STRATHMORE UNIVERSITY

SCHOOL OF BUSINESS
COMPANY LAW

TOPIC3: MEMBERSHIP OF A COMPANY

Definition of Member
Section 92 of the Act does not define the word “member”. Rather, it states the two basic ways in which a person may
become a member of a company, namely:
a) By subscribing to the memorandum and articles of the company, or
b) By agreeing to become a member and the entry of his name in the company’s register of members.
Who may become a member

Capacity to be a member of a company is governed by the rules of the common law relating to contracts. Anyone who has
the capacity to make a contract may become a member of a company. The following are some of the special cases, which
require explanation:

a) Infants: An infant is any person who has not attained the age of 18 years. An infant has a common law right to
enter into a contract to buy shares in a company, and thereby become a member of the company. The contract, is
however voidable at his option, and the infant may avoid it at any time during his infancy or within a reasonable
time after attaining the age of 18 years. However, it was explained in Steinberg v Scala (Leeds) Ltd that
although the infant has a right to repudiate the contract, he would only be entitled to get back the amount already
paid if there has been a total failure of consideration because the shares have become valueless. A company’s
articles may, however, restrict membership of the company to adults only, in which case an infant would not
become a member of the company.
b) Personal Representatives: On a shareholder’s death, ownership of the shares previously held by him is
transmitted to his personal representative, who may be an executor or administrator. The personal representative
would be entitled to be registered as a member of the company unless the company’s articles provide otherwise.
c) Corporations: A corporation, whether a registered company or not, may, if authorized by its articles (expressly or
impliedly), take shares in a registered company and become a member of it. It would authorize such person as it
thinks fit to act as its representative at any meeting of the company. The authorization would be made by a
resolution of its directors or other governing body

Methods of becoming a member

A person may become a member of a company in one or other of the following ways:

i. Subscribing to the Memorandum

Section 92 (1) provides that the subscribers to the memorandum and articles become members of the company on the
registration of the company.

Section 92(2) provides that as soon as practicable after the registration of the company, it shall enter in its register of
members the names and addresses of persons who subscribed to its memorandum and the date on which they became
members of the company.

The provision regarding entry in the register is an administrative directive for the company’s implementation and non-
compliance with it does not affect the pre-existing membership.

ii. Allotment
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A person to whom a company’s shares have been allotted acquires his membership by virtue of section 92(3). However, it
was held in Nicol’s case that the membership commences from the moment the name is entered in the members’ register.
If the company wrongfully refuses to enter the name in the register, the allottee must take rectification proceedings for a
court order directing the company to enter the name in its members’ register.

iii. Transfer

A transfer is a purchase of shares from a company’s shareholder and not from the company itself. A transferee also
acquires his membership by virtue of section 92(3), being a person who has agreed to become a member. The principle in
Nicol’s case applies to transferees as well, and a transferee becomes a member from the moment his name is entered in
the register of members.

iv. Transmission on death of a member

A transmission is a legal process by which ownership of shares in a company changes automatically on the death of a
member to his personal representative. If the personal representative elects or decides to be registered himself as the
holder of the shares, the election constitutes the agreement to be a member and the provisions of Section 92 (3) become
applicable, that us, he will become a member from the moment his name is entered in the register of members.

v. Transmission on bankruptcy of member

A bankrupt member’s shares in a company will be transmitted to his trustee in bankruptcy according to the principles
of bankruptcy law. The company’s articles may give the trustee an option of being personally registered as a member.
If the trustee elects or decides to be registered as the holder of the shares the election constitutes the agreement to be a
member and the provisions of section 92 (3)become applicable, i.e. the trustee in bankruptcy will become a member
from the moment his name is entered in the register of members.

vi. Estoppel

A person who, without having agreed to be a company’s member, is aware that his name is wrongly entered in its register
of members but takes no steps to have his name removed there from, may be estopped from denying his apparent
membership to somebody who relied on it and extended credit to the company. Without the company’s knowledge, he
represents himself as a member.

Register of members

Section 93 requires every company to keep a register of its members and prescribes the contents of the register. A
company shall enter in its register of members:

a) the names and addresses of the members;

b) the date on which each person was registered as a member: and
c) the date on which any person ceased to be a member.

If a company has a share capital, the company shall enter in its register of members, along with the name and address of
each member, a statement of:

a) the shares held by the member, distinguishing each share-

i. by its number if the share has a number; and
ii. if the company has more than one class of issued shares, by its class; and
b) the amount paid or agreed to be considered as paid on the shares of the member.

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If the shares of a company are held jointly, the company shall ensure that the name of each joint holder is entered in its
register of members.

If a company does not have a share capital but has more than one class of members. it shall enter in its register of
members, along with the names and address of each member a statement of the class to which the member belongs.

A company shall lodge with the Registrar a copy of its register of members within fourteen days after completing its
preparation. Similarly, the company shall lodge with the Registrar a copy of any amendment to its register of members
within fourteen days after making the amendment.

If a company fails to comply with these requirements the company, and each officer of the company who is in default,
commit an offence and on conviction are each liable to a fine not exceeding five hundred thousand shillings.

Location of the register of members

Section 94 provides that except in so far as the regulations otherwise provide, a company shall ensure that its register of
members is kept at its registered office.

If a company fails to comply with the above requirement the company, and each officer of the company who is in default,
commit an offence and on conviction are each liable to a fine not exceeding five hundred thousand shillings.

Index of members

Section 95 provides that a company that has more than fifty members shall keep an index of the names of the members of
the company, unless the register of members is in such a form as to constitute in itself an index.

A company shall make any necessary alteration in the index within fourteen days after the date on which any alteration is
made in the register of members.

A company shall ensure that the index contains in respect of each member, a sufficient indication to enable the account of
that member in the register to be readily found.

Except in so far as the regulations otherwise provide, a company shall keep its index of the names of members of the
company at its registered office and shall, within twenty-eight days after establishing it, lodge a copy with the Registrar.

If a company fails to comply with these requirements the company, and each officer of the company who is in default.
commit an offence and on conviction are each liable to a fine not exceeding five hundred thousand shillings.

Inspection of the register

Section 96 provides that a company shall keep its register of members and its index of members (if any) open for
inspection by:

a) a member of the company without charge; and

b) any other person on payment of the fee (if any) prescribed

On being requested to do so by a person and on receipt of the prescribed fee (if any), a company shall issue to the person a
copy of the company's register of members or such part of it as the person specifies.

Within five working days after receiving a request under section 96, a company shall either comply with the request; or
apply to the Court for an order under subsection (3) authorizing it not to comply with the request.

If a company:
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 a) refuses to allow an inspection required under section 96; or
b) fails to provide a copy required under that section.

otherwise than in accordance with an order of the Court, the company, and each officer of the company who is in default,
commit an offence and on conviction are each liable to a fine not exceeding seven hundred and fifty thousand shillings.

Changes to the register of members

A company may expunge from its register of members an entry relating to a person who was formerly a member of the
company after the expiry of ten years after the date on which the person ceased to be a member.

If the number of members of a limited company is reduced to one, the company shall enter in its register of members:

a) the name and address of the member;

b) a statement that the company has only one member; and
c) the date on which the company became a company having only one member.

If the membership of a limited company increases from one to two or more members, the company shall enter in the
register of members of the company:

a) the name and address of the person who was formerly the sole member;
b) a statement that the company has ceased to have only one member; and
c) the date on which the company ceased to be a single member company.

Power of the court to rectify the register

The person affected, or the company or any member of the company may apply to the Court for rectification of the
register in the following cases:

a) the name of any person is without sufficient cause, entered in or omitted from the register of members of a
company; or
b) the cessation of membership of a person who has ceased to be a member of the company has not been entered in
that register

On hearing the above application the Court shall either refuse the application or order rectification of the register and
payment by the company of any damages sustained by any party affected by the error or failure.

An order rectifying the register can be made even when the company is being wound up as was the case in Re Sussex
Brick Co.

The case of Burns v Siemens Bros Dynamo Works Ltd shows that the circumstances set out in Section 103(1), above,
are not the only ones in which the court can order rectification. It may also do so where a name stands on the register
without sufficient cause.

The court may also order rectification of the register by deleting a reference to some only of the registered shareholder’s
shares. It need not delete his name entirely. This is illustrated by Re Transatlantic Life Assurance Co Ltd (1979) in
which the court deleted an additional number of shares, which had been issued to the applicant in breach of the prevailing
Exchange Control Regulations but left the register intact as regards his previous shareholding.

When making an order for rectification of the register, the court shall by its order direct notice of the rectification to be
given to the Registrar, who shall on receipt of the notice make such adjustments to the Register as the Registrar considers
appropriate.
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Trusts not to be entered into the register

A company shall not accept, and shall not enter in its register of members, notice of any trust, expressed, implied or
constructive.

The consequences of this provision are as follows:

i. The company is entitled to treat every person whose name appears on the register as the beneficial owner of the
shares even though he may, in fact, hold them in trust for another. In particular, if the company registers a transfer
of shares held by a trustee, it is not liable to the beneficiaries under the trust even if the sale of the shares by the
trustee was made in breach of the trust. It was so held in Simpson v Molson’s Bank
ii. The company is not a trustee for persons claiming the shares under equitable titles as was held in Societe
Generale de Paris v Walker. However, the owner of an equitable interest in shares, such as an equitable
mortgagee or the recipient of a bequest of shares, may protect his interest by serving on the company a stop notice
(or what is sometimes called a notice in lieu of distringas), informing the company that he is interested in the
shares and requiring the company to notify him of a receipt of a transfer of the said shares to a transferee other
than himself. When the company eventually informs him of the proposed transfer, he would then apply to the
court for an injunction restraining the transfer.

Rights and liabilities of members

Rights of members

The ownership of at least a share of one or other of the aforesaid classes constitutes the “holder” a member of the
company which has issued the shares. As a member, the shareholder will enjoy certain rights in the company which,
unless modified or excluded by the company’s articles, will generally comprise the following rights as provided for under
section 114:

i. right to be sent a proposed written resolution;

ii. the right to require circulation of a written resolution;
iii. the right to require directors to call a general meeting:
iv. the right to receive notices of general meetings:
v. the right to require circulation of a statement;
vi. the right to appoint a proxy to act at a meeting;
vii. the right to be sent a copy of the company's annual financial statement and reports; and
viii. if the company is a public company, the right to require the circulation of a resolution for the annual general
meeting of the company.

Members will have a role to play in the following usual AGM agenda items:

i. discussing the company’s financial statements, the directors’ report and the auditor’s report;
ii. discussing any recommendation from the directors to declare a dividend;
iii. electing new directors to replace those stepping down; and
iv. appointing or re-appointing an auditor and deciding how much they will be paid.

Additionally, members also enjoy the following specific rights:

a) Dividend: A company does not legally have to declare a dividend and only directors can propose whether it is to
be paid. If this happens, the shareholders may vote in favour of it. Once a dividend is approved, all shareholders
are entitled to payment.

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 b) Company investigations: A minimum number of company members can ask the High Court to appoint an
inspector to investigate and report on the company’s affairs. The Court is free to order an investigation of
whatever matters it thinks appropriate or it may refuse the request.
c) Petition for winding up: Members can decide to end a company’s existence by special resolution or, if it is
unable to pay its debts, by ordinary resolution. This is done at a general meeting, at which a liquidator is
appointed.
d) Pre-emption rights: these are the rights of existing ordinary shareholders to be offered new shares issued by the
company pro rata to their existing holding of that class of shares. What is the difference between a rights issue and
a bonus issue?

Liability of members

Due to the separate legal existence of a company, shareholders are not responsible for the company’s obligations merely
by reason of being a shareholder.

The liability of a shareholder is usually limited to:

i. any unpaid amounts on the shares held by that shareholder;

ii. any liability or obligations expressly provided for in the company’s constitution or shareholders’ agreement; and
iii. Liability for breach of directors’ duties if shareholders are considered to be directors (for example, if shareholders
are provided with powers that would ordinarily be exercised by directors).
iv. It is also essential that members take part in supervising the performance of the company and its directors to
protect their financial and other interests.

Cessation of membership

A person’s membership of a company may cease or come to an end in the following ways:

i. Transfer

A “transfer” of shares occurs if an existing member sells them to a third party. If the third party is not yet a member, he
will become a member from the moment his name is entered in the company’s register of members. However, the
transferor does not automatically cease to be a member as a consequence of the transfer. A member is not bound to sell all
of his shares whenever he contemplates a sale. A member may transfer all or any of their shares. A member, therefore,
ceases to be a member only if he transfers all of his shares.

ii. Forfeiture

Where a company’s articles authorize the directors to forfeit a member’s shares and the director’s forfeit all of the shares
held by a member, the member will cease to be a member from the date specified in the articles as the effective date for
forfeiture.

A a person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares.

iii. Surrender of Shares

The precise nature of surrender and the machinery by which it is affected are not clear since it is not provided for by the
Companies Act. However, in Trevor v Whitworth, the judge stated that a surrender “does not involve any payment out
of the funds of the company,” and that “if it were accepted in a case where the company were in a position to forfeit the
shares the transaction would seem to me perfectly valid,” presumably even if not expressly authorized by the articles.

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A person’s membership will, therefore, come to an end if he surrenders all his shares to the company with the approval of
the directors.

iv. Death

When a person dies, his membership of a company will come to an automatic end by virtue of the provisions of the Law
of Succession. The shares previously held by him become, legally, the property of his personal representative.

v. Bankruptcy

When a person becomes bankrupt, his membership of a company will come to an end under the provisions of the
Bankruptcy Act, which vest a bankrupt’s property in his trustee in bankruptcy

vi. Sale by a company in exercise of lien

A company, like an unpaid seller under the Sale of Goods Act, has a right of lien on its shares as security for the balance
of their price. If the company sells all the shares held by a member, the membership will come to an end from the moment
the buyer’s name is entered in the register.

vii. Redemption of redeemable preference shares

If a member’s entire holding consist exclusively of redeemable preference shares and all of these shares are redeemed by
the company he will cease to be a member from the date on which his name is removed from the register of members.

viii. Repudiation by an infant

An infant member has a common law right to repudiate his membership of a company if there has been a total failure of
consideration because the shares have become worthless. It was so held in Steinberg v Scala (Leeds) Ltd

ix. Liquidation or winding up

A company’s liquidation terminates membership of all former members, from the moment it becomes effective.

x. Rescission of contract

A shareholder who rescinds a contract of purchase of shares or allotment by reason of a vitiating element or otherwise
ceases to be a member

xi. Disclaimer by trustee in bankruptcy

Under English law, if a trustee in bankruptcy refuses to take up the shares of an undischarged bankrupt, he ceases to be a
member of the company.