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THE COMPANY’S LIEN


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.

 
 
 

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