A lien is the right to retain possession of a thing until a claim is satisfied. Incase
of a company, lien on a share means that the member would not be
permitted to transfer his shares unless he pays his debt to the company.
Table
A, Article 11 may give the company “a first and paramount” lien on the
shares of its members, either in respect of amounts payable on the
shares or any amount due from the member of the company. The right of lien is not inherent but must be clearly provided for in the articles.
The lien does not however confer a power to sell the property retained. Consequently,
if the company wishes to be able to enforce its lien by selling the
relevant shares, without a court order, it must insert a suitable clause
in the articles.
Table A, Article 12 gives the company
power to “sell”, in such a manner as the directors think fit, any shares
which the company has a lien subject to specified conditions.
Since the shares are not physically in
possession of the company it appears proper to regard the company’s lien
as an “equitable lien” which does not arise until the registered
shareholder incurs a debt to the company.
Case Law: Bradford Banking Co. vs. Briggs & Co. (1886)
A
member deposited his share certificate with the bank as an equitable
mortgage of the shares to secure a loan to him by the bank. The bank gave notice to the company of its interest as mortgage. Later, this member became indebted to the company.
It was held that as the company had prior
notice of the bank’s mortgage, its lien was postponed to the mortgage
since the company’s claim under the lien arose after the bank’s notice
was received.
Oral Transfer
Section 77 of the Act provides that, not
withstanding anything in the articles of association of a company, it
shall not be lawful for the company to register a transfer of shares
unless a proper instrument of transfer has been delivered to the
company.
This means that an oral transfer of shares is illegal and void.
In Re: Greene,
the judge explained that the primary object of the section was to
“scotch” the then prevalent practice of registering oral transfers of
shares to the great detriment of the revenue. Its current effect is to enforce payment of the stamp duty that is payable on the transfer of shares. If
the company registers oral transfers, the transferee would not acquire
title to those shares and the transferor would be deemed to remain the
registered holder of the shares.
Forged Transfer
An instrument of transfer of shares on
which the signature of the transferor is forged is called a forged
instrument, and any transfer based on such instrument is called a forged
transfer.
A transfer is usually forged after a person steals another person’s share certificate with the intention of having the relevant shares registered in his name so that he may thereafter transfer them to a third party.
The first thing that a company should do
when an instrument of transfer is tendered is to inquire into its
validity. The company should sent a notice to the transferor at his
address and inform him that such a transfer has been lodged and that if
no objection is made before a specified day it would be registered.
Because the transferor’s forged signature
on the transfer is wholly inoperative, the consequences of such
transfer are as follow: -
(i) A forged transfer is a nullity and cannot affect the title of the shareholder whose signature is forged. If
a company transfers shares under a forged instrument of the transfer,
the true owner can compel the company to have his name restored in the
register of members.
(ii) If
a company has issued a share certificate under a forged transfer and he
has sold the shares to an innocent person, the company is liable to
compensate such a purchaser if it refuses to register him as a
shareholder. In such a case, he can claim damages from the company on
the grounds that he acted on the share certificate of the company.
(iii) If
the company has been put to loss by reason of the forged transfer, it
can claim an indemnity from the person presenting the transfer for
registration even though he is quite innocent of the forgery.
Transfer Advice
In order to minimize instances of forged
transfers, some companies in Kenya issue a “Transfer Notice” or
“Transfer Advice” to the registered holder to the effect that a transfer
of his shares has been presented for registration.
However, if the registered holder ignores
the ‘notice’, he is not estopped from later asserting that the transfer
was not signed or authorized by him.
Blank Transfer
A transfer signed by the transferor, but with a blank for the name of the transferee is called a blank transfer. In a blank transfer, neither the transferee’s name and the signature nor the date of sale, are filled in the transfer form. The
transferee is at liberty to sell it again without filing his name and
signature to a subsequent buyer. The process of purchase and sale can be
repeated any number of times with the blank deed and ultimately when it
reaches the hands of one who wants to retain the shares, he can fill
his name and date and get it registered in the company’s books.
The facility of blank transfer has often been used for illegal purposes particularly to avoid taxes.
MORTGAGE ON SHARES
A shareholder who intends to borrow money
on the security of his shares may do so by way of legal or equitable
mortgage on his shares.
(a) Legal mortgage
This entails the transfer of shares to the lender as a security for repayment of an old debt. As
long as the mortgagee remains a registered shareholder, he is entitled
to all dividends and he is entitled to vote, unless it is agreed between
the lender and borrower that dividends will be paid to the latter.
A legal mortgagee is for a period when the contract is still in force, a member of the company.
In order to effect a legal mortgage of
shares, the legal ownership of shares must be transferred to the lender
by the registration of a form of transfer with the company concerned.
Dividends paid to the lender during the
currency of the loan as the registered holder of the shares are payable
by him to the borrower unless the loan agreement provides that they will
be applied towards reduction of the loan. The voting rights exercisable in respect of the shares will depend on the provisions of the loan agreement.
(b) Equitable mortgage
This is effected by a deposit of share
certificate by the borrower with the lender as a security for the loans,
with or without delivery of a blank transfer. Incase the borrower fails to repay the loan the mortgagee may fill the blank transfer form and dispose the shares.
There are no legal formalities prescribed for an equitable mortgage which can therefore be created quite informally. Anything done by the lender and the borrower which shows an intention to mortgage the shares will suffice.
The common options for equitable mortgage are:-
(i) To deposit the share certificate with the lender without executing a transfer: -
If
the borrower fails to repay the loan as agreed between him and the
lender, the lender must apply to court for an order for sale of the
shares.
Alternatively the lender may apply for an order of fore closure which would vest the ownership of the shares in him absolutely.
(ii) To deposit the share certificates plus a blank transfer with the lender.
A blank transfer is one which is signed by a named transferor but does not specify the transferee. On
default by the borrower, the lender has an implied authority to sell
the shares and to enter the name of the purchaser in the transfer as the
transferee. In Deverges vs. Sandeman Clark Co., it was observed that no
court order is required in order to effect the sale.
Priorities
If a person who has borrowed money on the
security of an equitable mortgage by a fraudulent misrepresentation,
induces the company to issue him with another share certificate and uses
the certificate to sell the shares to a bonafide purchaser for value
who then obtains registration, that purchaser will have a priority over
the mortgage.
Share Certificates
Section 82(1) provides that within 60
days after the date on which a transfer is lodged with a company, the
company must have ready for delivery, a certificate of the shares
transferred.
Section 82(3) provides that a person
aggrieved by the company’s failure to issue a share certificate may
serve the company with a notice requiring the company’s compliance with
the section. If the company
does not do so within 14 days after the service of the notice he may
apply to the court for an order directing the company and the officer
responsible to issue the certificate with such time as the court may
specify. The costs of application shall be borne by the company or the officer of the company who was responsible for the default.
In Re: Bahia & San Francisco Railway
Co., the judge described the share certificate as a “declaration by the
company to all the world that the person in whose name the certificate
is made out and to whom it is given, is a shareholder in the company,
and it is given by the company with the intention that it shall be so
used by the person to whom it is given and acted upon in the sale and
transfer of shares”.
SHARE WARRANTS
Section 85(1) provides that a company
limited by shares, if so authorized by its articles may, with respect to
any fully paid up shares, issue under its common seal a warrant stating
that the bearer of the warrant is entitled to the shares therein
specified.
Section 114(1) provides that on the issue
of a share warrant, the company shall strike out of its register of
members, the name of the member then entered therein as holding the
shares specified in the warrant as if he had ceased to be a member. The
company shall then enter in the register the fact that the issue of the
share warrant, a description of the shares included in the warrant and
the date of issue.
Section 114(2) provides that the bearer
of the share warrant shall be entitled on surrendering it for
cancellation to have his name entered as a member in the register of
members.
The share warrant is a “warranty” that the bearer is the holder of the shares specified therein. Secondly
it is a negotiable instrument which is transferable by simple delivery
and a bonafide transferee for value of the warrant is not affected by
any defect in the title of the transferor.
FORFEITURE AND SURRENDER OF SHARES
Forfeiture
If a shareholder having been called to
pay any call on his shares fails to pay, the company has two remedies
against the shareholder:-
(i) To sue him for the amount due.
(ii) To forfeit the shares.
Forfeiture means losing the right of
ownership of the shares as a penalty for some act. Forfeiture for non
payment can be instituted if special powers are given by articles to the
directors to do so.
The company may forfeit shares of a shareholder for non payment of some call if the following conditions are satisfied:-
(i) In accordance with articles: - Forfeiture must be authorized by articles of the company.
(ii) Notice
prior to forfeiture: - Under Section 34, the notice is required to name
a day/date on or before which the payment is to be made, and to state
that in the event of non-payment, the shares will be liable to be
forfeited.
(iii) Resolution
of the Board: - If the defaulting shareholder does not honor the
notice, the directors must pass a resolution forfeiting such shares. If
this resolution is not passed, the forfeiture is invalid.
(iv) Good faith: - The directors must forfeit the shares in good faith and for the benefit of the company.
Effects of Forfeiture
(i) A person whose shares are forfeited ceases to be a member in respect of the forfeited shares.
(ii) Forfeited shares may be cancelled, sold or re-allotted on such terms and in such manners as the directors deem fit.
DEBENTURES
Section 2 of the Act defines a debenture
as including debenture stock, bonds and any other securities of the
company, whether constituting a charge on the assets of the company or
not.
A
debenture is a document given by a company as evidence of a debt to the
holder usually arising out of a loan and most commonly secured by a
charge.
According to Palmer, the word ‘debenture’
signifies “any instrument under seal evidencing a deed, the essence of
it being the admission for indebtedness”. In other words, debenture is a
document creating or acknowledging an indebtedness of the company which
may or may not be secured.
Debentures are usually issued by a
resolution of the Board of Directors under powers conferred by the
company’s articles of association. Table
A, Article 79 provides that, the directors may exercise all the powers
of the company to borrow money and to issue debentures, debenture stock
and other securities”.
Charges Securing Debentures
A company can issue secured and unsecured debentures. If the debentures are not secured by the assets of the company, the debenture holders position is that of an unsecured creditor. Secured debentures are issued by creating a charge on the assets of the company.
The term “charge” means an interest. It may either be a specific (fixed) charge or a floating charge.
(a) Fixed Charge
A fixed charge is created in respect of a
definite and ascertained property and this prevents the company from
dealing with that property without the consent of debenture holders. In
the event of winding up of a company, debenture holder secured by a
specific charge is in the highest ranking class of creditors. Where
there are a number of specific charges on the same property, their
priority is determined by the general rules relating to priority of
charges.
(b) Floating Charge
A floating charge is an equitable charge
which does not fasten on any ascertained or definite property and as
such can deal with any of its assets in the ordinary course of business.
Lord Gower defined a floating charge as
“a charge which floats like a cloud over the whole assets from time to
time falling within the generic description”.
The consent of the debenture holders is not necessary for the company to deal with its assets.
Characteristics of a floating charge
The characteristics of a floating charge
have been ably stated by Romer in Re: Yorkshire Wool Combers Association
Ltd (1903) that: -
(i) It is a charge on a class of assets present and future.
(ii) The class is one which changes from time to time in the ordinary course of the company’s business.
(iii) Is
contemplated by the charge that, until some event occurs which causes
the charge to crystallize, the company may use the assets charged in the
ordinary course of its business.
Distinction between Fixed and Floating Charge
“A specific/fixed charge is one that
fastens on ascertained and definite property or property capable of
being ascertained and defined; a floating charge on the other hand is
ambulatory and shifting in its nature, hovering over and so to speak
floating with the property which it is intended to affect, until some
event occurs or some act is done which causes it to settle and fasten on
the subject of the charge within its reach and grasp”, according to
Illingworth vs. House worth (1904).
Crystallization of Floating Charges
A floating charge may crystallize or become fixed in any of the following ways:-
(i) When the company ceases to carry on business.
(ii) When the company defaults and the debenture holders take steps to enforce their
security, either by appointing a receiver or applying to court to do so.
Case Law: Government Stock and Other Securities vs. Manila Railway Co. (1897)
The debentures created a floating charge. After three months, interest become due, but the debenture holders took no steps. The company then made a mortgage of a specific part of its property. The House of Lords held that the mortgage has no priority. It
was observed that “it is of essence of floating charge that it remains
dormant until the undertaking charged ceases to be a going concern, or
until the person in whose favor the charge is created intervenes. As long as he does not intervene the business will be carried on. Mere
default does not cause crystallization and that the debenture holders
must intervene by taking steps to enforce their security”.
(iii) When the company goes into liquidation.
(iv) When the receiver is appointed.
Priority of Charges
The priority between charges is as follows:-
(a) Legal fixed charges rank according to their order of creation.
(b) If
an equitable fixed charge (i.e. an informal mortgage created by a
deposit of title deeds or share certificate to the lender) is created
first and a legal charge over the same property is created later, the
legal charge takes priority over the equitable charge.
(c) A floating charge will be postponed to a later fixed charge over the same property.
The floating charge would however have priority over the fixed charge if: -
(i) The floating charge contained a clause prohibiting the company from creating fixed charges with priority over it.
(ii) The holder of a fixed charge actually knew about the prohibition.
(d) If two floating charges are created over the general assets of the company, they will rank in the order of creation.
(e) If
a company creates a floating charge over a particular kind of assets,
for example book debts, the charge will rank before an existing floating
charge over the general assets.