How to look at the issue of ‘membership’ under section 399 of Companies Act, 1956?

Section 397/398 of the Companies Act, 1956 provides a relief to the minority against the majority if the majority indulges in the oppressive acts and the acts of mismanagement. It is not that every shareholder can avail the remedy available under section 397/398 of Companies Act, 1956 and section 399 specifically deals with the issue as qualification to file a petition under section 397/398 of the Act. Section 399 of the Companies Act, 1956 substantially provides as follows:

“399. (1) The following members of a company shall have the right to apply under section 397 or 398:-

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares.

(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.”

As such, the issue of membership in the Company is crucial under section 399. However, there may be companies which are in reality run like proprietorship concerns or the partnership firms without adhering to the corporate regulations and without bothering much about the provisions of the Companies Act, 1956 etc. These are all family companies or closely held companies normally. As such, if the issue of membership is seen technically, then, the actual members or persons entitling for membership in the Company may not be regarded as members under section 399 of the Companies Act, 1956. Often these problems arise in a petition under section 397/398 of Companies Act, 1956. The majority in some cases contend that the petition itself is not maintainable on the ground that the petitioners do not qualify to maintain the petition under section 397/398 based on the records maintained by the Company and as such they will raise the issue of maintainability as a preliminary issue. The issue as to how to entertain the objections with regard to maintainability of the petition under section 397/398 of Companies Act, 1956 will normally depend upon the facts and circumstances of the case and there can not be any hard and fast rule in this regard.

Dealing with the issue of membership under section 399 of the Act in the light of section 41 of Companies Act, 1956, the Hon’ble Karnataka High Court in Shri Balaji Textile Mills Pvt. Ltd. And another. Vs. Ashok Kavle and Ors, 1989 66 CompCas 654 Kar, ILR 1988 KAR 1213, was pleased to observe as follows:

“15. We will first consider the provisions of section 41 of the Act which read as follows:

"41. (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members.

(2) Every other person who agrees in writing to become a member of a company and whose name is entered in its register of members, shall be a member of the company."

16. The setting of this section should be noticed. This section comes under Part II and Part II deals with the incorporation of a company and matters incidental thereto though the marginal note to section 41 reads:

"Definition of `member'".

17. In our view, that by itself does not throw any light on the scope of section 41 of the Act. The word "member" is also defined under sub-section (27) of section 2 of the Act. Sub-section (27) of section 2 of the Act reads as follows:

"`member', in relation to a company, does not include a bearer of a share- warrant of the company issued in pursuance of section 114."

18. The difference in the language of section 2(27) of the Act which comes under the definition clause in the Act and section 41 dealing with the membership of the company should be noticed. In section 2(27), the word "member" is defined in a very comprehensive manner and in relation to a company includes every type of member but excludes a bearer of a share- warrant of a company issued under section 114 of the Act. But, in section 41 of the Act, under the heading "membership of company", what is provided is that, in the case of subscribers to the company, they should be deemed to have been members of the company and their names shall be entered in the register of members. Under section 41(2) of the Act, every other person who agrees in writing to become a member of the company and whose name is entered in the register of members shall be a member of the company. So, the first part of section 41 deals with deemed membership and the second part of it deals with persons other than subscribers to the memorandum of the company.

19. Now, the point for consideration is whether this definition of "member" in section 41(2) of the Act would, in any manner, control the meaning of the word "member" in the other provisions of the Act which confer on these member certain substantive rights as shareholders of the company, e.g., sections 397 and 398 of the Act under which this petition is filed. Chapter VI of the Act provides for prevention of oppression and mismanagement of the minority shareholders of a company. Under section 397 of the Act, the minority shareholders can approach this court for relief against acts of oppression. Under section 398 of the Act, they can approach this court for reliefs against acts of mismanagement. The right to apply under sections 397 and 398 is controlled by section 399 of the Act. So, for the purpose of considering whether an application under sections 397 and 398 of the Act is maintainable, the line of enquiry should be as to whether the persons who claim relief under sections 397 and 398 of the Act come within the scope of the provision of section 399 of the Act. Section 399 of the Act reads as under:

"(1) The following members of a company shall have the right to apply under section 397 or 398:

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

(b) in the case of a company not having a share capital, not less than one- fifth of the total number of its members.

(2) For the purposes of sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

(3) Where any members of a company are entitled to make an application in virtue of sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them."

20. A combined reading of sections 397, 398 and 399 of the Act makes it clear that the meaning of the word "member" of a company should be understood in the context in which it is used and that meaning cannot be tagged on to the membership clause in section 41(2) of the Act. The clause which is applicable to test whether a member satisfies the requirement of section 397 and 398 of the Act would be section 2(27) of the Act and not the provision of section 41(2) of the Act. The language of section 41(2) of the Act as it existed prior to the amendment would throw some light on the scope of this provision. Before section 41(2) was amended, the language of that sub-section was "every other person who agrees to become a member of the company." But, after the amendment, the words "in writing" were incorporated. Why these words were introduced in the Amendment Act of 1960 is found in the report of the Companies Act Amendment Committee which reads thus:

"It has been brought to our notice that in some cases, on the verge of liquidation, entries are made in the register of members of the names of persons who never applied for shares, in order to fasten liability on these persons as contributories. To avoid this contingency, we suggest the addition of the words `in writing' after the word `agrees' in section 41(2)." (para 38 of the report).

21. So, this amendment was designed to protect the interests of persons who would have been otherwise fastened with liabilities as contributories, even in the absence of any request for allotment of shares of them. Perhaps there had been innumerable cases where such liabilities have been passed on even in the absence of a request for allotment. To avoid such a contingency, the committee made a recommendation that in case of any dispute about allotment, that dispute could be satisfactorily resolved by insisting on an application in writing for allotment of shares. So, this amendment has a limited scope and has to be interpreted by applying the rule of mischief as understood in the law relating to the interpretation of statutes.

42. These observations will go to show that if a shareholder who claims relief under sections 397 and 398 of the Act satisfies the company court that he is a shareholder of a company by virtue of allotment of shares in his favour which is evidenced not only by the register of members maintained by the company but also by the statutory returns and documents maintained and filed by the company, it is not open to the contesting respondents to content that for the purpose of sections 397 and 398 of the Act, a shareholder must comply with the condition precedent stipulated in section 41(2) of the Act.”

Again on the issue as to how Section 399 of Companies Act, 1956 is to be interpreted when the maintainability is questioned on the issue of membership, the Hon’ble Karnataka High Court, in Vijayan Rajes S/o M.S.P. Rajes & Another Vs. MSP Plantations Private Limited & Others, 2009 ILR(Kar) 3576, was pleased to observe as follows:

“32. The reasoning given by the Company Law Board does not appeal to us. If the finding is to be that the persons presenting the petition do not qualify for presenting a petition under Section 399 of the Act, no further question arises and the petition was to be dismissed at the threshold. But the Company Law Board has viewed the working of the Section 399 of the Act in the converse way, which is not a proper understanding of the provisions of Section 399. But, on authority, it has been established that for the purpose of examining as to whether the petitioning members qualify for maintaining a petition under Section 399 of the Act, the question to be looked into is as to whether the petitioners constitute the requisite number of members or they had the requisite shareholding in the company prior to the acts complained of. If the date of presentation of the petition should be looked into in a technical way, it could defeat the very purpose of the legislative enactment of Sections 397 and 398 of the Act, as the overbearing majority shareholders can simply by highhanded action or even for other purpose and by oppressive methods, dismember minority shareholders and leave them with no remedies, as the dismembered minority shareholders technically do not qualify for maintaining a petition under Section 399 of the Act, being not member at all. As the minority shareholders will be complaining only after the acts occurred and when they have been removed from the membership of the company, the understanding and interpretation to be given to Section 399 is only so as to further the object of relief to be given in a situation governed by Sections 397 and 398 of the Act and not to foreclose the options to an aggrieved person and to deny the very relief sought to be extended to a complaining minority shareholder/s envisaged under Section 397 and 398 of the Act.”

Note: the views expressed are my personal and a view point.