Minor as Shareholder in a Company:
A minor being incompetent to contract as per Indian Contracts Act, 1872 cannot become a shareholder of the Company. However, a minor acting through his/her legal guardian may become a shareholder.
Under Companies Act 2013, a minor cannot become shareholder of a company unless shares are either:
(a) gifted,
(b) transferred or transmitted to them by an adult
In such cases, however, shares are transferred to the guardian of the minor, which will be held by the guardian as a trustee of the minor until he/she attains majority.
Relevant provision:
Section 56 of Companies Act, 2013 read with Rule 11 of Companies (Share Capital & Debentures) Rules 2014 provides for the procedure of transfer of shares.
Section 56(5) states that “the transfer of any security or other interest of a deceased person in a company made by his legal representative shall, even if the legal representative is not holder thereof, be valid as if he had been the holder at the time of the execution of the instrument of transfer.”
Important Case Laws:
(1) Master Gautam R. Padival (Minor). v. Karnataka Theatres Limited., Company Petition No. 13/111.SRB of 1997
This is an important case law wherein the question was whether a minor who has obtained shares by transfer can be registered as a member of the company.
While a minor cannot enter into a contract as clearly held in the case, Mohori Bibi v. Dharmodas Ghosh (1903) 30 Cal. 539.
However, Company Law Board in this case observed that, the settled rule is that the natural guardian of a minor could enter into contracts on behalf of the minor for the latter’s benefit and in such cases, such contracts are binding on the minor. Thus, referring to section 8(1) of the Hindu Minority and Guardianship Act, 1956, the court held that a guardian could agree in writing on behalf of a minor to become a member.
Therefore, the court was of the view that there will be no bar in the shares registered in the name of a minor indicating therein, the name of the guardian representing the minor.
Also, fully paid up shares transferred to a minor is valid as decided by the Company Law Board in Nandita Jain v. Bennett and Colman Co. Ltd. (Appeal No. 27 of 1972)
Therefore, the court held that there will be no personal covenant to bind the minors, if these fully paid shares are transferred in the names of the minors. Company may refuse to register name of minors only in case of partly paid up shares.
Further, the court observed that while it is essential to enter into contract to become members by applying for allotment of shares, by purchasing shares. However, the same cannot be strictly applied in all cases like inheritance of shares, transfer of shares, gift of shares, etc., by which one can become a member.
With regard to this, the court referred to the case before the Delhi High Court in World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor, [1990] 67 Comp Cas 607 wherein the question was whether legal heirs of a deceased person could become members of a company. The observations of this court was upheld by the Supreme Court on appeal in World Wide Agencies P. Ltd. and another v. Mrs. Margaret T. Desor, 1990 (1) SCC 536.
(2) World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor, [1990] 67 Comp Cas 607 and 1990 (1) SCC 536.
The Delhi High Court referred to the Articles of Association of the Company and as there was no decision by our courts directly on the point, the Court referred to the English case, Jermyn Street Turkish Baths Ltd., In re [1970] 3 ALL ER 57 (Ch D), wherein the judge opined that personal representatives of a deceased holder, on whom title of his shares devolved by operation of law, must be regarded as members of the company.
The court further made reference to Article 25 and 28 of Table A of Schedule I to the 1956 Act that dealt with transmission of shares. It specifically says that a person becoming entitled to a share by reason of the death of the holder will be entitled to the same dividends and “other advantages” to which he would be entitled if he were the registered holder of the share, except that he shall not, before being registered as a member in respect of the share, be entitled in respect of it to exercise any right conferred by membership in relation to meetings of the company.
Articles 23 to 28 of Table F of Schedule I to the 2013 Act deals with transmission of shares and states the same as above.
What the court derived from these Articles is that the legal representatives are entitled to what the deceased shareholder whose name is on the register would be entitled to, except with regard to attending meetings and being counted for the purpose of a quorum, etc.
Upholding the above observation, the Hon’ble Supreme Court held that there is an instantaneous transmission of shares to the legal heirs on death of a shareholder and what a company does is only the secretarial work of entering the names of the legal heirs once the requirements of the articles are complied with.
(3) Dewan Singh v. Minerva Films Ltd. (1959) 29 Comp Cases 263 (P&H)
In this case, the Punjab High Court held that there is no legal bar to a minor becoming member of a company by acquiring shares by way of transfer provided the shares are fully paid up and no further obligation or liability is attached to them.
Conclusion:
From the above, one can conclude that a minor cannot be a shareholder by way of purchase, application for allotment or direct subscription.
However, minor can be a shareholder of only fully paid up shares if he/she is represented by a lawful guardian. If the minor is gifted or transferred partly paid up shares, then the company may refuse to register his/her name in the register.
A minor’s vote with respect to his/her fully paid up shares shall be through his/her guardian.
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