Category Archives: Chapter IV – CA2013

I received this interesting question on Quora and replied here. Other replies to the answer prompt me to post a short write up here on my blog. It seems it is a quite confusing and lesser explored area of most of us. We all students of corporate law at least once wonder about it and sometimes continue to do so.

The base question is – “How to decide voting rights of members in a guarantee company not having share capital?”

Here, before coming to the main question, it is prudent to discuss briefly the concept of the member under the Companies Act, 2013. Most of us use the terms members and shareholders as interchangeable. It is not so. All shareholders are generally members, but all members are not shareholders. When we say so, we usually think about shareholders pending registration of transfer or transmission. We miss 50% of the theoretical portion of the subject – Company limited by guarantee.

According to clause (55) of Section 2 the “member”, in relation to a company, means—

(i) the subscriber to the memorandum of the company who shall be deemed to have agreed to become a member of the company, and on its registration, shall be entered as a member in its register of members;

(ii) every other person who agrees in writing to become a member of the company and whose name is entered in the register of members of the company; and

(iii) every person holding shares of the company and whose name is entered as a beneficial owner in the records of a depository.

Membership of a company may or may not be in the form of shareholding. Membership is transferable. In the case of a company limited by shares, a member may transfer his membership by transfer of share. In the case of a company limited by guarantee, a member may transfer his membership by just transferring membership. If a reader is confused about such transfer of share, he may just discuss himself about a transfer of shares not fully paid.

As I mentioned some of my earlier answers on the Quora and on my blog, a company limited by shares and a company limited by guarantee have no practical difference except one. A reader may look into the definition given here as the footnote[1].

May you for a moment consider a company having a share capital with all members decided to pay only at the time of liquidation or winding up. It is akin to a guarantee company. A company with uncalled unpaid shares has no practical difference with a guarantee company. ( see footnote [2])

The voting rights in a guarantee company may be decided on the basis of the ratio of guarantee or say the amount of percentage of guarantee given by a member against total guarantee given to the company by all member combine.

A, B, C and D may form a guarantee company by a promising guarantee of Re.5,000/, Rs. 15,000/-, Rs. 12,000 and Rs 8,000/-respectively. They may have respectively 5, 15, 12 and 8 votes in the General Meeting of the company.

Now, you may understand how to elect directors in general meeting other than first directors.

All practical provisions related to appointment of directors and passing any resolution shall remain the same.

Note -To my understanding, there will not be any differential voting rights in the guarantee company. Readers may also discuss the same.

[1] Two other important definitions in this regards are as under

(21) “company limited by guarantee” means a company having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up.

(22) “company limited by shares” means a company having the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them.

[2] It is a secondary thing that present law requires receiving of money shares subscribed in the memorandum of association by the promoters.