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:
