Analysis: Lien Held by Company on Members’ Shares

• Jurisdiction: South Africa
• Published date: 25 May 2019
• Pages: 540-559
• Author: Henk Delport
• Date: 25 May 2019

Analysis

LIEN HELD BY COMPANY ON MEMBERS’

SHARES

HENK DELPORT

Professor, Nelson Mandela Metropolitan University

I INTRODUCTION

There is a dearth of authority in South African law dealing with the

concept of a company holding a lien on members’ shares to secure

payment of amounts owed to the company by the members. Aspects of

the lien, such as the waiver thereof and the lien’s preference over a pledge

of shares by members, have received the courts’ attention in a handful of

reported judgments, but the nature and effect of the lien have not been

analysed in any detail. Textbook writers on company law refer to the lien

in passing, without much discussion. The lien is nevertheless frequently

encountered in practice, particularly so in the case of share block

companies where the lien aims to secure the members’ levy and allocated

loan obligations to the company. See the generic Memorandum of

Incorporation (MOI) for share block companies compiled by the

Vacation Ownership Association of Southern Africa (VOASA), available

at http://voasa.co.za/blog/wp-content/uploads/2013/11/VOASA-MOI-

Generic-Pty-Ltd–05-Sept–2013.pdf, accessed on 6 April 2015, which

provides for a ‘f‌irst and paramount’ lien on members’ shares as well as a

pledge of the shares to the company. In the past the lien was usually

created in a company’s articles of association (Barnard v Liquidators of S

Seligmann & Co (Pty) Ltd 1964 (3) SA 692 (E)); today it will normally be

established in the company’s memorandum of incorporation (MOI)

pursuant to s 15(2)(a)(i) of the Companies Act 71 of 2008. In the case of

share block companies it may alternatively be contained in the use

agreement entered into between the company and the members

(Delpech v Holloway 2011 (2) SA 194 (GSJ)). To give substance to the

lien the company’s directors are invariably empowered to execute the

lien by selling the shares in the event of shareholders defaulting.

The security afforded by a lien on shares of a share block company has

been described as ‘suspect’ (Sonnekus, Sectional Titles, Share Blocks and

Time-sharing Vol 2 (LexisNexis 2014) para 3.9). This Note goes a step

further. The key propositions are the following:

540

(2015) 27 SA Merc LJ 540

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• The Companies Act 71 of 2008 allows companies to issue partly paid

shares, but a provision in a company’s MOI conferring on the

company a lien on partly paid shares is voidable.

• Companies are not prohibited from holding a lien on fully paid-up

shares to secure payment of amounts due to the company from

causes other than partly paid shares. Such liens, created in an MOI or

use agreement, are neither enrichment nor debtor-and-creditor

liens. They are contractual liens having the characteristics set out in

the contract by which they are created.

• Creating a lien on shares in quasi possession of a company requires

careful drafting since the rights and duties of the company and the

members in relation to the lien are not determined by common law

but hinge on the provisions of the contract creating the lien. This can

be bypassed by simply providing for a pledge of shares by cession in

securitatem debiti.

• A lien on shares in quasi possession of the shareholders is no more

than a contractual right (personal right/creditor’s right) purportedly

empowering the company to seize and sell the shares, without

judicial intervention, to satisfy debts owed to the company by

members. The ‘right’ to seize and sell the shares is of no consequence

since exercising it constitutes an infringement of a person’s constitu-

tional right to have any legal dispute decided by a court of law or

another independent tribunal or forum (s 34 of the Constitution).

The practice of providing for liens on shares to secure shareholders’

indebtedness to a company originated from English company law. Thus

the discussion commences with a brief exposition of the development

and nature of such liens in the UK.

II ENGLISH LAW

(a) Companies legislation

The concept of a lien on shares is well established in English company

law: Pennington, Company Law 8 ed (Wildy 2006) 482; Davies &

Worthington, Gower and Davies’ Principles of Modern Company Law 9

ed (Sweet & Maxwell 2012) 995. Its roots go back to the Companies Act

1862, more specif‌ically Table A in the f‌irst schedule as revised by the

Board of Trade on 30 July 1906. The Act permitted companies to issue

partly paid shares but no provision was made at commencement of the

Act for any form of security to secure payment of the balance owing by

shareholders. The matter was addressed by the revised Table A, effective

1 October 1906. A new provision was added (reg 9) stipulating that a

LIEN HELD BY COMPANY ON MEMBERS’ SHARES 541

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