Priority of equitable mortgage over share lien defeats refusal to register transfers based on an unsustainable lien claim.
Where a company has notice of a prior equitable mortgage over shares, its articles cannot be used to assert a paramount lien for later advances so as to defeat that prior interest. The High Court construed the lien and transfer provisions together and held that notice of the mortgagee's rights was attributable to the company through its controlling directors and agents, so the ordinary priority rules for equitable claims applied. The directors' refusal to register the transfers was also held not to be a bona fide exercise of discretion, because it rested on an unsustainable lien claim and was arbitrary and capricious. Rectification of the register was therefore warranted.
Issues: (i) whether the company could refuse registration of the share transfers on the footing of a lien under its articles notwithstanding the transferee's prior equitable mortgage and the company's notice of that interest; and (ii) whether the directors' refusal to register could be sustained as a bona fide exercise of discretion under the articles.
Issue (i): whether the company could refuse registration of the share transfers on the footing of a lien under its articles notwithstanding the transferee's prior equitable mortgage and the company's notice of that interest.
Analysis: The articles dealing with lien, recognition of interests, and refusal of transfer were construed together. On that construction, the company could not claim a paramount lien against advances made after notice of the mortgagee's interest. The company was treated as having notice because the mortgagors were themselves the controlling directors and agents of the company, and the transaction contemplated disclosure of the mortgage. The ordinary principles governing priority of equitable claims therefore applied, and the company could not use the articles to defeat the mortgagee's right to registration.
Conclusion: The objection based on lien failed, and registration could not be refused on that ground.
Issue (ii): whether the directors' refusal to register could be sustained as a bona fide exercise of discretion under the articles.
Analysis: The refusal was not shown to have been based on an approved transferee objection in substance; the reasons given rested on an asserted lien that was not sustainable. In the circumstances, the refusal was found to be dictated by an improper motive and to be arbitrary and capricious rather than a bona fide exercise of power. The Court also declined to force the petitioners to pursue a separate suit, since the rectification jurisdiction was apt for the controversy.
Conclusion: The refusal to register was not bona fide and could not stand.
Final Conclusion: The petitioners were entitled to rectification of the register and the appeal was dismissed with costs, with directions for registration of the transfers.
Ratio Decidendi: Where a company has notice of a prior equitable interest in shares, its articles cannot be used to defeat that interest by claiming a lien for later advances, and a refusal to register transfers founded on such an unsustainable claim is arbitrary and capricious.
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AI Drafter ✕
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