a person, the arrangements of the Indian Contract Act, 1872 will apply.

Categories of Different Persons as Members

The judiciary has dealt with a certain specific category of people and has set out specific standards for procuring membership in a company. Following is such category:

  1. Minors: A minor, is not a competent party to enter into a valid contract. All things considered, he is excluded to secure membership. But, minors might be assigned shares. On attaining majority, the minor has the choice to avoid the contract. In any case, the minor ought to renounce the agreement within a reasonable time.
  2. Lunatic and Insolvent: An insane person can’t turn into a member. An insolvent, be that as it may, can turn into a member and is qualified to vote at the meetings of the company. However, his shares vest in the Official Receiver when he is decreed insolvent.
  3. Partnership Firm: Partners in their name as the joint holder may hold shares in a company as for the partnership firm. In any case, the shares can’t be issued in the name of the partnership firm, as it is not a legal person in the eye of law.
  4. Company: Company is a legal person in the eyes of law due to which it is entitled to become a member of any other company if the same is permitted in its MOA.
  5. Foreigners: Foreign national can be members of organizations enrolled in India. For that authorization of the RBI is obligatory. When he turns an alien enemy, his privilege as a member will be suspended.
  6. Fictitious Person: When a person purchases shares in the name of an imaginary person, the person winds up at risk as a member. Additionally, Section 68A of the Act punishes such person for impersonation.

Rights of a Member of a Company

The members of a company enjoy certain rights and they are the one who has the final say on the issues of the company and its administration. Their rights can be gathered under three heads. They are point by point underneath:

1. Statutory Rights: The members are vested with certain rights which are provided to them by the law. These rights can’t be removed by the AOA or MOA. A few of the significant statutory rights are given underneath:

  1. Right to receive notice of meetings, to attend or participate in the discussion and vote at the meetings.
  2. Right to transfer the shares to another person in case of a public company.
  3. Right to get copies of the annual accounts of the company.
  4. Right to inspect the records of the company, for example, register of members, yearly returns, and so on.
  5. Right to participate in the appointment of directors and auditors in the annual general meetings.
  6. Rights to apply to the Government for requesting an investigation concerning the issues of the company.
  7. Right to apply to the Court for winding up of the company.
  8. Right to apply to the National Company Law Tribunal for seeking relief in the matters relating to oppression and mismanagement under Secs. 397 and 398 of the Act.

2. Documentary Rights: The rights which are vested with the shareholders through some documents like AOA, MOA are known as documentary rights.

3. Legal Rights: The general law provides certain rights which are entrusted upon every member of the company.

A ‘Liability’ is a condition of being legally in-charge of something. This term is normally utilized in an organization to focus on the duties of a member of the company. The liabilities of the member of a company are the following:

  1. To ensures that he/she owns the shares according to the Act.
  2. To pay the call money or pay the due sum of shares.
  3. To follow the majority’s opinion when they act ‘bonafide’.
  4. To add to the asset of the company if there should be an occurrence of winding up and when the shares are partly paid up.

Directors of a Company

The Act does not contain a comprehensive meaning of the expression “director”. Section 2 (34) of the Act defines the term director as a person appointed to the Board of the company. In other words, a person who is appointed to perform the duties and functions of the director as prescribed in the Act is a director.

A company, however, a lawful entity according to law, is an artificial person, existing just in consideration of the law. It has no physical presence. It has neither soul nor body of its own. Thus, it can’t act on its own. It can do as such just through some human being. The people who are accountable for the administration of the undertakings of a company are named as directors. They are on the whole known as Board of Directors or the Board. The directors are the core members of a company. They involve a significant position in the structure of the company. Directors take decisions for the management of a company on the whole in their gatherings known as Board Meetings or at the gatherings of their advisory groups comprised for certain particular purposes. Section 2(10) of the Act defines the term Board of Directors or Board.  The Act further provides for different types of directors such as additional director, alternative director, nominal director, independent director, etc.

According to Section 149(1) of the Act, the minimum number of directors in the case of Public Company is 3, in the case of Private Company is 2 and in the case of One Person Company is 1. The maximum number of persons who can be appointed as the directors in a company can be fifteen but more than fifteen people can be appointed as a director after passing a special resolution for the same in the general meeting. In every listed company there must be at least one women director.

The company must have at least one director who must stay in India for at least one hundred and eighty-two days during a financial year. In every public company, one-third of the directors must be independent directors. Section 2(47) of the Act defines independent directors. The conditions to be an independent director are provided in Section 149(6) of the Act. The independent director has to give a declaration for the same in the first meeting of the Board of the financial year or when there is some change in his/her status.

Subject to the provisions of Section 152 of the Act, an independent director can be selected for a term of up to five years on the Board and is qualified for re-appointment after such tenure. Further, an independent director can be considered for re-appointment after the termination of three years of stopping to turn into an independent director yet he should not be selected/related with the company straightforwardly or in a roundabout way in some other limit during the said time of three years. The provision of the retirement of directors on a rotational basis does not apply to an independent director.

The first directors of the majority of the organizations are named in their AOA. If in any case the directors are not named in the AOA, then the subscribers of the MOA are considered as the directors until proper directors are appointed.

General Provisions About Appointment of Directors

  1. Except as given in the Act, each director will be selected by the company in a general meeting.
  2. Director Identification Number is mandatory for the appointment of a director of a company.
  3. Each individual proposed to be named as a director will disclose his Director Identification Number and provide a declaration that he isn’t excluded to be appointed as a director under the Act.
  4. An individual named as a director will before the appointment agree to hold the workplace of the director in physical structure.
  5. AOA of the Company may give the provisions relating to the retirement of all directors. In case no guideline is provided in the AOA, at that point at the very least two-third of the complete number of directors of a public company will be people whose period of office will end by retirement on a rotational basis and such person is qualified to be reappointed at the yearly general meeting.

Powers and Duties of Directors

The powers which can be exercised by the Board of Directors by passing a resolution in the general meeting are:

  1. The power to make calls on shares for the unpaid amount of money.
  2. The power to authorize the lack of shares.
  3. They can issue debentures either within or outside India.
  4. They have the power to invest in funds.
  5. The directors can borrow money other than issuing debentures.
  6. They have the power to give loans but no such resolution for giving a loan in a banking company is required.
  7. They have the power to approve the company’s financial statement and the board’s report.
  8. They can diversify the business.
  9. They can approve the decision of amalgamation, merger, and reconstruction.
  10. They have the power to take over another company or to acquire a stake in another company.
  11. They can fill the casual vacancy of the directors.
  12. They have the power to appoint the first auditor of the company.
  13. They can make a certain contribution to political matters.
  14. They can appoint an alternative director for the company.
  15. They can appoint an additional director for the company.
  16. They have the power to declare an interim dividend of the shareholders.
  17. They can appoint or remove any key managerial person.
  18. They can declare the company’s solvency, where the company winds up voluntarily.
  19. They can recommend the rate of dividend on the shares which is further subjected to the approval of the shareholders.

In addition to this, there are certain other powers as well which can be exercised by the Board of Directors after a resolution has been passed which authorizes them to exercise such powers. Some managerial powers vested with the directors are:

  1. They can enter into a contract with the third party.
  2. They can recommend the dividend of the shareholders.
  3. They can allot, forfeit and transfer the shares of the company.
  4. The terms and conditions concerning the issue of debentures are decided by the Directors.
  5. For the efficient running of the business, they can form policies and issue instructions.
  6. They have the power to appoint the managing director, manager and secretary of the Company.
  7. They can control and supervise the work of their subordinates.

The duties of the directors are provided in Section 166 of the Act. The general duties of the directors are to act in good faith, not to gain any undue advantage or gain, to act in accordance with the AOA of the Company, to perform his duties diligently with reasonable and due care, to form committee and delegate power to them when authorized, etc. in addition to this the director must disclose his shareholding in the company and interest in any contract. They must disclose their details such as name, address, etc. and must acquire qualification shares within the period of two months. They have the duty to call the statutory and annual general meeting. They must decide the minimum subscription and issue prospectus which must not include any false or misleading statement. They must sign the prospectus before it is delivered to the Registrar. The directors are entrusted with various other duties in addition to these duties to ensure the smooth functioning of the business.

Difference Between Directors of a Company and Members of a Company

The members of a company majorly involve the shareholders of the company. The role of director and shareholder is completely different in a company. The shareholder can be termed as the owner of the company whereas the director is the one who takes care of affairs and management of the company. Unless the AOA provides to the contrary the same person can be a director as well as shareholder or two different persons can be shareholder and director.

The Board of Directors is endowed with following the legal formalities required and act to the greatest advantage of the company while the shareholders are not associated with the everyday business or the management of the company except if they are a part of the Board. The directors has the power to make decision ( for example proposal of dividend among shareholders, calling for amount due on unpaid shares, consideration of directors report and so on) and shareholders also have power in certain matters such as the appointment of directors, auditors, approving financial statements, opportunities for investment, issuing shares, and so forth. At the end of the day, the everyday activities rely upon the directors. In any case, the critical choices must be taken after the assent of the members.

In a Private Company, there must be minimum of 2 directors, in a Public Company there must be a minimum of 3 directors and in One Person Company, there must be minimum 1 director. The minimum number of shareholders required for a private company is 2 though for a public company is 7 and OPC can have just a single member.

The obligation to remove a director lies with that of the shareholders of the company, however, when Section 164 of the Act comes into play the director is supposed to disclose the grounds of their disqualification and should vacate the office. The shareholders of the company can’t be removed from the company with except when an order for the same has been passed by any judicial or quasi-judicial authority like the National Company Law Tribunal. Although, the shareholders, at their very own prudence, can transfer their shares to the other people.

There is additionally difference with respect to receipt of cash from a company. While the shareholders are qualified for getting some portion of the profit as dividend, directors are qualified to get remuneration and sitting charges from the company or some other expenses as given to them for fulfilling any other capacity. 

Conclusion

In this manner, Shareholders and the Directors are a vital part that is in charge of the fruitful running of the company. Their relationship is a perplexing as both are commonly dependent on one another. Consequently, transparency is required to be kept up. Both ought to go inseparably to serve the company in a better manner.


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