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In England, the risk of unauthorised transfers is contained in the application of certain rules of evidence. The rules adopted by English law with a view to allocating the risk of an unauthorised transfer away from the buyer does not involve a change in the substantive entitlement to the securities. English law has opted not to interfere with the legal owner’s title and applies the rules on estoppel to protect the buyer by allocating transfer risk to the issuer. Estoppel is a legal technique that restricts the issuer in proving that the buyer does not hold legal title to the securities; because the issuer is unable to prove that the buyer is not entitled to the securities it has to put the buyer in the financial position she would be in if she were the legal owner. The effect of the operation of the estoppel rules in this context has been described as ‘negotiability by estoppel’.3 The application of the rules of estoppel will be discussed in sections 6.2–6.3.

Section 6.2 contains an analysis of the rules that apply to certificated securities. The position of the legal owner of these securities will be examined first and then the issuer’s liability and the liability of the person who instructed the issuer to amend the register will be discussed. In section 6.3 the law in relation to uncertificated securities will be examined. As with certificated securities the position of the legal owner will be analysed first; CRESTCo’s and the issuer’s liability will then be addressed.

6.2 Certificated securities and estoppel

6.2.1 Restoration of the legal owner’s name on the register

Under English law, the legal owner of registered securities loses her entitlement only if she authorises a transfer,4 waives her rights, or is otherwise estopped from proving her entitlement.5 The legal owner does not carry the risk of unauthorised transfers.

If securities are transferred without the legal owner’s authority she may sue the issuer to have the register rectified and to receive dividends and other benefits that have fallen due since the securities were transferred out of her name.6 This rule applies notwithstanding the fact that

3W. Blair, ‘Negotiability and Estoppel’ [1988] The Company Lawyer 8 at 10; M Hapgood, Paget’s Law of Banking, 12th edn., (London: Butterworths, 2003) 654.

4Coles v. The Bank of England (1839) 10 Ad & E 437, 113 ER 166; Welch v. The Bank of England

[1955] 1 Ch 508; Dixon v. Kennaway & Co. [1900] 1 Ch 833.

5Barton v. London and North Western Railway Co. (1889) 24 QBD 77; see also Davis v. The Bank of England (1834) 2 Bing 39 , 130 ER 357.

6Re Bahia and San Francisco Rly Co. (1868) LR 3 QB 584; Kai Yung v. Hong Kong and Shanghai Banking Corporation [1981] AC 787; Simm v. Anglo-American Telegraph Company (1879) 5 QBD 188.

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the buyer’s name has been entered on the register. A change in the register does not interfere with the rights of the legal owner.7

The buyer acquires title only if her seller had authority to sell. Such authority can be express or implied. No authority will, however, be inferred from the fact that the owner entrusted a broker or an employee with transfer documents where that person used the documents to forge a transfer.8 The legal owner is likewise not bound by a transaction effected by a co-trustee.9 Moreover, she does not lose title if she fails to respond to notifications by the company warning her that a transfer has been lodged in relation to her shares.10

When an unauthorised transfer comes to light, the buyer’s name will be removed from the register. The buyer cannot prevent the removal of her name from the register; in certain circumstances, however (analysed below) she will receive an indemnity from the issuer.

6.2.2 Liability of the issuer

The buyer whose name has been removed from the register may claim indemnity from the company if she had originally acquired the securities in reliance on certificates issued by it. English securities certificates are issued in the name of the legal owner and state her entire holding of a particular type of security. A certificate states, for example, that Jane Bloggs is the registered owner of 100 type A securities.

If Jane Bloggs is not the legal owner, the issuer will be liable to anyone who purchased the securities in reliance on the certificate showing her as the legal owner. The reason the issuer is liable in these circumstances is that share certificates are a declaration to ‘all the world that the person in whose name the certificate is made out . . . is a shareholder in the company’.11 The statement that Bloggs is the legal owner was made by the issuer with the intention that it should be used as such a

7D. Frase, ‘Dematerialisation and Taurus’, [1991] Butterworths Journal of International Banking and Finance Law 73.

8Welch v. The Bank of England [1955] Ch 508 (broker); Cottam v. Eastern Counties Railway Co.

(1860) 1 J & H 243, 70 ER 737 (broker); Johnson v. Renton (1879) Law Rep 9 Eq 181 (broker);

Simm v. Anglo-American Telegraph Company (1879) 5 QBD 188 (employee).

9Welch v. The Bank of England [1955] 1 Ch 508; see also Bank of Ireland v. Evans Trustees (1855) 5 HCL 389, 10 ER 950; Swan v. North British Australasian Co. Ltd (1863) 2 H & C 175, 159 ER 73.

10Re Bahia and San Francisco Rly Co. (1868) LR 3 QB 584.

11Re Bahia and San Francisco Rly Co. (1868) LR 3 QB 584 at 595 per Cockburn J; Shropshire Union Railways and Canal Co. v. R. (1875) LR 7 HL 496; Balkis Consolidated Company v. Tomkinson

[1893] AC 396.

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declaration.12 Any person who relies on the representation when purchasing securities can enforce the same rights against the company as can be enforced by a registered shareholder.13 The issuer is liable to pay damages if it refuses to register her,14 or if it strikes her name off the register.15 The issuer is liable because, having represented to the buyer that the seller was the legal owner of the securities, it is estopped from proving that she was not.

An estoppel based on certificates protects only a claimant who can show that she has relied on the issuer’s representation and thereby suffered some detriment. It does not protect a person who acquires forged transfer documents. This happens when the seller is, for example, not authorised to sell securities, but possesses a genuine share certificate (perhaps because she was entrusted with the certificate by the legal owner). To carry out the transfer in such a case the seller will have to forge the signature of the legal owner on the transfer form. It is also possible that an unauthorised seller will forge both the share certificate and the transfer form.

In both cases, the buyer suffered the loss not because of an inaccurate statement of the issuer, but because of forged documents. A person who acts on forged certificates does not rely on a representation made by the company, but on documents produced by someone else.16 For this reason, the issuer is not estopped from proving that she has no title to the securities and does not need to indemnify the buyer. A person who acts on forged documents has to bear the misfortune arising from having accepted a forged transfer or having bought stolen securities.17 Lord Halsbury supported this result by the pragmatic argument that the buyer is in a better position than the company to discover fraudulent or forged transfers. She is free to choose with whom to deal and is better

12Re Bahia and San Francisco Rly Co. (1868) LR 3 QB 584; Webb v. Herne Bay Commissioners (1870) LR 5 QB 642; Balkis Consolidated Company v. Tomkinson [1893] AC 396; Dixon v. Kennaway & Co. [1900] 1 Ch 833.

13Simm v. Anglo-American Telegraph Company (1879) 5 QBD 188 at 216 per Cotton LJ; Re Otto Kopje Diamond Mines Ltd [1893] 1 Ch 618 at 625–626 per Lindley LJ.

14Balkis Consolidated Company v. Tomkinson [1893] AC 396; Re Otto Kopje Diamond Mines Ltd

[1893] 1 Ch 618.

15Re Bahia and San Francisco Rly Co. (1868) LR 3 QB 584.

16Simm v. Anglo-American Telegraph Company (1879) 5 QBD 188; Cadbury Schweppes plc v. Halifax Share Dealing Ltd [2006] EWHC 1184 (Ch).

17Simm v. Anglo-American Telegraph Company (1879) 5 QBD 188 at 205 per Bramwell LJ; Royal Bank of Scotland v. Sandstone Properties Ltd [1998] 2 BCLC 429.

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able to judge from the circumstances under which the transaction is made whether the transfer documents are genuine.18

The conclusion of this subsection is that the common law protects certain buyers against unauthorised transfers. It does so by giving special evidential force to the securities certificate. This results in the buyer being able to sue the issuer for an indemnity. The risk of an unauthorised transfer thereby shifts from the buyer to the issuer.

The English method of protecting certain buyers against unauthorised transfers is firmly rooted within English market practice and English legal doctrine. Originally inspired by the law of novation, English practice causes issuers to make statements in certificates that identify the name and the holding of every individual owner. The law then protects the buyer by holding the issuer accountable for these statements by relying on the English rules of evidence which happen to have developed principles that are capable of protecting the buyer against adverse claims.

6.2.3 Liability of the person who instructed the issuer to amend the register

The conclusion of subsection 6.2.2 was that an English securities certificate can give rise to an estoppel and can trigger the liability of the issuer of the securities. The issuer is liable to indemnify a buyer who purchased securities in reliance on certificates that contained inaccurate information. The issuer does not, however, in all circumstances ultimately bear the risk of unauthorised transfers. The issuer is able to claim the cost of the indemnity from the person who acquired the securities from a seller who was not authorised to sell, but nevertheless produced a share certificate and a transfer form to that buyer. It goes without saying that, in such circumstances, the transfer form and sometimes also the certificates will be forgeries.

If the buyer of forged documents succeeds in having her name registered and in being issued with a certificate, that certificate will be inaccurate. It is, however, a genuine certificate made out by the issuer. In section 6.1 it was concluded that a third party who relies on this inaccurate certificate and buys the securities from the person who is named as the legal owner on them will be protected by estoppel. If it is later discovered that the securities were, originally, transferred without the legal owner’s authority, the third party’s name will be

18 Sheffield Corporation v. Barclay [1905] AC 392 at 396.

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removed from the register. The third party can then claim an indemnity from the issuer. The issuer can claim the cost she incurred to indemnify the third party from the buyer of the forged certificates or the person instructing the issuer to register a forged transfer. The buyer or her agent will be liable irrespective of whether she was aware of the forgery.

The basis of the liability is contract law. When an issuer is requested to exercise a statutory duty for the benefit of the person making the request, a contract for indemnity is implied.19 The person requesting a transfer to be registered warrants that the transfer is genuine. The request includes a promise to indemnify the issuer if, by acting on the request, the issuer causes actionable injury or damage to a third party. The promise is accepted by the issuer when it acts on the request.

The leading authority on this point is a decision by the House of Lords in Sheffield Corporation v. Barclay.20 In that case, Barclay presented forged transfer documents and instructed the issuer to put its name on the register. This caused a loss to the issuer and Barclay had to indemnify the issuer against that loss. Their Lordships reached this conclusion despite the fact that the bank had itself relied on the forged documents and had had no reason to believe they were forgeries. The rule in Sheffield was affirmed and extended by the Privy Council in Kai Yung v. Hong Kong and Shanghai Banking Corporation.21 In that case, forged transfer documents were presented to the company not by the buyer himself but by a broker who acted on his behalf. The broker lodged the forged documents with the company requiring it to register the buyer. In the letter covering the documents, the broker referred to them as ‘duly completed transfer deed(s)’. The broker, though he did not act on his own behalf, was held liable to indemnify the company against the loss it incurred by registering the forged transfer.

The conclusion of this subsection is that the person who instructs the company to register a transfer must indemnify it if the transfer documents are later discovered to be forgeries. This rule applies notwithstanding the fact that the person submitting the documents honestly and with good reason believed that they were genuine. The contributory

19Sheffield Corporation v. Barclay [1905] AC 392 at 399 per Lord Davey; Welch v. The Bank of England [1955] 1 Ch 508; Kai Yung v. Hong Kong and Shanghai Banking Corporation [1981] AC 787, PC; Cadbury Schweppes plc v. Halifax Share Dealing Ltd [2006] EWHC 1184 (Ch); see also Bank of England v. Cutler [1908] 2 KB 208 (CA).

20[1905] AC 392. 21 [1981] AC 787, PC.