One of the fundamental principles of corporate law is that a company independent existence than the existence of its shareholders. Therefore, all members of a company may die, the company will not.
When I read this principle, admittedly, I had limited vision. I presumed members either as natural persons with life and death or bodies corporate as members, their merger, amalgamation, winding up and liquidation. The removal of the name of the member company from the registrar was not an example suggested then.
There would be no direct impact on the existence of the company if the Registrar of Companies removed the name of a member company under Section 248 of the Companies Act, 2013 from the register of companies. However, for companies with small numbers of members, this is not an ideal situation.
The removal of the name of one or more member companies:
- quorum in general meetings;
- holding of company meetings on shorter notice;
- holder of beneficial interest in a share if in favour of such a member company; and
- Significant beneficial ownership (SBO) may have interest impacts.
This list is not an exhaustive one.
No, paying dividends to these companies does not bother. On the contrary, it may help to a limited extent. The right issue of shares may also have an exciting twist.
Quorum in general meeting is not a big deal if managed by other members properly. They may calculate the required number of transfers to satisfy the legal number.
Even without such an odd situation, a company may face a hurdle to convene a general meeting on shorter notice. The company may not call an extraordinary public meeting on a shorter period notice, where a member company holds more than 5% shares. Similarly, where the company has less than 20 members, there will not be an annual general meeting on a shorter notice period. In the first case, only a fresh issue of shares may help. In the second case, some well-calculated share transfers by an existing member may help.
In all earlier situations, these shares shall always remain in the hand of companies whose name is not in the register of companies.
I see no direct impact on the holder of the beneficial interests except to comply with an earlier direction given by the actual owner or beneficial owner.
The law related to significant beneficial ownership comes into the picture if the member company has a shareholding of more than the threshold limit of the applicability of these rules. Unlike previous situations here, these shares may land in the hand of the Investor Education and Protection Fund Authority. The company will have to transfer these shares held by such a member company will also be transferred to the Investor Education and Protection Fund Authority in case of declaration of dividend, but with a wait of seven years.
As the name of the member company remains there in the register of members despite its removal from the register of companies in the office of the Registrar of Companies, it requires some regulatory step to be taken. I suggest a law to transfer shares belonging to these member companies in favour of the Investor Education and Protection Fund Authority.