Company law revision question and answer

Odulla is a member of XYZ Ltd. he doest clearly understand the companies Act (cap 486) provision in relation to company shares. He requests for your advice on the following matters.

(i) Share warrants
(ii) Mortgage of shares
(iii) Lien on shares Advice him accordingly

answer
(i) Share Warrants

This is a document issued a company under its common seal stating that the bearer is entitled to the shares therein specified. A warrant is a title dead entitling the bearer to the shares there in specified and divided payable thereon.
Under section 85(1) of the Act, a company may issue share warrants in the following circumstances:

1. It must be limited shares
2. The issue must be authorized the articles of the company
3. A warrant can only be issued with respect to fully paid shares of the company Under section 85(1), a warrant may also provide a coupon to facilitate payment of dividend. Effect of Issue of Share Warrants:
Under section 114(1) of the Act, whenever a company issues a share warrant, the members name is struck off the register of members and the following particulars entered:-

1. The fact of issue of the warrant.
2. Date of issue
3. A statement of the shares included in the warrant

A share warrant holder is not in fact a member of the company. However, under section 114(5) of the Act, the articles of a company may deed a share warrant holder a member of the company for all or certain purposes.

Under section 114(2), a share warrant holder may surrender a warrant where upon his name entered in the register as holder of the shares and the warrant is therecancelled. If a company has issued share warrants, its annual return to the register must show;

1. The number of shares comprised in each warrant.

2. The number of shares in respect of which warrants are outstanding
3. The total amount of share warrants issued and surrendered

A share warrant differs from a share certificate in the following respects;

1. It is a contractual document entitling the bearer to the shares and dividend payable thereon.
2. It can only be issued in respect of fully paid shares
3. The bearers name struck off the register
4. It is a negotiable instrument transferable mere delivery
5. The shares comprising a warrant are transferable mere delivery.

(ii) Mortgage of Shares

As items of property, shares may be disposed off way of transfer or as a security for a loan. Mortgage of shares entails the use of shares as a security and the transaction may be legal or equitable

Legal Mortgage

This is a mortgage transaction wherethe shareholder or borrower transfers his security (i.e. the shares) to the lender subject to a retransfer upon repayment of the amount borrowed. The lender becomes the temporal owner of the shares with all the rights of a member. He is entitled to the dividend payable thereon and can attend and vote in general meeting of the company. Other terms of the contract are contained in the mortgage instrument. Upon repayment, the shares are retransferred to the shareholder. However, in the event of default the transfer becomes absolute. A legal mortgage has 2 disadvantages:
1. Formalities of transfer and retransfer of shares
2. Payment of stamp duty on transfer

Equitable Mortgage

This is a mortgage transaction wherethe borrower deposits the executed mortgage instrument and the share certificate with the company as security

The borrower remains the registered holder of the shares capable of exercising all the rights of a member. The mortgage instrument sets out the terms of the contract. In the event of default, the mortgages rights are enforced court action. The share certificate may be redeemed paying the total amount due.

(iii) Lien on Shares

The articles may give the company alien on shares held a member for his unpaid cal or installment or for some other debt due from him to the company

A lien is essentially a right, a company or third party may have on a persons shares. It is a n equitable change upon the shares and gives rise to the same rights as if the shares were expressly charged the member in favour of the company

Under Article 11 of Table A, “The company shall have a first and paramount lien on every share (not being a fully paid share) for all monies (whether presently payable or not) called or payable at a fixed time in respect of that share, and the company shall also have a first and paramount lien on all shares (other than fully paid shares) standing registered in the name of a single person, for all monies presently payable him or his estate to the company, but the directors may at any time declare any share to be wholly or in part exempt from the provisions of this regulation.

The company‟s lien, if any, on a share shall extend to all dividends payable thereon.

The article may grant a lien on shares which are fully paid in rare circumstances. If the lien given the articles extends only to shares not fully paid, the company can alter its articles so as to give a lien on all shares even if any one member will be affected the alteration.

A shareholder against whom a lien is to be enforced, can compel the company to assign its lien to his nominee who is willing to pay off the amount of the lien.

A lien is enforced like other equitable charges, a seal. If the power is not conferred the articles, the company must apply to the court for an order. Additionally, the article may give the company power to nominate a person to execute the transfer as embodied in article 13 of Table A

If a third party advances money on the security of shares, question has arisen as to whether the third party‟s lien has priority over the company‟s. If the third party gives notice of his security to the company before the company‟s lien arises, the third party has priority. It was so held in Bradford Banking Company V. Brigg & Co. 1886. The articles of the company gave a first and paramount lien and change on the shares for debts due from a shareholder. A shareholder, created an equitable mortgage of its shares depositing the share certificate with a bank as security for an overdraft and the bank gave notice of the deposit to the company. The shareholder subsequently became indebted to the company whereupon a lien arose in favour of the company. Issue was which lien had priority. It was held that the bank had priority as the company‟s lien arose after of the Banks equitable mortgage.

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