Transfer of Membership in a Company Limited by Guarantee
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- By Taxmann
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- Last Updated on 23 August, 2021
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Citation: [2021] 129 taxmann.com 192 (Article)
Introduction
A company limited by guarantee is a private company where the liability of the members is limited by the company’s constitution.1 The limit is set out in the Memorandum of Association to such amount as the members may respectively undertake to contribute in the event of winding up of the company. Generally, on becoming a member of a company limited by guarantee, every member undertakes to contribute: (i) to the assets of the company in the event of its being wound up while he is a member, or within one year after he ceases to be a member, for payment of the debts and liabilities of the company or of such debts and liabilities as may have been contracted before he ceases to be a member; and (ii) to the costs, charges and expenses of winding up. This undertaking or guarantee may be for any amount but is limited to the sums as mentioned in the constitution of the company. The liability of the members to pay the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern.
The subscribers on incorporation of a new company limited by guarantee automatically become members as the company is incorporated by the Registrar of Companies. Their details should be recorded in the Register of Members as soon as possible after incorporation. Subsequently, the process by which new members are admitted to membership depends on the rules set out in the individual company’s articles of association.2
Transfer of Membership
The transfer of the membership in a company limited by guarantee is subject to the company’s Articles of Association. Preferably, the Articles of Association would have to set out the conditions of issuance of membership of the Company including qualifications, privileges, and obligations. The articles would also have to specify the transferability of membership of the Company. Any transfer of membership, in case the articles contain restrictions with respect to transfer of membership, would have to fulfil the requirements prescribed. Therefore, the articles of the company must be reviewed carefully.
In respect of companies not limited by shares, section 29 of the Companies Act, 2013 provides that the Articles of Association of such companies must be in such one of the forms in Tables C, D and E in Schedule I as may be applicable or in a form as near thereto as circumstances admit. This, however, does not prevent such companies from including in their articles any additional matters insofar as they are not inconsistent with the provisions contained in the form in any of the Tables C, D and E adopted by the company.3 In cases where the articles are silent and where there exists lack of clarity in the articles regarding the transferability of membership, the Courts have taken a view that the right to membership was subject to the interests of the Company and that qualifications can be imposed could by implication be imposed in the absence of specific provisions.4 However, this would introduce an element of doubt that would put into question the validity of transfers made.
In the U.K., the articles may provide for membership to be transferable. No pre-emption rights apply; and when the member leaves, the fact is simply noted in the register of members. Any financial issues, such as a refund of subscription, are a matter of contract, whether this is the contract formed by the articles or by some extrinsic contract.5 The membership in a company limited by guarantee is seen as personal to the individual members of the company and as being non-transferable. Thus, unlike a company limited by shares, the company law in the U.K. does not contain any equivalents to a transfer or transmission of shares.6 So when a member wishes to leave the company, the member simply resigns their membership.
Comment
One way to proceed would be for the members of the Company to amend the Articles of Association to incorporate a specific provision affording the transfer of membership and any necessary qualifications on the same. This option has been suggested by authorities in other common law jurisdictions where there is a lack of clarity in the Articles of Association.7 Where the Articles of Association of a company does not explicitly bar the transfer of membership by the members, transfer of membership in the Company would lead to complication without altering the articles. In such cases, a company could proceed by amending the Articles of Association in advance of completion of the proposed transfer to the third party. The amended articles should clearly set out the process to be followed as regards transfer of membership. By means of following the process/procedure as set out in the amended articles, the transferee would be able to establish certainty as regards membership in the company and, likewise, the transferor would be knowledgeable of the steps to be taken in order to transfer the membership.
The amended articles, ideally, should specify that on the transfer of membership, the member would tender their certificate of membership to the Board of Directors so as to terminate their membership. The amended articles should also require a new member to notify the Board of the transfer and that the Board would then issue new certificates to the transferee and register them as members.
Generally, a company can alter the Articles of Association by way of addition, deletion, modification, substitution, or in any other way in accordance with Section 13 of the Companies Act, 2013 read with Rule 29 of the Companies (Incorporation) Rules, 2014 and any other condition contained in the Memorandum of Association of the Company. The steps involved would be:
Where a few members of the company remain untraceable, it would also become pertinent that the company issues a notice that it intends to amend its Articles of Association to enable transfer of membership in the company before providing notice for convening of the Board Meeting. The members who are untraceable would comprise those members whom the company has not been contact, members to whom the company has not been able to deliver dispatches to their address as recorded in the register of members or other last known address given by the member to the company and whom the Company believes cannot (or their successors in title cannot) be traced without expenditures disproportionate to the nominal value of the member’s contribution in the Company.
The Notice should provide a statement regarding the proposed alterations to the articles and call for the untraceable members or successors in title wishing to object to such alterations/amendments to notify the company through a letter to the registered office and/or email to register their objections. The Notice should also include the date and time within which the objections are to be made.
It would also be advisable to make available the list of untraceable members and the Company’s original articles for inspection at the company’s registered office, which shall also be informed though means of the Notice mentioned above. The Notice should be advertised in a Tamil newspaper in Tamil and in English language in an English newspaper with a wide circulation.
Upon the completion of the period mentioned in the Notice, the company may issue the Notice calling for the convening of the Board Meeting as mentioned above and follow the steps mentioned thereon.
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