COMPANY SHARE CAPITAL

SHARE CAPITAL
Share capital is the amount that purchasers of shares have agreed to contribute to the
Company in return of its shares. This is the amount of capital raised or to be raised
by issue of shares by the Company.
Types of Shares Capital
1. Authorized Share Capital
It is also known as nominal / registered capital
Every Company limited by shares is required to have a nominal capital with which
it is to be registered
This is the maximum amount of share capital which is stated in the memorandum of
association and which the Company is authorized to issue in its lifetime unless it
alters provisions of the capital clause.
2. Issued capital
It is the nominal value of the shares which have been taken up or offered to public
for subscription. It can either be equal to or less than the authorized capital but cannot
exceed it
3. Subscribed capital
It is that part of issued capital which has been taken up by the public. The entire
issued capital may be subscribed by the public or it may be less where not all of the
issued capital is taken up
4. Called up capital
It is that part of the subscribed capital which has been called on the unpaid shares
5. Uncalled capital
It is that part of the subscribed capital which has not been called up by the Company.
It includes part of the capital which Company through a board resolution decides not
to call until during winding up of the Company
6. Reserve capital
It is that part of uncalled capital which the Company decides by a resolution not to
call except when the Company is being wound up. Such a step is usually taken by

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the Company as security to creditors.
Shares
Definitions of share
The capital of a company is divided into certain indivisible units of a fixed amount
called shares. A share denotes a unit of capital.

A share is a transferable form of property, carrying rights and obligations, by

which the interest of a member of a company limited by shares is measured.

A share is the interest of a shareholder in the company measured by a sum of

money, for the purpose of a liability in the first place, and of interest in the second,
but also consisting of a series of mutual covenants entered into by all the
shareholders inter se.

Characteristics of shares

Is a yardstick of the holder's liability to the company in respect to the amount

unpaid on shares he holds (if the company is limited by shares);

Is the yardstick of the holder's right in the company, particularly the dividends
(profits) payable by the company to the shareholders correspondent to the
number of shares he holds, voting rights and return of capital on a winding
up;

Is the foundation, of the bundle of rights and liabilities arising from the
statutory contract contained in the Articles of Association.
A share is a form of personal property which, being transferable can be
bought, sold, given as security for a loan or disposed of under a will.
Shares in a limited company having a share capital are each required to have
a fixed nominal value and are required to be denominated in shillings.

Note: A share is therefore not a sum of money but an interest measured by a sum of
money, consisting of various rights.
Primary Rights

A person who acquires a share in a company automatically becomes subject to the

obligations imposed by the Companies Act, and the company’s Articles of
Association. He also becomes entitled to the rights conferred therein.

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 a. Right to dividend
A shareholder is entitled to dividend if the company is a going concern and
when a profit has been made. However a company is not legally obliged to
pay dividend. This right is only exercisable if dividend has been declared
and become payable.

b. Right to Vote
A shareholder has an individual membership right to attend and vote in all
general meetings of the company.

c. Right to capital
If the company is wound up and all the creditors are paid the remaining
assets are available for division among the members.
A shareholder is entitled to a proportionate part of the company’s capital in
the event of winding up after payment of debts and other liabilities of the
company.
Secondary Rights
a) Right to notices of General Meetings of the company.
b) Right to copies of the Balance sheet laid before the company in General
Meetings and its annexes.
c) Right to copies of the Memorandum and Articles.
d) Right to inspect the minute book of General Meetings.
e) Right to inspect copies of charges, various registers maintained by the
company.
f) Right to petition for the alternative remedy in the event of opression of the
minority.

Shareholders’ obligations
The primary obligation of a shareholder is:
a) To observe the provisions of the Companies Act as well as the provisions of
the company’s Memorandum and Articles of Association.
b) In the case of a company limited by shares, he is also under an obligation to
pay, when called upon to do so, the amount, if, any, unpaid on the shares he
holds.
Classes of Shares

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Ordinary shares
This are also referred to as the equity capital.
Members holding them are said to have the equity in the company and equity here
means ownership of the company.

These are the most common types of shares. The rate of dividend to be paid is not
fixed, but normally, such shares carry full voting rights which enable the
shareholders to attend the meetings, appoint directors and auditors of the company
etc.
As the ordinary shares carry the main financial risks, they are entitled to the
following rights which are not available in respect of other shares:
a) After providing for any dividend which is payable on preference shares, the
whole of the profits can be made available to them
b) They are entitled by use of their voting power at the general meeting to
control the company.
c) In winding up, the holders of the ordinary shares are entitled to the entire
residue after payment of the company’s liabilities

Preference shares
This is the highest class of shares a company can create because as the name
suggests it gives preference to the holders over the holders of the other classes of
the shares
The preference here is in respect of the following matters: -
i) When a divided is declared it shall carry a preferential right as to the
payment of dividend first before any other shareholder.
ii) When receiving dividends, preference shareholders are paid at a fixed rate so
that the company cannot pay them more or less than the rate agreed upon.
E.g. they will receive the dividend at a rate of 5%. For this reason the
company, must pay them the dividend at the rate of 5%.
In the case of the holders of other classes of shares, they are not paid
dividend at any fixed rate but it depends upon the amount of dividend
declared by the company and available for distribution. If the dividend
declared is large they may end up earning more than the preference
shareholders. As far as dividends are concerned, preference shareholders can
boast of a steady rate of income from their investment in this class of shares
iii) In the event of winding up, there is a preferential right to the repayment of
the paid up capital. They however do not have residual rights.

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Shares can further be classified into the following;
 Accumulative preference share: Dividend earned or to be paid in one year
which is not claimed will be carried forward to the next year automatically. If
the dividend was fixed at 6% and is not paid in the current year, it’s carried
forward and paid at 12% in the next year.

 Non-accumulative preference shares: Are shares on which dividend is fixed

but will not accumulate.

 Redeemable preference shares: Are shares whose dividend are fixed but are
issued for a specific period of time. During that period, the company can
redeem these shares.

Conditions for redemption of redeemable shares

A company may issue redeemable preference shares pursuant to the following

conditions:

 The issue must be authorized by the articles.

 The company’s capital must be divided into different classes of shares.

 The issue must be disclosed in the company’s prospectus or statement in

lieu.

 The registrar must be notified of the issue.

 The shares must be fully paid.

 The share must be redeemed out of profit or proceeds of a special issue

for that purpose.

 If the shares are redeemed otherwise than out of the proceeds of a special
issue, the capital redemption reserve fund must be created.

Irredeemable preference shares: Are shares which once issued cannot be

redeemed unless the company is dissolved.

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Participative preference shares: Are shares where the dividend is fixed but once
all the shareholders and creditors are paid, they can participate in the residual profit
of the company together with the ordinary shareholder.

The dividend of preference shareholders is fixed but the following points should be
remembered as regards to priority;
 Payment of dividend is entirely at the discretion of the directors and if the
directors decide to transfer the whole profit made by the company to reserve
capital, then nobody can question the decision.

 Payment of dividend to preference shareholders only becomes due once the

dividend has been recommended and approved and the date of payment is due.

 If the dividend was not declared and the company goes into liquidation, even
preference shareholders will not be paid.

 If it was declared before the company went into liquidation and was not paid,
then the right will not be lost.

Non participative preference shares: these are shares where the dividend is fixed
and once all the shareholders and creditors are paid, they cannot participate in the
residual profit of the company together with the ordinary shareholder.

Deferred (Founders) Shares: These are shares that are usually issued to the
founders or promoters as a reward for their services. They are entitled to dividends
only after other classes of shares. Although their rights depend on the articles,
these shares normally take a larger share of surplus assets during winding up than
ordinary shares and they also carry greater voting rights.

Employee Shares: A company may have shares issued to employees to encourage

them to have a direct interest in the company. This is done through an employee
shares scheme managed and administered by a trustee for the benefit of deserving
employees and those that have rendered exemplary service to the company. Usually
employees make no payment for these shares and the shares have no voting rights at
company's Annual General Meeting. They serve as a retirement benefit for
employees as they will be able to enjoy dividends and other benefits.

Bonus (Scrip) Shares: These result from payment of dividends in terms of shares

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instead of cash. It results in capitalizations of profits which then proportionately
increases the shares held by each shareholder.

Treasury shares
Treasury shares are created when a private or public limited company legitimately
purchases its own shares out of cash or distributable profit. The purchased shares
are then held by the company ‘in treasury’ which means the company can re-issue
them without the usual formalities. They can only be sold for cash and the
company cannot exercise the voting rights which attach to them.

Class rights
Class rights are rights which are attached to particular types of shares by the
company's constitution.
A company may at its option attach special rights to different shares regarding:
Dividends
Return of capital
Voting
The right to appoint or remove a director
Shares which have different rights from others are grouped together with other
shares carrying identical rights to form a class. The most common types of share
capital with different rights are preference shares and ordinary shares. There may
also be ordinary shares with voting rights and ordinary shares without voting
rights.

Variation of class rights

The holders of issued shares have vested rights which can only be varied by
following a strict procedure. The standard procedure is by special resolution passed
by at least three-quarters of the votes cast at a separate class meeting or by written
consent.

Definition

A variation of class rights is an alteration in the position of shareholders with

regard to those rights or duties which they have by virtue of their shares.

Transfer of Shares
This is a voluntary conveyance of title in shares from one person to another.

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Ownership changes hands at the instance of the parties.

Under the Companies Act, the shares or other interests of any member in a
company shall be movable property transferable in manner provided by the
Articles of the company; shares in public and private companies are transferable.

For public companies, shares are freely transferable; however, the directors may
decline to register the transfer of a share (not being a fully paid share):

 To a person of whom they shall not approve; or

 On which the company has a lien.

In private companies, transfer of shares is restricted by:

 Pre-emption clauses that require directors to offer the shares to existing

members at the first instance.
Def of pre-emption clause
Pre-emptive rights (or "rights of pre-emption") are any rights shareholders
may have to be offered shares in a company before they are made available
to anyone else. They can arise on the allotment, transfer or transmission of
shares.

Pre-emptive rights on the issue of shares do not apply if:

a) The articles of a private company exclude them

b) The company passes a special resolution to exclude them; or
c) The shares are issued for non-cash consideration;
d) Shares within employees' share scheme.

Restrictions on register of transfer by directors

This rule confers upon directors, total discretion to refuse to register a transfer.

NOTE: It is important to note that Articles of a company may restrict but not
forbid the transfer of shares. This is because the right of a member to transfer his
shares is a statutory right which cannot be taken away by the Articles since the
Articles are subordinate to the express provisions of the Companies Act.

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The Companies Act requires the articles of private companies to restrict the right to
transfer the company's shares.

Directors may in their absolute discretion and without assigning reasons refuse to
register any transfer of any shares whether paid up or not; and as long as the
directors have acted in good faith the transferor has no actionable claim against
them.
Therefore, the directors must in every case, genuinely consider the application for
the transfer and if they do not act in good faith, the court may order the company to
register the transfer.

Therefore, if the Articles give the directors an absolute discretion to refuse to

register the transfer, they are empowered to decline registration without giving
their reasons.

The rules on the exercise of the discretion to refuse to register transfer of shares
by directors are:

a) To exercise their power, the directors must consider the transfer and take a
decision to refuse to register it
In RE Hackney Pavilion
A transfer of shares was sent in by the executors of a deceased director and
shareholder. The two surviving directors held a board meeting and disagreed
as to whether the transfer should be registered. There was no casting vote.
The secretary wrote to the executors to inform them that the directors had
declined to register the transfer.
Held:
This was incorrect since a positive act of refusal was necessary and there had
been none. The register must be rectified by registering the transfer.

b) The directors in reaching their decision must act bona fide in what they
consider to be the best interests of the company.

c) Where the articles specify grounds of refusal, the directors may be required
to identify the grounds of refusal. However, they are not obliged to disclose
the detailed reasons for their decision (unless the articles so provide). If
nonetheless the directors do disclose their reasons, the court will consider
whether the directors acted bona fide or whether their reasons accord with
the grounds specified in the articles (if that is the case).

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 In Re Bede Ss Co Ltd (1971)
The directors were authorized to refuse transfers if in their opinion it was
contrary to the interests of the company that the transferees should be
members. The directors rejected transfers of small numbers of shares (and of
single shares) on the ground that it was prejudicial to the company that its
issued share capital should be fragmented.

Held:
The reason given could be challenged and was invalid. The power to refuse
registration must (on the formula used in the articles) be confined to cases of
objection to the transferees on personal grounds. In this case the directors
were objecting to the small amount of shares transferred which was not an
objection to the transferees personally.

d) The power of refusal must be exercised within a reasonable time from the
receipt of the transfer. A company is required to give notice of any refusal
within sixty days. If the power is not exercised within a reasonable time it
lapses and can no longer be used. The requirement of notice of refusal
within sixty days effectually makes that the "reasonable" period.

In Re Swaledale Cleaners Ltd (1968)

On 3rd August 1967, transfers of shares were presented. There was only one
director then in office and he purported to refuse to register the transfers in
exercise of a power of refusal given by the articles. But a quorum for
meetings of the directors was two and so the one director was not competent
to exercise the powers of the board. On 11th December 1967 proceedings
were begun for rectification of the register, i.e., a court order that the
transfers should be entered in the register. On 18th December 1967 a second
director was appointed and there was a board meeting at which the two
directors refused to register the transfers (4 months, 14 days).
Held:
The attempt to exercise the power of refusal on 18th December 1967 was
invalid since, in the interval of 4 1/2 months (since the transfers were
presented), the power had expired (as regards those transfers). Since the
power of refusal had not been exercised the transfers must be entered in the
register.

Reasons why a transfer may be declined by a board of directors

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There are a number of reasons why the transfer may instead be rejected. A few
possible examples include:

 The transfer has not been documented correctly using an acceptable form;
 The transferring shareholder has failed to return their share certificate or a
completed and sign;
 The shares are not fully paid and the proposed transferee has not accepted
liability for future calls on them;
 The proposed share transfer is to an infant, person of unsound mind, a
bankrupt or an entity which is not a corporate body able to hold shares itself;
 Where the company has a lien on the shares;
 Where transfers in the shares have been suspended;
 Where the Articles of Association define pre-emption rights over the shares
and the appropriate procedure related to these rights has not been followed;

If a company refuses to register a transfer of shares or debentures, it must notify

the transferee within 60 days of presentation of the transfer for registration failure
in which the company and every officer in default are liable to a default fine.

Shares may be transferred by:

 A registered holder
 Personal representative of a deceased member (administrator or executor)
 Trustee in bankruptcy of an undischarged bankrupt

Procedure of Transfer of Shares

Total transfer
1. The parties enter into an agreement to sell and buy shares
2. The transferor and the transferee execute a written instrument of transfer
specifying the name address and occupation of the transferee
3. The executed instrument of transfer must be presented for stamping
4. The executed instrument of transfer and share certificate are presented to the
company for registration of the transfer
5. the directors then registers the transferee as the owner of the shares and enter
the name of the transferee in the register in place of that the transferor
6. On registration of the transfer the share certificate is cancelled and another
issued in the name of the transferee

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Partial transfer
1. The parties enter into an agreement to buy and sell shares
2. They execute the proper instrument of transfer
3. The transferor produces the share certificate along with the transfer instrument
to an officer of the Company who certificates the transfer by writing in its
margin the words “certificate lodged” and mentions the number of shares for
which the certificate has been lodged
4. The certificated instrument is handed back to the transferor with a balance
ticket for any shares that have not been transferred. The ticket entitles the
transferor to apply for a new certificate for the shares which have not been
transferred
5. The certificated instrument is then forwarded to the transferee who can make
a good title for the shares bought. The Company will then register the
transferee as a shareholder of the shares sold to him and then cancel the old
certificate and then prepare two certificates:
 One for the shares sold and which shall be given to the transferee
 The other for the unsold shares which will be handed over to the
transferee
N/B the Company’s liability for false certification is subject to the qualification that
the person certificating is authorized by the Company to do so and in the absence of
such authority; the Company is not liable to the transferee for any loss suffered by
him

Contents of a Transfer Form

1. Name and address of transferor
2. Name and address of transferee
3. Name of the Company
4. Number of shares being transferred
5. Date of transfer
6. Consideration paid
7. Signatures of transferor and transferee

Effects of Transfer
A transferee does not acquire the legal title to the shares transferred or the full status
of a member until his name is entered in the register. Until this happens;
a) The transferor continues to be the legal owner of the shares but holds them in
trust for the transferee.
b) The transferee cannot exercise the rights of a share holder
c) The transferee only has an equitable claim on the shares

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 d) If calls are made the transferor must pay them but he can recover the amount
so paid by him from the transferee
e) If dividends are paid, the transferor is the person entitled to them
f) The transferor must vote as the transferee directs him since the voting rights
attaching to the shares have been transferred to the transferee

Electronic Transfers

With the coming into force of the Central Depositories Act 2000, all tradable
securities (shares) ought to be immobilized and shareholders who desire to transfer
shares are required to open a securities account with the central depository and
settlement corporation.

To transfer shares in a members account the shareholder must give written

instructions to the broker or investment bank which ascertains or confirms that the
shareholder has shares in his account.

The stock broker or investment bank offers the shares for sale at the NSE. When
the shares are sold, the shareholder’s account is debited and the proceeds are
credited to the stock broker or investment bank (client) account.

Unregistered Transfer
This is a legally binding agreement between the transferor and the transferee which
comes into existence when the parties execute the proper instrument of transfer.

However, it is incomplete with regard to the transfer of shares as the transferor

retains legal title in them. The transferee however retains an equitable interest.

If two or more transferees are beneficiaries of an unregistered transfer, the equities

are said to be equal and the first in time prevails. However, the first transferee to
secure a valid registration acquires the legal title (which takes precedence over the
equitable title).

Forged Transfer
An instrument of transfer of shares on which the signature is forged is called a
forged instrument and any transfer effected on such instrument is called a “forged
transfer”.

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The first thing that a company should do when an instrument of transfer is tendered
to it is to enquire into its validity. The company should send 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 will be registered.

Where a transfer is effected through forgery, such a document is a legal nullity. It

confers no rights and imposes no obligations on the parties.

It was so held in Ruben v. Great Fingall Consolidated where the certificate was
not signed by the proper officers, but were forged and the company were held not
liable.

Consequences of a Forged Transfer

Therefore it follows that:
a. Where the true owner of the shares has been removed from the register of
members, the company must restore his name and pay him any dividends
which have been declared during the time of his name having been removed.
b. The person who lodged the forged transfer for registration must indemnify
the company against any loss it suffers as a consequence of the registration.
c. If the company issues a share certificate to the transferee under the forged
transfer and the transferee sells or mortgages the shares to another person,
who relying on the certificate takes them bona fide for value, the company is
estopped from denying the transferee’s title to the shares.
d. The company would be liable in damages to the purchaser or mortgagee in
respect of the loss arising out of the fact that he does not obtain registration.

Oral transfer
Notwithstanding anything in the Articles of the 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 is illegal and
void.
If the company registers an oral transfer of shares. The transferee would not
acquire title to those shares and the transferor would be deemed to remain the
registered holder of the shares.

Implied terms in the transfer of shares

The contract of transfer of shares is a contract of sale as the transferor agrees to sell
and the transferee agrees to buy shares. Though the parties may set out the terms of
the contract, some are implied by law, such as;

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 i) That the transferee will pay the price of the shares
ii) That the transferor will hand over genuine instruments of transfer and the
share certificate
iii) That the share certificate carries the rights and interests which it purports
to convey
iv) That the transferor will do nothing to prevent the transfer from being
registered or delay the process
v) That the transferor does not undertake that the transfer will be registered;
it is the responsibility of the transferee to ensure that it is registered.
vi) That the transferee will indemnify the transferor with respect all calls and
other liabilities arising on the shares after the transfer

Effect of transfer
Unless shares are being transferred as a gift, a transfer is a contract of sale which is
effected through the agency of a stockbroker who is a member of the Nairobi Stock
Exchange which will be evidenced by a purchase contract note and a sale contract
note issued by the stockbroker. The property in the shares is however not vested in
the transferee unless and until his name is entered in the company’s register of
members. Until that happens the position is as follows:
i) The transferor continues to be legal owner of the shares but holds such
shares in trust for the transferee
ii) The transferee cannot exercise rights of a shareholder vis-à-vis the company
iii) The transferee has an equitable claim to the shares
iv) If calls are made, the transferor must pay them but he can recover the
amount so paid by him from the transferee
v) If dividends are paid, the transferor is the person entitled to them according
to the company’s records. He would however hold the dividends on trust for
the transferee.
vi) The transferor must vote as the transferee directs him since the voting rights
attaching to the shares have passed to the transferee

Transmission of Shares

This is an involuntary conveyance where title changes hands by operation of law.

A transmission takes place in the event of death or bankruptcy of a shareholder.

Transmission by death

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Upon death, the shareholder ceases to be a member and his shares pass to the
personal representative who becomes a member when entered in the register of
members as a member. However he is free to transfer the shares to a 3rd party
before his name is entered into the register.

Transmission by bankruptcy
Under the provision of the Bankruptcy Act, when a member is declared bankrupt
his shares pass to the trustee in bankruptcy but remains a member as long as his
name remains in the register. The trustee in bankruptcy may transfer the shares to a
3rd party before his name is entered in the register.

Share Certificates and Share Warrants

Share certificate
Every person who is entered as a member in the register of members of a company
has a right to receive a share certificate in respect of those shares he holds in the
company.

Definition

A share certificate is a certificate issued by a company certifying that on the date

the certificate is issued a certain person is the registered owner of shares in the
company.

It is documentary evidence of members’ rights and under and it is evidence of its

contents and the member’s right to the share.

Unless the terms of issue or the articles of the company provide to the contrary, the
company must issue a share certificate within two months of the issue.

Most companies will require the share certificate to be produced when a request is
made to transfer shares.

SHARE CERTIFICATE

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 Certificate No… Number of Shares…..
Ordinary Shares
BENSUNDA SECURITIES COMPANY LIMITED
Incorporated under the Companies Act (Cap 486)
Capital 100,000
Dividend into
100,000ordinary shares of 10/= each
P.O BOX 222777
KITENGELA

this is to certify that Ocampo of………….is registered proprietor of two hundred

and fifty ordinary shares of ten shillings each
numbered 1077 to 1133 both inclusive, in the above named company subject to
the memorandum and articles thereof, and that up to this date there has been paid
in respect of each share the sum of five thousands shillings.

Given under the COMMON SEAL of the said company on the 7th day of 2007.

1. Winston Oganda…………Director
2. Kimanikaranja…………...Director

MakauKimanzi…………...Secretary

Contents of a share certificate

a. Name and common seal of the company
b. Date of issue
c. Name of the registered holder
d. Number of shares and class
e. Extent to which they are paid up
f. Serial number of shares
g. Serial number of the certificate
h. Signatures of at least two directors

Legal Effects of Share Certificate

A share certificate is not a document of title but is prima facie evidence of ownership.
The company therefore requires the holder to surrender his certificate for

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cancellation when he transfers all or any of his shares. If the company issues a share
certificate which is incorrect it is estopped (prevented) from denying that it is correct
but only against a person who has relied upon it and thereby suffered loss .
The issue of a share certificate makes the company liable in two ways:-

Estoppel by Share Certificate

Although the share certificate is only prima facie evidence of title, its contents may
lender the company liable under the equitable doctrine of estoppel. This is because
the contents of the share certificate are a representation by the company to 3rd
parties and a bona fide 3rd party who suffers loss or damage by reason of relying
upon the representation will hold the company liable under the doctrine of
estoppel. The company cannot argue that it never made the representation or that it
was false.
This phenomenon is referred to as estoppel by share certificate.

However, the conditions necessary for estoppel must be fulfilled.

Conditions for Estoppel were set in the precedent of (High Trees Case) and are as
follows:

a) A legal relationship between the parties must exist e.g. landlord and tenants
b) There must be a promise or representation by one party intended to affect the
legal relations and to be acted upon by the other
c) There must be reliance upon the representation
d) There must be a change in the legal position as a result of the reliance
e) It would be unfair not to estop the plaintiff

The doctrine of estoppel by share certificate does not operate where:

 The 3rd party is aware of the falsity of the representation
 The share certificate relied upon is forged and the forgery was discovered
before the registration was effected.

Estoppels as to payment
If the share certificate states that the shares are fully paid, the company is estopped
as against a bonafide purchaser from alleging that he amount in the share
certificate as being paid has not being paid.
In Bloomenthal V Ford (1897)
The company borrowed money from B and as security gave him share certificates
for 10,000 shares of 1 pound each in his name in which the shares were described as

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fully paid. B believed that the amount due on shares had been paid by a previous
holder. But this was not true. The company went into liquidation and the liquidator
claimed from B the amount due on his shares.
Held:
The company was estopped by its own statement on the certificate that the shares
were fully paid. The claim must fail.

Mortgage of Shares

As personal property shares may be disposed of by way of transfer or as a security.

Mortgage of shares is therefore a transaction whereby shares are used as collateral
security for loans.
Mortgage of shares may be legal or equitable.

Legal mortgage
Under a legal mortgage the borrower transfers his shares to the mortgagee who
becomes the registered holder subject to a separate agreement by which he
undertakes to re-transfer the shares to the mortgagor on repayment of the loan.
The lender becomes the temporal owner thereof. The terms of such ownership are
contained in the mortgage instrument (deed). Upon repayment the shares are
retransferred to the borrower but in the event of default the transfer becomes
absolute.
The agreement also determines who is entitled to the dividends and gives the
mortgagee the right to sell the shares if the mortgagor defaults on the loan. As
registered holder, the mortgagee can transfer the shares to a purchaser who buys
from him. The voting rights exercisable in respect of the shares will depend on the
provisions of the mortgage deed.

The main disadvantage of a legal mortgage is that it involves the formalities of a

transfer and a retransfer
N.B: a legal mortgagee is, for the period when the contract is in force, a member of
the company.

Equitable Mortgage

This transaction is affected by the deposit of the share certificate and a blank
instrument of transfer with the lender. The borrower retains title and membership

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with all the rights exercisable by a member other than the right to transfer the
shares. The lender acquires an equitable title on the shares.
N.B: A Blank transfer is a transfer signed by the mortgagor as registered holder but
without the name of a transferee inserted in it.
This usually gives the mortgagee an implied power to insert his own name as
transferee in case of default. He can then dispose of the shares after transferring them
into his name. Upon repayment the share certificate is returned to the borrower
(redemption)

Distinction between legal mortgage and equitable mortgage

Legal mortgage
 Borrower transfers his shares to
the lender
 The lender becomes temporal
holder capable of exercising all
the rights of the owner.
 In the event of default the
transfer becomes absolute
Equitable mortgage
 Borrower deposits the share
certificate and signs a blank
transfer with the lender
 Borrower retains legal ownership
of the shares but has no custody
of the share certificate
 In the event of default the lender
may sell the shares if the article
so provide failing which the
application must be made to the
court to facilitate the sale

Lien on Shares
“Lien” means a right to retain possession of some property of another until some
claim attaching to it is settled. The right of lien on shares is not conferred on a

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company by the statute.
A lien is therefore an equitable charge on the shares of a member to secure sums
owing by the member to the company. The company has a lien only if its articles so
provide and to the extent that the articles provide.
The company has a first and paramount lien on un-fully paid shares for the amount
outstanding. This lien extends to dividends payable on the shares.

Priority of Lien
If the company and a 3rd party have liens on a member’s share, the question will
arise as to which lien has priority particularly; particularly where the company’s
lien is subsequent to the 3rd party’s.

Generally, the person whose lien arose first has priority if the second person had
notice of the first person’s existing lien. The subsequent lien can only have priority
if the second person was unaware of the 1st lien.
Bradford Banking Company V Briggs & Co
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 mortgagee. Later, the member became indebted to the company.

Held: As the company had prior notice of the bank's mortgage, its lien (although the
right to a lien existed when the notice was received) was postponed to the mortgage
since the company's claim under the lien arose after the bank's notice was received.

Loss of lien
A company loses lien if:-
a) It registers transfer of shares subject to the lien of the transferee
b) A member pledges his shares to a third party as security for a loan and the
company has notice thereof, and then incurs a liability to the company. In such
a case, the pledge has priority over the lieu of the company as was held in
Bradford Banking Company V Briggs & Co

Calls on Shares

This is a demand by the company through its directors to members with amounts
outstanding on shares held to pay the same or any instalments thereof after
allotment of shares at any time during its lifetime. Although the unpaid value of the
shares is a debt due from a member of the company, the liability for its payment
does not arise until a valid call has been made.

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Calls are necessary where the company’s issued capital is not fully paid and they
may be made by directors or the liquidator in the cause of winding up.
Usually the articles of association of the company prescribe rules for making calls
on shares.

Rules relating to calls on shares:

Directors may from time to time make calls to the amount unpaid on shares
1. Time: Such calls must be separated by at least one month
2. Rate of call: a call must not exceed a quarter of the nominal value of the
shares
3. Notice: Members must be accorded a notice of at least 14 days
4. Resolution: a call is deemed to have been made at the time the resolution
authorizing it is passed by the board of directors.
5. Powers of directors: Directors are empowered to postpone or revoke a call
before it is effected
6. Liability of joint holders: joint holders of a share are jointly and severally
liable to pay all calls made
7. Interest payable: if a member fails to pay a call on appointed dates he is
bound to pay interest at the rate of 5% per annum
8. Directors are empowered to accept calls paid in advance. This means that:
 The shareholders liability is reduced or extinguished
 The member becomes a creditor to the company entitled to interest at
6% per annum
 The company cannot be compelled to repay the sum except in
winding up
 The shareholders must give consent for such repayments
 Upon winding-up, the shareholder ranks after other creditors but must
be paid before the other shareholders
9. The non-payment of a call or instalment thereof renders the shares liable to
be forfeited

Types of calls
Call in advance
The board of directors may if it thinks it fit and if authorized by the articles and for
the benefit of the company receive from any member the whole or any part of the
amount uncalled and unpaid upon any shares held by him.

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The board upon all or any of the money received may pay interest at such rate not
exceeding 6% p.a unless the company in a general meeting otherwise directs.
Calls in arrears
If a sum called in respect of a share is not paid on or before the day appointed for
payment, the person from whom the call is done shall pay interest from the day
appointed for the payment at 5% p.a or such rate as the BOD may determine. The
directors have the discretion to waive payment of any such interest wholly or in
part.
Call in the event of winding
Where a shareholder did not pay the call money due on the shares and the company
has not passed the resolution to forfeit the shares, he will continue to be a member
till his name is removed from the register of members. In the event of winding up,
the amount of calls in advance together with interest will rank in priority before
payment of called up and paid up capital.
Consequences of non-payment of calls
Non-payment by a director within 6 months from the date of call is disqualification
on his part leading to vacation of his office
No member shall be entitled to vote at any general meeting unless all calls or other
sums presently payable by him in respect of shares in the company have been paid
by him
The company may subject to the provisions of its articles forfeit the shares and the
amount received thereon after due notice and a resolution passed in this regard
The company shall have a first and paramount lien on every share unpaid or not
fully paid. The company can sell the shares in exercise of the lien.
Forfeiture of Shares
Def: This means the cancellation of shares of a shareholder by way of penalty for
non-payment of any call made in respect of them.

If a shareholder falls to pay the call the Company has two remedies:
a) It may sue for the amount
b) It may forfeit his shares

Normally a Company should take legal action against defaulting members, however
it avoids going to court and instead prefers to acquire the power under its articles to

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forfeit the shares of such members.
Rules relating to a valid forfeiture

1. Authority of articles; a forfeiture must be authorized by articles of the

Company and it will only be valid if such provisions are strictly compelled
with.
2. Notice; a proper notice of the intention to forfeit must be served on the
defaulting member requiring him to pay the outstanding amount of call which
remains unpaid with interests if any. The notice must further state that in event
of non-payment of the call at or before appointed time the shares shall be liable
to be forfeited.
3. Resolution of the board; if the member does not comply with the notice the
board will pass a formal resolution of forfeiture.
N/B Shares can only be forfeited for non-payment of calls but not for any
other debt.
4. Good faith; the power to forfeit shares must be exercised by directors in good
faith and for benefit of the Company. The power cannot be used at the request
of a shareholder to relieve him from liability on his shares.
5. Statutory declaration; the secretary or director of Company shall make a
statutory declaration in writing that certain shares in Company have been
forfeited on the date specified in the declaration.

Effect of forfeiture: a person whose shares have been forfeited shall cease to be a
member in respect of the forfeited shares.

Statutory provisions on forfeiture of shares

The Companies Act describes the circumstances in which shares may be
forfeited.

1. If a shareholder fails to pay a call the directors may serve a notice on the
member demanding payments and interest.

2. The notice must specify:

a. The due date
b. The fact that the shares are liable to forfeited
c. At least 14days notice must also be given.

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 3. The forfeiture of shares is concluded by a statutory declaration sworn by a
director or company secretary to the effect that the shares have been duly
forfeited. This declaration is conclusive evidence of the forfeiture.

4. If the notice is not honoured the board of directors may pass a resolution
determining the shares as forfeited.

5. A forfeited share maybe sold or otherwise disposed of as per the directions

of the board. The board is also entitled to cancel the forfeiture.

6. A shareholder whose shares have been forfeited ceases to be a member of

the company in respect of the shares but remains liable for amount unpaid
until it is received by the company.

Effect of forfeiture
a) The defaulting member ceases to be a member of the company and his name
is removed from the register of members
b) He loses his claim to be paid amount on his shares
c) He remains a contributory as a past member
N/B: A forfeited share may be sold on such terms and in such manner as the directors
think fit and at any time before such seal, the forfeiture may be cancelled by the
directors.

Surrender of Shares

It is the loss of shares by a member at his instance or option.

The member gives up the shares to the company.
However, if the Articles allow for forfeiture then the surrender of shares may be
implied.
A valid surrendered of shares may take place in two circumstances:

 Where the share are accepted to avoid the formality of forfeiture. Where the
Articles give power to the directors to accept surrender of shares and it is
accepted in case of partly paid shares to save the company from going
through the formalities of forfeiture, the surrender is valid. Any provision in
the Articles for the acceptance of surrender in other circumstances is invalid.
 Where fully paid shares are accepted in exchange for new shares of the same
nominal value surrendered.

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Surrendered shares may be reissued by the directors to other persons if the articles
authorise their re-issue.

The ultimate effect of surrender and forfeiture of shares is the termination of the
membership of a shareholder. But surrender of shares is voluntary whereas
forfeiture is at the instance of the company.

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