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Robert Pennington in his seminal text on company law and Joanna Benjamin in her pathbreaking monograph on interests in securities trace the historical roots of registered share transfers and conclude that registered shares, historically, used to be transferred by way of novation. Both authors stop short of making a statement as to whether this analysis continues to be accurate in the current legal climate.7

It is telling that both books refrain from a definitive statement in this respect. It is possible that both authors see some difficulty in stating outright that modern share transfers are, in the same way as their historical counterparts, to be classified as novations. The authors, however, also refrain from adopting any new analysis that would classify share transfers in terms other than novation. They fail to explain how the traditional analysis is to be applied to modern transfer practice. It seems as if a new explanation is needed to do justice to share transfers in the face of modern transfer procedure. Before an attempt is made to advance such an explanation, the second mechanism through which English law protects buyers against defective issues will be examined.

5.3 Defective issues and estoppel

The second mechanism English law has used to protect buyers from equities arising out of the relationship between the seller (or any of her predecessors) and the issuer is perhaps even more than the first firmly embedded in English law. English law has achieved protection for the buyer by making use of its rules on evidence.

The purchaser of securities is, in certain circumstances, protected by the rules on estoppel. Securities certificates are prima facie evidence of the title of the member in whose name the certificate has been issued.8 If the transferee acquires shares relying on certificates issued by the issuer in the transferor’s name, the company is estopped from denying the transferor’s title to the securities.9 Likewise, if the company issues certificates representing that the shares have been fully paid by the transferor, it is estopped from proving the contrary against the transferee.10 It has been suggested that similar rules apply to shares which have been defectively issued.11

7 Pennington, Company Law 398–399; Benjamin, Interests in Securities 3.05.

8 CA 1985, s. 186.

9 See section 6.2.

10Burkishaw v. Nicolls (1878) 3 App Cas 1004; Bloomenthal v. Ford [1897] AC 156.

11Pennington, Company Law 405, referring to Re General Estates Co. (1868) LR 3 Ch 758; Romford Canal Company (1883) 24 ChD 85; Webb v. Herne Bay Commissioners (1870) LR 5 QB 642.

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The rules on estoppel achieve a result comparable to the result achieved by the rules governing negotiable instruments. They transform shares into an asset that exists largely independently of the rules by which it was created. Relying on authority relating to debentures, it is possible to argue that the company, by issuing certificates and by registering transfers, represents that the shares have been validly issued and is therefore estopped from proving the contrary to a bona fide purchaser for value.12

These rules, however, were developed in an environment in which the company, or an agent on its behalf, issued certificates and registered transfers and thereby made representations to every individual transferee. The normal procedure was that the purchaser entered into an agreement with the seller upon having been presented with certificates issued by the company. The company was bound because of the representation it had made ‘on the face’ of the certificates.13

It is unclear, how, if at all, these rules protect the purchaser of uncertificated securities. When uncertificated shares are transferred, the contract is not entered into on the strength of a representation by the company; there are no certificates and the parties do not consult the register before they enter into a transaction. Securities are transferred through CREST and CREST does not make any representations to the buyer prior to her agreeing to buy securities.

5.4 Securities as negotiable rights

The final argument that may be advanced in order to insulate the transferee against equities is that securities are transferable under a statutory provision.14 This provision does not provide that the transfer is subject to equities. Pennington writes that where a chose in action is assignable at law in this way, a purchaser for value takes it free of equities of which she is unaware.15 Pennington supports this proposition by reference to

12Pennington, Company Law 405.

13Webb v. Herne Bay Commissioners (1870) LR 5 QB 642 at 651 per Cockburn J: ‘The debentures on their face import a legal consideration’, at 653 per Blackburn J: ‘on the face of which it was expressely stated’; Romford Canal Company (1883) 24 ChD 85 at 92 per Kay J: ‘represent on the face of them.’

14Companies Act 1985, s. 182 (1) b states, ‘the shares or other interest of any member of a company . . . are transferable in a manner provided by the company’s articles, but subject to the Stock Transfer Act 1963’.

15Pennington Company Law 405.

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the authority on debentures. The cases he cites, however, appear to rely on estoppel or contract rather than the statutory rule governing their transferability.16 Moreover, there is also a more general statutory provision providing for the assignment of choses in action.17 This provision does not mention equities either, and there is no doubt that the assignee of an ordinary debt is subject to equities. For these reasons, the fact that the Companies Act is silent on the topic does not show that transfers take effect free of existing equities.

Nonetheless, Pennington’s argument contains an important idea. This idea has also been voiced by J. S. Ewart, albeit in relation to estoppel and negotiable instruments.18 Securities are rights of a certain kind; they are created to circulate in a liquid market. Ewart used the term ‘ambulatory rights’. German scholars have also noticed this feature. Georg Opitz coined the term ‘Wertrechte’ as referring to rights that enjoy negotiability notwithstanding the fact that they are not represented by paper documents.19 H. Staub and O. Pisko classify securities as rights whose content is not determined by the act which created them but by their outward appearance in the market:20 the nature of the asset justifies the disapplication of equities. This reason applies irrespective of whether there is an immediate representation by the issuing company or reliance by the transferee. The issuer is bound because it allowed securities, which are by their nature ambulatory, to be processed by CREST. This, of course, goes beyond orthodox notions of contract law as well as orthodox principles of estoppel, but may help us to understand the legal mechanics of modern transfer systems.

5.5 Summary of the analysis

The conclusion of this chapter is that English law uses two doctrinal tools to protect purchasers against equities arising out of defective issues. The first is the doctrine of novation, the second the law of estoppel. Both were developed in relation to certificated transfers but,

16Re Romford Canal Company (1883) 24 ChD 85 at 92–93 (estoppel); Higgs v. Assam Tea Company (1869) LR 4 Exch 387 at 394–396 (contract).

17LPA 1925, s. 136.

18J. S. Ewart, ‘Negotiability and Estoppel’, (1900) 16 LQR 135 at 142–144.

19Georg Opitz, Fu¨nfzig depotrechtliche Abhandlungen (Berlin: Walter de Gruyter, 1954) 432–433, 721–723, 444–448.

20H. Staub and O. Pisko, Kommentar zum Allgemeinen Deutschen Handelsgesetzbuch, Ausgabe fu¨r

¨

Osterreich, Band II, 2nd edn. (1910) Art. 307, para. 5.

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in principle, continue to apply in relation to uncertificated transfers. England did not abolish the common law when it made it possible for companies to issue uncertificated securities; English legal doctrine will therefore continue along the path which it had previously adopted.

Notwithstanding this, it is currently difficult to see how the rules on novation and the law of estoppel apply to modern share transfers. Issuers no longer explicitly approve of securities transfers. The rules on estoppel were developed against a background of paper certificates and are therefore very difficult to apply when shares are transferred electronically. Nevertheless academic writers address securities transfers by referring to the historic starting point of the law and seem to suggest, without explicitly committing themselves, that the historic analysis still applies today. It is possible to explain the continuation of a rule protecting the buyer against equities arising out of the original issue by referring to the special nature of the rights concerned; this explanation, however, goes beyond the orthodox law of contract as well as the orthodox law of estoppel. The English courts have yet to analyse defective issues of uncertificated securities. When they do, they will apply the law in a manner that is predetermined by the path previously adopted by English legal doctrine.

From a comparative perspective it is important to note that English law has achieved a similar outcome as German and Austrian law. All the three legal systems have developed a mechanism protecting investors against defective issues. It will also become clear in chapter 10 that in addition to this functional similarity there even exists a doctrinal overlap between the three jurisdictions. It will also be shown that, similar to English law, German and Austrian law have yet to come to terms with applying their traditional analysis to modern securities transfers.21 There is no evidence, however, that either of these systems will solve this difficulty by leaving the doctrinal path they have previously followed.

The focus of this chapter were the rules protecting buyers of securities against equities that exist because the securities concerned were issued under a defective contract. The focus of chapter 6 are the rules that apply when securities are transferred by a buyer who was not authorised to do so.

21 For German and Austrian law see section 10.3.