TRANSFER OF SHARES

Transfer of shares is generally the transfer of ownership of shares

Section 75 of the Companies Act provides: the shares of any member in a company “shall be movable property transferable in manner prescribed by the articles of the company.”

NB: a member has the right to transfer his/her shares which are prima facie transferable.

RESTRICTIONS ON TRANSFERABILITY

Re Smith & Fawcett Ltd: Prima facie right of a shareholder is not to be

cut down by any uncertain language or doubtful implications.

The right if it is to be cut down, must be done so by cutting down with satisfactory clarity.

Articles if appropriately framed are allowed to cut down the right of transfer to any extent which the articles on their true construction permit.

Restrictions on transferability of shares, if any, depend solely on the provisions of the company’s articles and may take any form.

TABLE A PROVISIONS In the case of companies whose articles

correspond with Table A the extent of the restrictions depend on the type of the company i.e. public or private.

PUBLIC COMPANIES “The directors may decline to register the

transfer of a share (not being fully paid) to a person of whom they shall not approve and they may also DECLINE to register the transfer of a share on which the company has lien.” Article 24 of Table A, part 1.

Public companies cont…

Article 24 of Table A, Part 1 may be explained as follows:

a) Re Smith & Fawcett Ltd. The directors must exercise their discretion bona fide in what they consider not what the courts consider.

b) Directors may only decline to register a transfer to a person of whom they shall not approve (on personal grounds). They cannot decline on other grounds. Re Bede Steam Shipping Co.

Public companies cont… c) if the company has lien over the relevant shares,

the directors may refuse to register a transfer. NB: Registration cannot be refused on grounds

other than those stated in the article. Re Smith & Fawcett Ltd

If the directors wrongfully fail to exercise their power of refusal, the transferee may apply to the court for rectification of the register and entry of his name therein. Re Hackney Pavillion Ltd.

Moodie v Shephard (Bookbinders) Ltd

PRIVATE COMPANIES Article 24 has been excluded by Article I

and II and is replaced by the following provision for those private companies that have adopted table A:

“the directors may, in their absolute discretion and without assigning any reason therefore, decline to register any transfer of any share, whether or not it is a fully paid share.” Re Smith & Fawcett Ltd

Private companies cont… Directors power of refusal must be done

within a reasonable time from the receipt of the transfer.

Section 80 (1): the reasonable time is limited to a period of sixty days after the date on which the transfer is lodged with the company.

What doctrine is this?

TRANSFER PROCEDURE

The transfer depends on the provisions of the company’s articles. Companies that have adopted table A, the procedure is as follows:

1. The transferor completes the transfer form, or if a transfer form is not used, he/she prepares a document which corresponds to a transfer form

2. Tranferor signs the transfer form or document usually in the presence of a witness

3. Transferor gives the transfer form of document and relevant share certificate to the transferee

4. Transfree signs the form or document in the presence of a witness who also signs it.

5. Stamp duty is affixed by the transferee on the form rdocument and lodges it and the share certificate with the company for registration. Art 25.

6. The transfer is considered and aproved by the BOD

Transfer procedure cont…

7) company secretary makes out a new share certificate in the name of the transferee and affixes the company seal on it after it is signed by one of the directors and countersigned by the secretary or another director.

8) transferee’s name is entered on the company’s register of members in place of the transferor’s name.

9) new certificate is delivered, or sent, to the transferee.

section 82(1) (a) section 118

CERTIFICATION OF TRANSFERS

A certification is necessary where:a) The transferor is transferring only part of his/her holdingb) Transferor is transferring all his shares to two or more

tranfereesc) Transferor has not yet received a certificate from the

company but has been issued with a document of title to the shares e.g. an allotment letter

d) transferee is not satisfied with the transferor’s title to the shares e.g. the name on the certificate does not correspond with the transferor’s name

NB: In any of these circumstances, the transferor or his/her broker will forward the transfer form or document together with the certificate, to the company for certification.

Certification of transfer cont…

Section 81 (3) (c) provides that a certification shall be deemed to be signed by any person if:-

i. It purports to be authenticated by his signature or initials (whether handwritten or not), and

ii. It is shown that the signature or initials was or were placed there neither by himself nor by any person authorised to use the signature or initials for the purpose of certificating on the company’s behalf.

The transferor will deliver the certified transfer to transferee who will then lodge it with the company for registration.

EFFECT OF CERTIFICATION Bishop v Balkis Consolidated CoCertification must amount to representation

LIABILITY FOR FALSE CERTIFICATION

Section 81 (2) provides: “where a person acts on the faith of a false certification by a company made negligently, the company shall be under the same liability to him as if the certification has been made fraudulently.”

If a company’s agent makes a fraudulent certification the company will be bound by it. Kleinwort v Associated Automatic Machine Corporation Ltd

If a person was not authorised to certificate transfers on the company’s behalf, the company is not liable.

Ms. Miriam

Effect of Transfer.-A transfer is a contract of sale that is effected through the agency of a stock holder and is evidenced by a purchase contract note and a sale contract note.-These documents are issued by the stock broker.-The property in the shares is not vested in the transferee unless and until his name is entered in the company’s register of members **see S 28 (2)**

In the Interim…1. Partly paid for shares;If a call is made, the transferor is legally

liable and must pay the amount required, but ask for an indemnity from the transferee.

2. If dividends are declared;The transferor is paid in person, as

according to the company’s records he is entitled. He however holds them in trust for the transferee

3. If a meeting by the company is convened and the transferor decides to attend, his right to vote will be dictated by whether he has been fully paid for those shares.

- If he has, he votes as the transferee directs.- If he has not, he would have the prima facie

right to vote in respect of those shares.

- See the considerations set out by Russell J in Musselwhite V CH Musselwhite & Son Ltd.

Competing claims in shares.

Shropshire Union Railways & Canals Co V R1. ** The transferee’s legal title to the

shares will prevail over the creditor’s earlier equitable title**

Rationale? Doctrine

2. The First in Time Rule.Applied in instances where the equities as

between successive transferees of shares are equal.

See Joyce J in Peat v Clayton.

A Company’s Lien.

Right of Lien; Implies power on the part of the creditor to retain the property of his debtor which is in his possession as security as payment for a debt.

This right does not however confer power to sell the property retained.

In the case that a company wishes to sell the shares without a court order…

-it must insert a suitable clause in the articles.Art 12. gives a company the power to sell in such

manner the directors think fit, any shares that the company has lien, but subject to specified conditions.

Legal Nature of a company’s Lien.1. A company, unlike an unpaid seller is not in

“possession” of the shares and thus cannot “retain” them.

2. The ownership and notional possession of the shares is still vested in the registered holder.

The company can only refuse to allow the registered holder to transfer then to a 3rd party.

This right does not arise unless the registered holder incurs a debt with the company.

Related Case Law.1. Mackereth V Wigan Coal & Iron LtdWhere a company has prior notice of a 3rd

party’s equitable interest, and despite this deals with the shares for its own benefit, the 3rd party’s equitable interest will take precedence over the company’s Lien.

2. Bradford Banking Company v Briggs and Co.

Oral Transfers.The registration of transfer of shares will

only be done unless a proper instrument of transfer has been delivered to the company.**section 77**

This is notwithstanding the provisions of the Articles of a company.

Oral transfers are illegal and Void.Rationale?

Re;Green…the primary object of this section is to scotch the then prevalent practice of registering oral transfers of shares to the great detriment of the Revenue Authorities...(stamp duty payable on the transfer of shares)

If the company does register an oral transfer, the transfer would not acquire title of those shares.

Void Transfers.

1. S 76(a) If shares are transferred to a body

corporate that was not registered with the written approval from the treasury thereto, the transfer shall be void, if it is disapproved by treasury.

2. S29(1)Subsidiary companies cannot hold

shares in their parent companies.

Forged Transfers.

A transfer is forged when 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.

Available Remedies.1. Restoration of the real owners name to

the register and payment of dividends paid during the period in which his name was not in the register.

2. The person that lodged a forged transfer for registration must indemnify the company against any loss it suffers as a consequence of the registration.

The fact that he might have been innocent on the matter and that the company may have issued him a share certificate is irrelevant.

3. Estoppel.Where the company is estopped from

denying the transferee’s title to the shares even though under a forged certificate if he sells them to a 3rd party.

See also the position of the Law as established in Sheffield Corporation V Barclay

The Effect of innocent misrepresentation.Fry V SmellieThe Private limitation of authority cannot

be pleaded against a 3rd party who was not aware of it.

Judy

MORTGAGE OF SHARES

A shareholder who intends to borrow money on the security of his shares may do so by way of a

legal or equitable mortgage of his shares.

Legal Mortgage

To effect a legal mortgage of shares the legal ownershipof shares must be transferred to the lender.-This is done by the registration of a form of transferwith the company concerned. -Terms of the loan are incorporated in a loan agreement which will also contain a clause in which the lender undertakes to transfer the shares when the loan is repaid in full.What Doctrine in Mortgage law is this?

Equitable Mortgage

-There are no legal formalities prescribed.-Intention to mortgage the shares shall suffice. -The common options include:

- To deposit share certificate(s) with the lender without executing a transfer.

- To deposit the share certificates plus blank transfer with the lender.

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 used the certificate to sell the shares to an innocent 3rd party who then obtains registration, that purchaser will have priority over the mortgagee.What doctrine is this?

BONA FIDE PURCHASER FOR VALUE WITHOUT NOTICE

Share Certificates

-S. 82(1) provides that within sixty 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.-In the event of non-compliance with this provision, the company and every officerof the company who is in default shall be liable to a default fine.

-By s.82(3) A person aggrieved by the company's failure to issue a share certificate as provided by s.82(1) may serve the company with a notice requiring the company's compliance with the section.-If the company does not do so within fourteen days after service of notice an order may be issued by the court directing the company to issue the certificate. Cost is borne by the company responsible.

-The provisions of section 82 (1) are reproduced in Table A, article 8 with the following provisions;a)One certificate is to be issue to the member for all shares without payment, or if more than one certificate is issued, the member shall pay Kshs. 2.50 for every certificate after the first.

-b.)every certificate shall be under the seal of the company and shall specify the shares to which it relates and the amount paid up thereon.-c.) the company is not bound to issue more than one certificate in respect of a share or shares held jointly by several persons-d.) if one certificate is issued in respect of a share or shares held jointly by several persons the delivery of a certificate to one of the joint holders shall be sufficient delivery to all the holders.

Form of Certificate

-The form and layout of share certificates vary as between different companies since it is not governed by any statutory provisions.-Different classes of shares are usually different in design or colour.-Usually, only the address of the senior holder is stated.

Share CertificateCertificate no Number of shares

Ordinary SharesJuju Shoe-shiners Co Ltd

Incorporated under the Companies Act……………………….

Capital 10,000,000 shillingsDivided into 1,000,000 shares of 10/= each

………………….This is to certify that …………of……………….is the registered holder of………Ordinary shares of 10/= each fully paid, in Juju Shoe-shiners Co Ltd, subject to the Memorandum and Articles of Association of the said Company .Given under the seal of this company, this….. Day of ……..Signed 1)…………………………DirectorSigned 2)………………………....Security

Effect of Certificate

-Section 83 provides that “a certificate, under the common seal of the company, specifying any shares held by any member shall be prima facie evidence of the title of the member to the shares.

Estoppel by Share Certificate

-If the company negligently issues a certificate that is incorrect in some material particulars it may be estopped from denying the correctness of the stated facts if a third party changes his position in reliance on them.

-Illustrations:-1.) Re: Bahia & San Francisco Railway Co.-2.) Burkinshaw v Nicolls -3.) Balkis Consolidated Co. v Tomkinson

-If the company becomes aware of an incorrect statement in a share certificate before the shareholder sells the shares, -it would be entitled to recall the certification for cancellationso as to issue another one.

Forged Certification-The principle of estoppel does not apply when the certificate relied upon was issued fraudulently and without the authority of the board of directors.-This may be so if the secretary wrongly affixed the company's seal an forged the signature attesting it, or where, although the signatures are genuine, they were made as part of a fraudulent design of the signers-See: Ruben v Great Fingall Consolidated

Share Warrants

-s.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. -The warrant may provide for the payment by coupons or otherwise, of the future dividends on the shares included in the warrant.

-s.85(3) provides that a share warrant shall entitle the bearer thereof to the sharestherein specified which may be transferred by the delivery of the warrant.-s.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.

-s.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.-By s.144(5) the bearer of the warrant may, if the articles so provide be deemed to be a member of a company to a full extent or for any purposes defined in the articles.

Nature of Share Warrant

-A share warrant is a 'warranty' that the bearer is the holder of the shares therein specified.-Secondly, it is a negotiable instrument which is transferable by simple delivery and a bona fide transferee for the value of the warrant is not affected by any defect in the title of the transferor.

Faizah Ali

Debentures:There is no precise legal definition of a debenture.  In levy v Abercorris Slate & Rubber Co, the judge stated that he

could not find any precise legal definition of the term debentures. It is derived from latin word Debenture Mihi, opening words of

certain documents which is used to be issued by English companies in 1980s as acknowledgement of loan the companies had received from the persons to whom the document was issued.

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.

• Legal definition  ,A promissory note or bond offered by a corporation to a creditor in exchange for a loan, the repayment of which is backedonly by the general creditworthiness of the corporation

Although with time debentures was define as document issued by registered company to acknowledge or evidence an indebtedness.

A debentures is the traditional name given to a loan agreement where the borrower is a company. Typically, a debenture will set out the terms of the loan: the amount borrowed, repayment terms, interest, charges securing the loan, provisions for protecting and insuring the property etc., and terms for enforcement if the company defaults.

The directors have power to issue debentures according to 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”.

Debenture stock A type of stock that makes fixed payments at scheduled intervals of time. Debenture stock differs from a debenture in that it has the status of equity, not debt, in liquidation.

Debentures are usually secured by charges on the company's property. Debentures as such do not have to be registered, but charges securing

them do. There are different types of charges When unsecured, it is called a bare debenture or naked debenture;

when secured by a charge on a specific property, it is called a mortgage debenture.

The company receives cash to fund its capital expenditures, and the investor receives guaranteed interest and principal payment.

Debentures are usually a formal document in printed formThe types of debentures the company can issue are:1-A single debentures: Its formal document in printed form and sealed. It is usually issued when a company obtains a loan from a single lender, bank. the company signs and seals one of the bank standard form of debenture which only will be in favour of the company but would also give the bank certain power in relation to the charged property.2-Debentures issued as series: If the company decides to borrow money from different lenders on different dates but in such a way that the lenders will rank equally in their right to repayment and in any security given to them.3-Debenture Stock: is created when a public company issues debentures stock certificate to a class of debentures holders, evidencing the portion of the total to which each of them is entitled. Each lender have the right t be repaid the capital and the

agreed amount of interest at due time.

Debentures & shares Similarities

1. Debentures is usually one of a series or class which is similar to class of shares.

2. They are long term investment in the company and are transferable in the same manner.

3. Issued in the same way through a prospectus issues.

DifferenceSHARES

1. Shareholder is a member.2. A Shareholder has an interest in

the company but not in the property.

3. A shareholder can attend the meeting of the company and vote.

4. Shareholder cannot insure the company property.

5. Dividends paid when the company makes the profit.

6. Cannot be paid out of the capital.7. Company cannot purchase its

own shares.8. Shares cannot be issued at a

discount

Debentures1. Debentures holder is a

creditor.2. Has interest in the property

not the company3. Debenture holder cannot do

so.4. Can insure the company

property.5. Interest must be paid even

if the company does not make profit.

6. Paid out of the capital7. Can purchase its own

debentures.8. Debentures may be issued

at discount.

Debentures certificateS.82(1) provides that debentures or debenture stock certificates must be completed and must be ready for delivery within 60 days.TRUST DEEDS:When debentures are offered for public subscription the company usually enters into a trust deeds with trustee.The trustee are appointed and paid by the company to act on behalf of debenture holders. The charges securing the debentures is made in favour of trustee who holds it on trust for the debenture stock holders. The main function of trustee is implementing

safety measures in the interest of debenture holders.Trustee cannot be a person who has possession of company shares. but it can be bank carrying on money making actions, body corporate, any financial institution or

insurance company.

Contents of trust deeds1) A covenant (promise) by the company to pay to by the

debenture holders the agreed installment of the accrued interest.

2) A description of the property charged ,whether specifically or floating charge.

3) The event in which the security is to becomes enforceable, such as failure to pay the principal sum or interest as agreed.

4) A clause empowering the trustee to take possession of the property charged in the event of the security becoming enforceable, and to carry on the business and to sell the property charged.

5) Appointment of receiver.6) Meeting of debenture holders7) Covenants by the company to insure the property

charged and to keep the property charged in good repair.

Advantages;a) The circumstances in which the principal sum may become

repayable are clearly spelt out.b) The appointment of trustee facilities the efficient

administration of the trust since they are there to exercise continuous supervision of the debentures holders right an to take prompt action if need arises.

c) The trustee is empowered to appoint receiver to carry on the business incase of urgency.

d) Covenant are entered into by the company for insurance ,repair and other matters which can be enforced by the trustees.

Liabilities of trustees: Trustee for debenture holders owe the same duties to their beneficiaries as are owed by trustee in general.

S.90(1) provides provision in trust deeds .in particular, the trustee cannot purchase the debentures without the consent of all the debenture-holders.

Remedies of debenture holders;

This usually includes the power such as;i. To appoint a receiver to carry on the business or sell

the charged property.ii. To sue as creditor for arrears of interest or principal

or both,iii. To petition the High court for winding up order.iv. To apply to the court for the appointment of a

receiver or for an order in the sale if there is no power in the trust deed

s.88(1),requires every company which issues a series of debentures to keep at its registered office a register of holders of such debenture.

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.

Charges means Interest, It may either be a specific (fixed) charge or a floating charge.

Fixed charges: If it is a mortgage of ascertained or specific property such as plant and machinery or uncalled capital. 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 creditors.

it may be legal or equitable.  Floating charges: 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.

floating charges has the following characteristics:• 1-it is charge on a class of assets of a company, present

and future.• 2-the class is one which charges from time to time in

the ordinary course of the company business.• 3-It is contemplated by the charges that, until some

event occurs which cause the charges to crystallize, the company may use the assets charged in the ordinary course of its business.

Under Kenyan and English law a floating charge cannot be issued by a partnership or sole trader.

Crystallization of floating charges: A floating charge may crystallize or become fixed in

any of the following ways:-A. When the company ceases to carry on business.B. When the company defaults and the debenture

holders take steps to enforce their security, either by appointing a receiver or applying to the court. 

C. The company is put into liquidation, in this case, no action by the debenture holder is necessary. The charge crystallize because the authority of the company to deal with the assets charged is subject to the implied condition that it carries on business.

Advantage &Disadvantage of floating chargesAdvantages (Company point

of view)

I. The company is free to deal with the assets charged as if they had not been charged.

II. It enables the company to charge property which otherwise would not have been charged.

Disadvantages (lenders point of view)

I. The value of assets charged is uncertain since no particular assets are charged.

II. It is postponed to a later fixed charge.

III. The charges may be avoided, during the company liquidation ,S.314 of the act .

IV. Where a seller of goods reserve title until the payment a floating charge will not on crystallization attach to these goods.(Illustrated by Aluminium industrie vaaseen v Ramalpa Aluminium)

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 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. (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.

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.

Registration of charges:• S.96(1) requires the prescribed particulars of specified

charges on company’s property to be delivered to the register for registration within 42 days after the date on which the charge was created.

• The specified charges are:a) A charge to secure an issue of debentures.b) A charge on uncalled share capital.c) A charge created by an instrument which, if executed

by an individuals would require registration .d) A charge on lande) A charge on books debts of the company.f) A floating charge.g) A charge on calls made but not paid.h) A charge on goodwill, a patent, copyright or trade mark.

The prescribed particulars:The prescribed particulars of registered charges are enumerated in form No 214 and are:I. The date and description of the instrument creating or

evidencing the mortgage or charge.II. The amount secured by the mortgage or charge.III. Short particulars of the property charged.IV. Names, postal address and description of the persons

entitled to the charge.(if any)V. Amount of rate per cent of commission, allowance or

discount paid.The purpose of registering is to enable would -be creditor to know the company existing indebtedness and the assets available for their settlement.S.99 requires the register to give certificate of registration of any specified charges. certificate it is evidence that statutory requirement of registration have been complied with.

Effect of Non-registration• S.96(1) provided that if any of the specified charges are

not registered within the prescribed period of 42 days the charges will be void against the liquidator and any creditor of the company.

• Although the charges become void but;I. The money secured become immediately repayable.II. The court is empowered by s.102 to extend the time for

registration of the charge on being satisfied that the omission to register the charge within the prescribed time was accidental or other sufficient cause provided that neither creditors nor shareholders would be prejudiced by the extension.

s.97(1) permits the registration to be effected on the application of any person interested in the charge. The person can recover from the company the amount paid by him to the register.

• s.105(1) provides that every limited company shall keep its registered office a register of charges and enter therein:

a. A short description of the property charged.b. The amount of the charge c. The names of the persons entitled to the charges.Failure to comply the officers of the company responsible for the omission shall be liable to a fine not exceeding one thousand shillings.