12.8.14 (Lien on shares)

A lien, like a mortgage or pledge, is a form of security. It is an equitable charge on shares to secure any debt which may be due from the member of the company. The Act contains no reference to lien but the articles of companies normally give the company a lien on the shares of a member for money owed by him to the company. An article providing that company will have lien on shares of a member for his debts and liabilities to companies is valid [Canara Bank v. Thribhuvandas (1957)27 Comp. Cas. 647 . where shares are held in joint names of more than one person the company will have a lien on such shares in respect of a debt due by any one of the joint holder [Naranda v.The lndian Manufacturing Co. Ltd. 55 Bom. L.R.567].

This lien extends to the dividends as well. The Articles may provide for a lien even after the death of the shareholder [Allen v. Gold Reefs of west Africa (1900) 1Ch.566].].

A lien of a company is transferable. Thus, for example, if the company has a lien on X's shares for a debt and X borrows the money from y to pay the debt, X may request the company to transfer its lien to Y.

Howeve4 the company must not enter either on the Register of members or on the share certificate any notice of lien it may have.

Enforcement of lien. Company can enforce its lien on shares by the sale of those shares incase the member defaults in payment of the amount due against him. In the absence of an express power of sale in the Articles, the permission shall have to be sought from the Court.

In case the amount received on sale of such shares is more than the amount due, the excess shall be payable to the former owner. Power to sell should be exercised after a notice has been given to the shareholder requiring him to pay the debt due to the company within a specified time. It should be made clear that the company intends to sell shares in enforcement of the lien.

But a company cannot enforce the lien by forfeiting the shares. A provision in the Articles to such effect is void amounting to reduction of capital without an order of the Court.

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's Iiability to the company was incurred after the notice of the mortgage has been given to the company [Bradford Banking Co. u. Briggs (1886)12A.C.29]. But the Articles may provide that the company is not bound to recognise such interest of third parties. Even there the ordinary rules of law and equity will be applicable [Rninfold v.James Keith, etc. Co. (7905)2Ch.147].

The death of the shareholder does not destroy the lien [Allen a. GoId Rcefs of West Asia (7900)7Ch.6561]. Company's lien will not be lost by reason of the debt becoming time barred because lien can be enforced without seeking the assistance of the Court [Unit company a. Diamond Sugar Mills AIR (1971) Cal.18].

Lien and forfeiture compared

            (1) Forfeiture involves reduction of capital, in case the forfeited shares are cancelled and not reissued. Lien never involves a reduction of capital because the shares are necessarily sold if the member defaults in payment.

            (2) Lien is a form of security of a debt. Forfeiture is a penal proceeding. Forfeiture can be done for reasons other than non-payment of calls, e.g., in the case of Naresh Chandra Sanyal v. The Calcutta  Stock Exchange Association Ltd., (supra) the shares of the stockbroker of the Exchange were forfeited for not carrying out his commitment with his client. But lien cannot be exercised for reasons other than the non-payment of a debt.

            (3) In case of lien, the former holder is entitled to, on the sale of the share, the amount in excess of the amount due. In case of forfeiture, nothing is payable to the former holder.