Page 109 - DCOM106_COMPANY_LAW

Company Law

Notes members immediately on incorporation of the company, that is, they automatically become
members. The latter, though having agreed to take shares, become members only after their
names are registered in the register of members of the company.

8.2 Member and Shareholder

In the case of a company limited by shares, the persons whose names are put on the register of
members are the members of the company. They may also be called shareholders of the company
as they have been allotted shares and are holding them in their own right. In such a situation, the
terms ‘member’ and ‘shareholder’ are interchangeably used to mean the same person. In Srikanta
Data vs. Venkateshwara Real Estate Enterprises (P) Ltd. (1990) 68 Comp. Cas. 216 (Kar), it was
held that unless the context otherwise requires, the word ‘member’ under s.2(27) means a
‘shareholder’ excepting a person, who is a bearer of a share warrant of the company. But in the
case of an unlimited company or a company limited by guarantee, a member may not be a
shareholder, for such a company may not have a share capital. However, sometimes a distinction
is maintained between a member and a shareholder in the case of a company having a share
capital. In other words, as regards the same set of shares one person may be a member and
another be the shareholder of the company. This distinction arises in the following situations:
1. X is a member of a company limited by shares. His name is placed on the register of
members as he is holding shares in his own right and, therefore, whether we call him a
member or a shareholder, it is immaterial. In such a situation, the terms ‘member’ and
‘shareholder’ may be used interchangeably. Now, in the following three situations he will
cease to be a shareholder, though he continues to be the member of the company:
(i) On Sale: X sells the shares to Y. He fills in a share transfer form and hands it over to
Y. He also gives the share certificate representing the shares to Y. In return for sale
of shares, he receives consideration from Y. X is no longer a shareholder as he has
sold the shares and property in the shares has passed to Y. But the name of X continues
to be on the register of members till the transfer of shares is registered by the
company in favour of Y. Thus, a person who acquires the shares in the open market
may be a shareholder but he does not become the member immediately. It is only
when his name is entered in the register of members that he becomes a member of
the company.
(ii) On Death: X dies and his property, including shares, is inherited by Y, his legal
representative. X is no longer the shareholder. He is not in existence to hold the
shares. Y is holding the shares in his own right and, therefore, can rightly be called
the shareholder. But X continues to be the member as his name still appears on the
register of members. However, as soon as Y gets his own name registered in the
register of members, then X will cease to be a member.
(iii) On Becoming Insolvent: X becomes insolvent and his property, including shares, vests
in the Official Receiver or Official Assignee. The Official Receiver or Assignee is
holding the shares in his own right. Therefore, X is no longer the shareholder,
though he continues to be the member of the company.

2. A person who is holding a share warrant is a shareholder but he is not a member of the
company as his name is struck off the register of members (s.115).
3. A person who subscribes to the memorandum of association immediately becomes a
member, even though no shares are allotted to him. Till shares are allotted to the subscriber,
he is a member but not a shareholder of the company.

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