Lien Under Company Law
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Case law and judicial decisions that has developed on the aspect of Company Law
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Lien and Articles of Association of a Company
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Effect of exercise of Lien
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When lien cannot be enforced
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Black’s Law Dictionary, 6th edn defines the word “lien” as a claim, encumberance or charge on property for payment of some debt, obligation or duty
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Webster’s New Collegiate Dictionary defines lien as “a charge upon real or personal property for the satisfaction of some debt or duty ordinarily arising by operation of law”
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Though the Indian Companies Act, 1956 (“the Act”) does not directly deal with the right of Lien of a company on its shares held by members, Regulations 9 to 12 of Table A, Schedule I to the Act contain detailed provisions which a company may adopt to exercise lien
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This article discusses the wide foray of case law and judicial decisions that has developed on this aspect of Company Law
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Lien and Articles of Association of a Company
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Regulations 9-12 Table A contain provisions relating to lien
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These regulations are not compulsory and a company may make its own regulations to govern its Lien on shares
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Unless the Articles of the Company provide for Lien, a company primarily has no Lien on members’ shares
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In other words, to exercise a right of lien, the Articles of the Company must provide such a power. The Company has no lien or equitable charge on the members’ shares for sums owed by them to it, unless the lien is expressly conferred by the Articles
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If there is no such power, then, as given in Nanalal Zaveri & Another v The Bombay Life Assurance Co. Ltd., All India Reporter 1950 Supreme Court 172, the Articles may be amended and then the right exercised, provided the amendment is bonafide, in the interest of the Company and enures for the benefit of the Company
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If the Articles contain the right of lien without confering the power of sale, the Company should file a suit to enforce its lien (Everitt v Automatic Weighing Machine Co. (1892) 3 Chancery 506}
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Usually, the Articles give the Company power to nominate someone to execute the transfer (pursuant to a sale)
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The sale of shares is subject to any restrictions on the transferability of those shares contained in the Articles of a private company
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Where fully paid-up shares are, under the original Articles of a company exempt from lien, the Articles may be altered so as to give the company a lien over them
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Gore-Browne, 44th edn at Pg 14.022 says, “While a lien can be created by retrospective alteration of the Articles after the issue of shares, it will not be effective against a transfer which is lodged before the resolution creating the lien, is passed”
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The directors of a company cannot delay registration and enable the company to alter its Articles to take a lien which would defeat transfer [Liquidator of W & A McArthur Ltd. v Gulf Line Ltd (1909) SC 732]
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A provision in the Articles of a registered company, which makes a share holder’s debt to the Company a charge on his shares applies to the case of debtors who afterwards become share holders [C Punnaya & Another v Venugopala Rice Factory Co. Ltd., Tenali All India Reporter 1919 Madras 1161 (63)]
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Effect of exercise of Lien
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Lien under the (English) Act is an equitable charge upon the shares and gives rise to the same rights as if the shares had been expressly charged by the member in favour of the company
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A lien on shares is a security and makes the company a secured creditor in the bankruptcy of a shareholder
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On the exercise of the right of lien, the member ceases to be a member of the company
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A company is not entitled to enter a note of any lien that it may have either in its Register of members or on the share certificate (Re W. Key & Son Ltd (1902) 1 Ch 467)
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A lien imposed by the Articles of a company attaches not only to the shares in question but also to dividends payable in respect of them (Hague v Dandeson (1848)2 Exch 741) and to any assets which in a winding—up may come to the shareholder (Re General Exchange Bank (1871) LR 6 Ch Appn 818)
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The lien may also extend to the right which the company has in any case to set off debts owed by its members, against dividends payable to them (Re Cannock & Rugely Colliery Co. (1885) 28 Chancery Division 363)
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The lien may extend to disputed as well as admitted liabilities (Amarnath & Another v Karnal Electric Supply Co. Ltd. All India Reporter 1952 Punjab 411)
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The lien attaches to the shares from the moment they are issued, even though the shareholder does not become indebted to the company until a later date [Borland’s Trustees v Steel Bros. & Ors. (1901) 1 Chancery 279(289)]
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If a member holds shares in trust for another person, the lien does not extend debts which the beneficiary owes to the company (Re Perkins (1890) 24 QDB 613)
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When lien cannot be enforced
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The following situations are considered –
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If a lien is only for moneys presently payable, it cannot be enforced in respect of Bills of Exchange which have not matured (Re Stockton Malleable Iron Co. (1875) 2 ChD 101)
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A lien on the shares cannot be enforced for a debt incurred after a transfer (in respect of those shares) has been lodged with the Company (Re Cawley & Co. (1889) 42 ChD 209 (CA))
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A lien cannot be enforced by forfeiture, even if the Articles of a company so provide
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A similar view is adopted by Charlesworth & Morse, Company Law, 14th edn pg. 305 stating that a lien cannot be enforced by forfeiture even if the power to forfeit is contained in the Articles
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Death of a shareholder does not destroy the company’s lien on his shares and it is good even if it is imposed for the first time after his death (Allen v Gold Reefs of West Africa Ltd. (1900) 1 Ch 656 (CA))
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In PL. TL. T. Chettiar by agent M. S. Ganesa Aiyyar v Indian Overeas Bank Ltd. (All India Reporter 1942 Madras 743), the Court held that unlike transfer, transmission of shares is the result of operation of law and the shares continue to be subject to the original liabilities
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Buckley on the Companies Act, 14th edn, Vol I page 920 says that lien does not cease on the death of the member but continues, being available against his executors (though not members themselves) as it had been against him in his lifetime
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If trustees are registered holders, the company’s lien for debt due from one of the trustees to the company prevails over the title of the cestui que trust (beneficiary) of the shares (New London and Brazilian Bank v Brockle Bank (1882) 27 ChD 302), unless the company had notice, before the trustee’s debt was incurred, that the trustee held as trustee (Mackereth v/s Wigan Coal & Iron Co. Ltd (1916) 2 Ch 293)
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This can be studied under the following topics –
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Not affected by the law of Limitation
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The right of lien can be exercised even though the claim in respect of which the lien is exercised has become barred by the law of limitation (Unity Company Pvt. Ltd. v Diamond Sugar Mills & Other, All India Reporter 1977 Calcutta 18),
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Thus, the company’s lien is not lost/destroyed by reason of any debt due by the shareholder to the company becoming barred by limitation since the only effect of the Limitation Act is to bar the remedy to recover the the debt by a suit and not to extinguish the debt. The company may, therefore, if authorised by its Articles, sell the shares in enforcement of the lien and recover the debt without seeking any assistance of the Court
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However, it has been laid down in (Rajibnath Mukherjee v The Chota Nagpur Banking Association Ltd & Others, (All India Reporter 1948 Patna 443) that the rights upon the debt (due to the company) which formed the foundation of the lien ceased to exist once a decree was obtained. Such rights became rights under the decree which could be enforced only by execution — where the execution became barred, there remained no other means of enforcing them
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A lien of a company is transferable. Thus, if a company has a lien on A’s share for debt due and A receives money from B to pay the debt, A may call upon the company to assign its lien to B
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In case of Joint Shareholding
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Where a share stands in the joints names of more than one person, the company will have a lien on such share, in respect of a debt by anyone of the joint-holders in as much as the jointholders are not a legal entity but members of the company in their individual capacity under section 41(2) of the Companies Act, owning the share (Narandas v The Indian Mfg. Co. Ltd. 55 Bombay Law Reporter 567)
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Marshalling If a lien in favour of the company has arisen and the shareholder sells part only of his shares, the purchaser can require the company to discharge the lien primarily out of the shares not sold (Gray v Stone & Funnell (1893) 69 LT 282)
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In other words, a purchaser of shares subject to a lien, is bound by it, but by virtue of the principle of marshalling, he may require the company to resort to any shares remaining in the hands of the vendor
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Share warrants/Letters of Allotment
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Pennington, Company Law, 5th edn, pg 444 says, “… in practice, the Articles (of a company) never impose a lien on shares represented by share warrants and even if a lien were imposed, it is difficult to see how the company could enforce it unless the share warrant came into its possession ….. Further, the law governing liens on registered shares appears to apply equally to liens on shares represented by Letters of Allotment”
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Capable of being waived/discharged
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In Buckley on the Companies Act, 14th edn, pg 920 dealing with question of lien, it is observed that “….for such a provision is for the protection of the company and is capable of being waived by the company”
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In Turner Morrison & Co. Ltd. v Hungerford Investment Trust Ltd, All India Reporter 1972 Supreme Court 1311), it was held that where under the Articles, the company had power to waive the paramount lien it had upon all the shares registered in the names of each member for his debts and liabilities to the company, registration by the company of transfer of shares on which it might have had lien tantamounted and operated as waiver of lien
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Thus, a company may waive its lien and register a transfer and if it does so, the transfer will ofcourse be valid. But if a transfer passed by mistake be corrected within a reasonable time, this may invalidate the transfer (Andersen’s case 1869 LR 8 Eq 509)
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A lien on shares may be discharged by a new arrangement between the company and the shareholder, the terms of which are incompatible with the retention of the lien or which show an intention to waive it (Bank of Africa v Salisbury Gold Mining Co. (1892) AC 281)
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If a shareholder mortgages his shares and the mortgagee gives notice thereof to the company, the mortgagee has a priority over the company if the shareholder incures a liability to the company after the notice of the mortgage has been given to the company (Matheran Steam Tramways Co. v Lang 33 BLR 184)
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The Articles may however provide an exemption clause that the company shall not be bound by or recognise any contingent, future, partial or equitable interest in the nature of trust or otherwise, in any share or any other right in respect of any share, except an absolute right thereto in the person from time to time registered as the owner thereof
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However, decisions over the time has settled the position, which is that, whether or not there is an exemption clause in the Articles, to the company of an equitable or beneficial interest in a share will deprive the company of its priority over such interest in respect of any subsequent claim made by it in regard to that share
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Thus, if before the lien becomes effective by the holder of the shares becoming indebted to the company, the company has notice of an equitable interest which already been created out of the shares, the company cannot claim priority of its lien (Bradford Banking Co. v Briggs & Co. (1886) 12 AC 293)
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When notice threatening sale invalid
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If a company seeks to sell shares for the recovery of a debt which was far in excess of what was actually due by the shareholder, to that extent, the notice demanding payment and threatening sale is not in compliance (with the Articles) and is wrongful (A. J. Judah v Ramapada Gupta & Another, All India Reporter 1959 Calcutta 715)
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When sale illegal and purchaser protected
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In A. J. Judah v Ramapada Gupta & Another (supra), the following has been laid down as the law by the Calcutta High Court – “When the transaction resulting in the sale of shares is illegal in the sense that the directors under the Articles had no power to sell or that the sale had been efftcted by directors with defective appointment or that the sale was effected without satisfying the conditions laid down in the relevant Article or that an important step in the transaction, namely, the determination of the liability and decision to enforce the lien by sale of the shares and giving notice required, was taken by those who at the time had ceased to be directors, then the purchaser of the shares can only protect his title as purchaser at such sale, either under Section 86 of the Companies Act 1915 (corresponding to Section 290 of the Act) or the Article which says that the purchaser is not bound to see the application of the money or that his title shall not be affected by irregularity or illegality in reference to the sale …. In each of these cases however, the sale will not be upheld by the court unless the party seeking assistance of the court acts ‘bonafide’. An innocent purchaser will be protected. But the court will never come to the assistance of a purchaser who purchases the shares without good faith, i.e. with notice that the sale is wrongful”
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Where in a suit for a declaration that shares of the company (in question) are not liable to be sold in enforcement of lien for debt owed by the holder of shares to the company, the Articles constituting contract between the member and the company are not pleaded, the relief prayed for cannot be granted
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