Transfer of Shares and Membership — Company Law Notes

Transfer of Shares and Membership

Free transferability is a company’s great advantage — you can walk away by selling your shares. But a private company deliberately restricts transfer to stay closed. Where the line falls between a valid restriction and an unlawful confiscation of a member’s property is the examiner’s playground.

Membership — who can be a member?

A member (s.2(55)) is a person who has agreed to become a member and whose name is entered in the register of members. One becomes a member by:

• subscribing to the memorandum (subscribers are members automatically on incorporation); or
• agreeing to take shares and having one’s name entered in the register (by allotment, transfer or transmission).

Who may be a member: any person competent to contract — individuals, companies, etc. A minor cannot be a member (no valid contract), though shares may be held by a guardian on his behalf. A company may be a member of another; a partnership firm cannot (not a legal person), but its partners can.

A minor registered as a member — liability on attaining majority. Because a minor cannot contract, an allotment or registration of shares in a minor’s name is void/defective and, while he is still a minor, he incurs no liability on the shares. But the position can change when he comes of age. If, on attaining majority, the former minor affirms the membership by his conduct — typically by accepting dividends and not repudiating the shares within a reasonable time — he is estopped from later denying that he is a member. He is then treated as having ratified what was voidable, and becomes bound as a contributory (liable for the amount unpaid on the shares) on a winding up. Silence coupled with the taking of benefits after majority is what fixes him with liability; a former minor who promptly repudiates on attaining majority escapes it.

Transfer vs transmission

• Transfer — a voluntary act: a member sells/gifts his shares to another. Governed by s.56.
• Transmission — an operation of law: shares pass on the member’s death or insolvency to his legal heir/official assignee, without a transfer deed.

Procedure for transfer (s.56)

• Execute a proper instrument of transfer (Form SH-4) signed by transferor and transferee;
• deliver it to the company with the share certificate within the prescribed time;
• the Board registers the transfer and issues a new certificate within the statutory period.

Refusal and remedy. A company may refuse to register a transfer only on proper grounds. On refusal, it must give notice with reasons; the aggrieved person may appeal to the NCLT (s.58/59) for rectification of the register of members. This is the “quasi-judicial intervention” in transfers — the NCLT can order the name entered or removed.

Restrictions & lien. A private company restricts transfer by its articles (pre-emption clauses etc.), which are valid. A company may also have a lien on shares for money owed by the member. But the articles cannot be used to confiscate a member’s shares arbitrarily — expulsion powers are read narrowly (a bare power to “expel” does not let the company seize the shares).

Section 56(1): a company shall register a transfer only on a “proper instrument of transfer… duly stamped, dated and executed by or on behalf of the transferor and the transferee.”

In Simple Terms: You become a member by getting your name on the register. Shares move either by transfer (you sell them, following the s.56 paperwork) or by transmission (they pass automatically on death/insolvency). If the company wrongly refuses to register your transfer, you appeal to the NCLT to fix the register.

flowchart TD
    ROOT["Change of membership"]:::root
    ROOT --> T["Transfer (voluntary, s.56)"]:::mid
    ROOT --> M["Transmission (by law: death/insolvency)"]:::mid2
    T --> T1["Instrument SH-4 + certificate -> Board registers"]:::leaf
    T --> T2["Refusal -> appeal to NCLT (s.58/59)"]:::leaf
    ROOT --> L["Private co restricts transfer; lien valid; no arbitrary confiscation"]:::leaf
    classDef root fill:#FFF8DC,stroke:#000,color:#000;
    classDef mid fill:#DCFCE7,stroke:#166534,color:#000;
    classDef mid2 fill:#FDE8D0,stroke:#92400E,color:#000;
    classDef leaf fill:#E6F3FF,stroke:#1E3A8A,color:#000;
    linkStyle default stroke:#888,stroke-width:1px;

🧩 WORKED EXAMPLE — expelling a member and seizing his shares

Facts. A company’s articles authorise it only to expel a member. The company now wants to deprive the expelled member of his shares.

Rule. Shares are the member’s property (s.44); a power to expel does not include a power to confiscate shares, and the articles cannot be used oppressively.

Apply. The articles authorise expulsion, not forfeiture of the shares; taking his shares exceeds that power.

Conclusion. The company cannot deprive him of his shares merely by expelling him; doing so would be invalid and could amount to oppression (s.241).

Case Laws

• Bajaj Auto Ltd. v N.K. Firodia (1971) — grounds on which a company may refuse to register a transfer; discretion must be bona fide.
• Public Passenger Service Ltd. v Khadar (1966) — restrictions on transfer must be in the articles to bind.

Back to Top

📄 Full notes + Question Bank (₹199) — every topic in depth, model answers to all past KSLU questions, in one printable PDF. Get the bundle · 10 Solved Problems · All Company Law topics