EXPULSION OF A MEMBER

The termination or cessation of a membership can be undertaken pursuant to section 41 of the Companies Act, 1956, whereby the member may be expelled from membership.

1.      Public Limited Company

The concept of expulsion of a member of a company by the Board of Directors, pursuant to alteration of articles by special resolution[1] had been attended to by the erstwhile Department of Company Affairs (“Department”) vide Circular No. 32/75[2] (“Circular”). The Department opined that[3]

“…….that amendment of articles of association of a company providing for expulsion of a member of the management is opposed to the fundamental principles of the company's jurisprudence and is ultra vires the company.

The principles laid down by the Supreme Court in this case[4], even though pertaining to the refusal of a company to the admission of a person as a member of the company, are applicable even with greater force to a case of expulsion of an existing member. ……… it is clarified that assumption by the board of directors of a company of any power to expel a member by amending its articles of association is illegal and void.”

By placing reliance on the aforementioned Circular there seems to be an absolute bar on the expulsion of member from membership of a public limited company.

2.      Company limited by guarantee

It has been clarified in K. Leela Kumar Vs. Government of India[5], that the Circular does not apply to clubs, associations, etc., incorporated under Section 25 of the Companies Act, 1956 but only to public limited companies and the Circular in the form of administrative instructions.

In Siddarth Gupta Vs. The Delhi Golf Club Limited and Ors.[6] the member was expelled from the membership of the club by the Defendant without following due process. The Hon’ble High Court of Delhi was of the view that the Defendant could have revoked the membership only in accordance with the procedure laid down in the Articles of Association. The plaintiff is entitled to continue as member unless he is disqualified in terms of Article. The Court further held that:

“Once a person becomes the member of the club, who has enjoyed its facility whether he becomes a member in its ordinary course or out of turn, it is the duty of the club to follow the due process as prescribed under Regulations. The membership cannot be terminated without due process of procedure and regulations.”

On perusal of the aforementioned facts it may be concluded that the Companies limited by guarantee such as a social club, professional, cultural, religious or other such associations may expel any member of the company in accordance with the regulations and provisions contained in the articles of association.

Position under the erstwhile Companies Act, 1956

The Court of Appeals laid down a principal in Sidebottom’s case[7] whereby it was held that the company had the power to alter its articles provided that such alteration was in the interest and benefit of the company i.e. bona fide in nature, and not in the benefit of some shareholder even if they are the majority shareholders.

The principle laid down in Sidebottom[8] was relied upon in Gothami Solvent Oils Limited[9]. The articles of the company were amended to include an article on cancelation of membership by a special resolution in a General Body Meeting. The Respondent, a shareholder in the company was expelled as a member from the company for instituting legal recourse against the company. The question of law before the High Court was whether a power to expel a member of a company can be conferred by the Articles of Association as originally framed. The Court relied on principal laid down in Sidebottom's case[10] and reiterated that compulsory transfer must be in the interest of the company and not for the benefit of some of the shareholders.

The Court was of the view that in the given case, the expulsion does not give any advantage to the company as there is no assurance that the Respondent would discontinue their act of complaining against the company, accordingly the appeal was dismissed and the expulsion was reversed.

In instances where the companies have pursuant to the expulsion of members, undertaken amendment of articles to authorize a Director to sign the necessary transfer instrument on behalf of such transferor to transfer the shares of the expelled member the Court has reversed the expulsion of members and examined two issues: (i)whether the amended article after expulsion of a member could bind him; and (ii)whether the article can provide for execution of the transfer instrument by a person other than the member or his authorized representative and whether the same would be valid in terms of Section 34 of the Act. On both the issues, the court has held in the negative[11].

In conclusion the expulsion of member from membership of a company is not expressly barred by law however, there is a tendency of the Judiciary to reverse the expulsion on the grounds that the expulsion would provide no benefit or advantage to the company. 

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[1] Section 31: Alteration of articles by special resolution

[2] Circular No. 32/75, dated 1-11-1975

[3]Text of Circular No. 32/75: “where a public limited company has amended its articles of association by including a clause by a special resolution passed at the extraordinary general meeting of the company empowering the board of directors of the company to expel a member in a case where the board is prima facie of the view that activities or conduct of the member is detrimental to the interest of the company or that by reason of his continuance as a member, it would be prejudicial to the future of the company. The question whether such an amendment of the articles of association of a company is valid has been under consideration of the Department. After considering the scheme of the Companies Act, the Department is of the view that amendment of articles of association of a company providing for expulsion of a member of the management is opposed to the fundamental principles of the company's jurisprudence and is ultra vires the company. Such a provision is repugnant to the various provisions in the Companies Act pertaining to the rights of a member in a public limited company and cuts across the scheme of the Act as it has the effect of rendering nugatory the very powers of the Central Government under Section 111 of the Companies Act, 1956, and the powers of the courts under sections 107 and 395 of the Act and is, therefore, void by the operation of the provisions of section 9 of the Act. The articles of association is a contract between the company and its members setting out the rights of members inter se under the contract, and expulsion of a member is not only a violation of this contract but it is also opposed to the principles of natural justice. Moreover, under section 23 of the Indian Contract Act, any agreement which is contrary to any law or opposed to public would be deemed to be unlawful and void. The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1 has laid down the law as to the condition on the basis of which directors could refuse a person to be admitted as a member of the company. The principles laid down by the Supreme Court in this case, even though pertaining to the refusal of a company to the admission of a person as a member of the company, are applicable even with greater force to a case of expulsion of an existing member. As under Article 141 of the Constitution the law declared by the Supreme Court is binding on all courts within the territory of India, any provision pertaining to the expulsion of a member by the management of a company which is against the law as laid down by the Supreme Court will be illegal and ultra vires. In the light of the aforesaid position, it is clarified that assumption by the board of directors of a company of any power to expel a member by amending its articles of association is illegal and void.”

[4] Bajaj Auto Ltd. v. N.K. Firodia [1971] 41 Comp. Cas. 1

[5] [2002]108CompCas610b(Mad)

[6]  CS(OS) 2805/2015

[7] Sidebottom Vs.Kershaw, Leese and Company, limited: [1920] 1 Ch. 154

[8] Ibid

[9] Gothami Solvent Oils Limited[9], Pydiparu, Tanuku, W.G. District and another Versus Mallina Bharathi Rao and another: 2001 SCC OnLine AP 163 : (2001) 2 

[10] Supra 7

[11] Madhav Ramachandra Kamath Vs. Canara Banking Corporation Ltd, AIR 1941 Mad 354 :The petitioner a shareholder in the company was expelled from membership and subsequently the articles of the company were amended so that the company could authorize a Director to sign the necessary transfer instrument on behalf of such transferor to transfer the shares of the expelled member. The High Court was of the view that there has been no valid or legal transfer of the share which the petitioner held in the company to any transferee and he was still the holder of the share; therefore his name must be included in the list of members. The amendment conferring power on the Directors to transfer shares in the absence of an instrument of transfer, was ultra vires of Section 34 of the Companies Act.