The relevant provisions in the articles of association of Treeng Ltd (â€œTreengâ€) are twofold. First, the directors are empowered to refuse to register a transfer of shares, and it seems that they may exercise this power in their absolute discretion. At common law, however, such power must be exercised â€œbona fide in what they consider â€“ not what a court may consider â€“ is in the interests of the companyâ€
and the decision to refuse to register a transfer must be a positive act taken by the board, not a mere failure to approve the registration
, but the directors do not need to give reasons for their refusal
. Secondly, the articles provide that the directors must notify the transferee of their refusal within two months. This is consistent with the requirement imposed by section 183(5) of the Companies Act 1985 (â€œCA 1985â€), which also provides for a penalty if this requirement is breached (section 183(6) and Schedule 24 CA 1985). These provisions are currently still in force, and will be effectively recast in sections 771(1)(b), (3) and (4) of the Companies Act 2006 (â€œCA 2006â€) when the latter provisions come into force. The articles appear to be silent on the issue of pre-emption rights of other members, and the issue will therefore not be considered further. Arnold lodged the transfer of the shares to Bill with Treeng immediately after its execution four months ago, but the transfer has not been registered by the company and Bill has not been notified of any decision by Treengâ€™s directors. The transfer of shares is not complete until Bill is registered as the new owner of the shares in the register of members, although Bill may have an equitable interest in the shares if he purchased them
. However, the directorsâ€™ right of refusal must be exercised within a reasonable time, and in any event within the statutory two months
. As four months have now elapsed, if the directors have not taken a positive decision to refuse to register the transfer, they will have lost the right to do so
, and Bill therefore has a right to be registered as a member. He should apply to the court to have the register rectified under section 359 CA 1985 and should serve a notice on Treeng for a share certificate to be issued as required by sections 185(1) and (5) and Schedule 24 CA 1985. There may be an obstacle for Bill if the directors of Treeng can show that they in fact decided to refuse to register the transfer within two months of the transfer form being lodged with the company, and then simply failed to notify Bill of their decision. In Popley v Planarrive Ltd Laddie J held that such default will make the relevant officers liable under section 183(6) CA 1985, but will not in itself affect the validity of the refusal. However, Laddie J went on to suggest that there may be circumstances in which the delay in notification is such that the company ought to be estopped from relying on its refusal to register. In my view it is likely that even if the directors did decide to refuse to register the transfer within the prescribed two months, Bill may persuasively argue that the delay in notifying him is such that the company ought to be estopped from relying on the decision and that the register ought to be rectified and the share certificate issued as discussed above. Question 2 As Henryâ€™s signature on the transfer form is forged, the instrument is void and there is therefore no transfer of his shares. This means that Henry has the right under section 359 CA 1985 to request that the company rectify its register of members by restoring his name in place of Malcolmâ€™s. This will be the case even if there is evidence that Henryâ€™s own conduct gave Bernard the opportunity to commit the fraud (and indeed it appears that Henryâ€™s carelessness gave Bernard the opportunity to steal the share certificate and then commit the fraud). This strict position will of course adversely affect Malcolm, who is likely to have paid Bernard for the shares. In addition, there will be little point in Malcolm seeking to pursue a claim against Bernard, as the latter has in all likelihood disappeared with the money. Malcolm will want to rely on the doctrine of estoppel by share certificate. The doctrine provides that where a company has issued a share certificate (which contains a statement that the transferor is the registered holder of the shares) and a transferee has subsequently relied on the certificate to his detriment as proof that the transferor did in fact own the shares, the transferee may claim an indemnity from the company if it later transpires that the share certificate was in fact false and that the transferor did not own the shares. The company, on the other hand, may in turn claim an indemnity against the party who lodged the forged instrument which led to the issue of the false certificate, even if such party had no knowledge that the instrument was forged. In the present scenario, a valid share certificate was issued by the company to Henry. There is no suggestion that Bernard fraudulently transferred the shares to himself and then requested a certificate in his own name to be issued before purportedly transferring the shares to Malcolm. Therefore, Malcolm will have relied on the valid share certificate as evidence that the shares were owned by Henry, and will then have acted on the erroneous assumption that Bernard was in fact Henry. It follows that the doctrine of estoppel by share certificate will not assist Malcolm in these circumstances, as the certificate relied on by Malcolm was in fact a perfectly valid one. As Malcolm will not be able to seek an indemnity from the company, there will be no scope for the company to seek an indemnity from the party who lodged the forged instrument, although rather interestingly in these circumstances that party would be Malcolm himself, creating a rather odd circularity. Consequently, it appears that Henryâ€™s name will be reinstated and Malcolm will have no remedy against Bernard or the company. Although this approach is somewhat harsh in relation to Malcolm, it appears that the rationale underlying it is that the transferees or their brokers are in a better position to asses whether the purported transferors are rogues than companies, who generally issue share certificates as a mere administrative procedure. The situation would be different if Malcolm had meanwhile transferred his shares to Nadia, whose name now appeared in the register of members. Henry would again be able to insist on the reinstatement of his name in the register in place of Nadiaâ€™s, but Nadia could argue that she had relied on the share certificate issued to Malcolm as evidence of Malcolmâ€™s ownership of the shares. As such certificate is in fact false, Nadia would be able to seek compensation from the company, which in turn would be able to seek compensation from Malcolm who, though unknowingly, lodged the forged transfer form in the first place. BIBLIOGRAPHY Barber, Company Law, 4th ed., London, Old Bailey Press, 2003 Davies, Gower and Daviesâ€™ Principles of Modern Company Law, 7th ed., London, Sweet & Maxwell, 2003 Mayson, French & Ryan, Company Law, 23rd ed., Oxford University Press, 2006 Sealy, Cases and Materials in Company Law, 7th ed., London, LexisNexis UK, 2001 Shepherd, Company Law: 150 Leading Cases, 3rd ed., London, Old Bailey Press, 2004 Hardoon v Belilios  AC 118 Popley v Planarrive Ltd  1 BCLC 8 Re Hackney Pavilion Ltd  1 Ch 276 Re Smith and Fawcett Ltd  Ch 304 Re Swaledale Cleaners Ltd  1 WLR 1710 Royal Bank of Scotland plc v Sandstone Properties Ltd  2 BCLC 429 Simms v Anglo-American Telegraph Co (1879) 5 QBD 188 Welch v Bank of England  Ch 508 1
Footnotes  Re Smith and Fawcett Ltd  Ch 304, per Lord Green MR at 306.  Re Hackney Pavilion Ltd  1 Ch 276.  This position will be changed when sections 771(1)(b) and (2) of the Companies Act 2006 come into force.  Hardoon v Belilios  AC 118.  Re Swaledale Cleaners Ltd  1 WLR 1710.  Ibid.   1 BCLC 8.  This point was not argued by either counsel in the case, and is therefore strictly obiter.  The delay will be of at least two months, as the decision must have been taken within two months from the lodging of the transfer: Re Swaledale Cleaners Ltd, cf. note 5 above.  Simms v Anglo-American Telegraph Co (1879) 5 QBD 188.  Welch v Bank of England  Ch 508.  It should be noted that under section 186(1) CA 1985 a share certificate is merely â€œprima facie evidenceâ€ of a memberâ€™s title to the shares.  Royal Bank of Scotland plc v Sandstone Properties Ltd  2 BCLC 429.  Ibid.