Konde lent Sh.1 million to Bahari Ltd, on the security of 100,000 shares of Sh.100 each. He was given a certificate which showed that these were fully paid up shares and the payment had been paid in full. But he was surprised to learn, during winding up that he had been placed on a list of contributories, with regard to the shares were part of the shares. Evidence is adduced in court that the shares were part of the company‟s unissued shares and nothing had been paid for them.
Discuss the relevant law and advise Konde.
The contents of a share certificate with respect to the name of the registered holder, the number of shares and the extend to which they are paid up, is a representation the company to third parties and a bonafide third party who suffers loss or damage reason of relying upon the representation may hold the company liable in damages. The company is estopped from denying:
(a) The fact of having made the representation
(b) The fact that the representation was true.
Hence it is argued that a company must take great care when issuing share certificates. This is necessary as they could render the company liable.
However, for the company to be estopped and held liable, it must be proved that:
(a) The representation was contained in a genuine share certificate of the company
(b) The third party relied upon the representation in good faith.
(c) The third party had changed the legal position to its detriment as a result of the reliance.
(d) It is fair to estoppel the company or hold it liable.
In Bloomenthal V. Foor, a company borrowed money from X and as security gave him a share certificate describing the shares as fully paid and X believed so. However, it was not the case. In liquidation, the liquidator sought to recover the amount due on the shares from
X. X pleaded estoppel the share certificate. It was held that the company could not claim the amount due since its share certificate described the shares as fully paid, a fact it could not deny.
A similar holding was made in Burkinshaw V. Nicolls where a company issued shares to a party under a share certificate describing the shares as fully paid which was not the case. The party sought to recover the amount due from Nicolls who pleaded estoppel and the company was estopped.
In Balkis Consolidated V. Tompkison X sold his shares to I. X had no title but had fraudulently induced the company to issue a share certificate to U. I resold the shares to a third party but the company refused to register on the ground that I had no title like X before him. I was compelled to purchase other shares to fulfill third party claims. I sued the company in damages for the loss. It was held since the company had issued a share certificate o him describing him as the owner, it could not deny that fact and was liable.
A similar holding was made in re Oho Kopjes Diamond Mining company and in re Bahia and San Fransisco Railway Company.
However, the doctrine of estoppel does not apply and the company can deny title evidenced a share certificate in two circumstances:
1. If the third party had notice of the falsity of the representation.
2. The representation relied upon was contained in a forged share certificate since such a document is a legal nullity.
Bahari Limited cannot therefore claim the amount due since its share certificate described the shares as fully paid; a fact it cannot deny.