26 E N G L I S H L A W

2.2 Law and equity

Like the rules governing transfer procedure, the rules regulating the transfer of proprietary interests in securities have been shaped by the path adopted by English private law. English private law is predominantly case-based law. Unlike the rules on the sale of goods, which are codified in the Sale of Goods Act 1979, the law relating to the sale of other assets has not been subject to codification.

Moreover, the structure of the English courts and their procedural rules have crucially determined the content of modern substantive property law. English property law exists in its current form only because England at one time operated two different and independent branches of the judiciary that had jurisdiction over the rules governing the transfer of property. These branches were the courts at common law and the court in equity. Both courts gave decisions in cases involving transactions in securities and other property, and each court created its own independent body of law. The English method of organising the administration of justice around a set of two independent courts resulted in what can be termed a ‘dualistic model’ of property law. English law does not have one, but two concepts of ownership. It distinguishes between ownership at law and ownership in equity. The rules on ownership at law were developed by the common law courts, the rules on ownership in equity were developed by the equity court.

From the point of view of a common lawyer, there would be no need to explain the difference between the courts at law and in equity and their jurisprudence in a book on securities. This book, however, addresses an audience concerned with comparative law. It is also written for the benefit of readers who have their background in a legal system that does not work around a distinction between law and equity. It is therefore useful to explain, in a few paragraphs, the relationship between the law and equity courts and the case law developed by them. In doing so, no attempt will be made to contribute to the English discussion on the nature of equity.

Historically, the courts at common law operated long before the court in equity came into existence. The jurisdiction of the equity court began at a point in time when the common law had become too rigid. It would, theoretically, have been possible for the law courts to change the rules created by them to do justice in cases where the law was considered to be too harsh. This, however, did not happen. What happened instead

P A P E R T R A N S F E R S

27

was that parties who felt that the law courts were unable to assist their rightful complaint petitioned to the Chancellor for relief; the Chancellor would give special remedies to prevent or stop unconscionable conduct. Over time, the office of the Chancellor administering petitions on his behalf became transformed into a special court, the court of equity.

For some time the courts of law and the court in equity operated independently. The courts at law continued to develop the body of case law already established by them, which came to be referred to as ‘law’.

The equity court developed rules providing exceptions to or supplementing this pre-existing ‘law’. As time moved on, the equity court developed its own body of case law by relying on its own precedent and by distinguishing previous authority on the basis of fact. This body of case law became to be referred to as ‘equity’.

One advantage available to the equity court was that it was subject to less rigid procedural rules and was, for example, able to grant injunctive relief or specific performance of contracts. The law courts did not have procedural rules that would enable them to grant injunctions and they could give monetary awards only in the form of damages for breach of contract.

The courts of law and equity were fused in 1873 and 1875 and both branches of English law are now administered by the same courts. Nevertheless, the distinction between law and equity has survived in legal terminology. The case law that goes back to cases decided by the courts of law is still commonly termed ‘law’. The case law that goes back to cases decided by the court of equity is still referred to as ‘equity’.

Civil lawyers are used to distinguishing legal rules exclusively according to their content. Property law, for example, is the branch of private law determining ownership and other rights in rem. Company law is the branch of law governing the formation and organisation of certain legal entities. The distinction between law and equity does not operate under such subject headings: whether a rule belongs to law or equity is solely determined by whether it evolved out of case law created by the law courts or by the court of equity, respectively.

The distinction between law and equity cuts across a number of private law fields. In terms of scope, equity could be characterised as an eclectic collection of exceptions to legal rules. Equity also exclusively governs whole areas of the law that have not been developed by law, for example trust law. The English trust is a legal institution that was invented by the court of equity.

28 E N G L I S H L A W

A civil lawyer would be forgiven for asking why, given that the separate jurisdictions merged 130 years ago and equity consists only of exceptions to other legal rules, the distinction between law and equity continues to exist. Would it not be more logical to think of English private law as being organised by content rather than according to the historic origin of the rules? This would be consistent with having special subject headings for areas of law, such as trust law, that have their historic starting point entirely in the court of equity.

There is, of course, some benefit in analysing current legal rules in terms of their historic origins, but whether or not this justifies a principled separation between law and equity is open to discussion. The significance of the distinction between law and equity, and the nature of equity itself, are issues that are hotly debated in the common law world.

One school of thought argues that law and equity are different in nature. On that view, rules that go back to case law decided by the equity court need to be interpreted with a view to enforcing conscionability.26 Another school of thought argues that the rules in equity do not justify a

different approach and should be developed through the same methods as law.27

This book is not the place to contribute to the debate on this issue. It suffices to note here that the distinction between law and equity is based on the historic origin of rules and that that historic origin continues to be of significance in modern English law. The path adopted by English law – and, in particular, the method chosen by English law to administer justice – caused property law to develop rules on ownership at law and rules on ownership in equity. English securities law developed path-consistently within this framework. The result of this is that English law does not approach securities transfers in terms of defining the circumstances in which a transferee acquires ownership in the securities. It rather contains rules according to which, at law, the transferee acquires what is called ‘legal ownership’. In addition, equity gives the transferee in certain circumstances an interest in the securities sold. This interest is termed ‘equitable’ or ‘beneficial’ ownership.

26R. P. Meagher, J. D. Heydon and M. J. Leeming (eds.), Meagher, Gummow, and Lehane’s, Equity: Doctrines and Remedies, 4th edn. (Sydney: Butterworths Lexis Nexis, 2003) [3.005–3.260] 85–121.

27Birks, P. ‘Equity in the Modern Law: An Exercise in Taxonomy’ (1996) 25 U Western Australia L. Rev. 1; A. Burrows, ‘We Do This at Common Law But That in Equity’ (2002) 22

OJLS 1.

P A P E R T R A N S F E R S

29

The interest does not arise in all cases; if it arises, it is vested in the buyer before she becomes the legal owner.

In section 2.3 the instances in which ownership at law vests in the transferee will now be analysed. In section 2.4, the rules governing the acquisition of equitable or beneficial ownership by the transferee will be discussed. Both sections will show that the English rules on ownership rights in securities are a function of the path historically adopted by English property law.

2.3 Legal title and registration

In England, the securities register is the focus point for the acquisition of legal title to securities. The position in modern English law is that legal title is vested in the buyer when her name is registered on the shareholder register. Nourse LJ, for example, held in J. Sainsbury plc v. O’Connor (Inspector of Taxes) that there ‘is no difficulty in ascertaining the legal ownership of shares, which is invariably vested in the registered holder’.28 Another case is Re Rose, where Jenkins LJ wrote:29 ‘In my view, a transfer under seal in the form appropriate under the company’s regulations, coupled with delivery of the transfer and certificate to the transferee, does suffice, as between transferor and transferee, to constitute the transferee the equitable owner of the shares . . . [But,] the transferee must do a further act in the form of applying for and obtaining registration in order to get in and perfect his legal title.’

These cases are consistent with CA 1985, s. 22, according to which a person who agrees to become a member of a company and whose name is entered in its register of members is a member of the company.

The view that registration is needed to perfect the legal title of the transferee to the securities is not uncontested. Robert Pennington writes that it seems historically more likely that title to shares passed at common law prior to registration when the transferor delivered the executed instrument of transfer to the transferee.30 In Pennington’s view, the requirement for registration was embodied as a condition in the deeds of settlement simply as a measure for the issuer’s own

28[1991] 1 WLR 963 at 977 (CA).

29Re Rose, Rose v. Inland Revenue Commissioners [1952] Ch 499, at 518–519 (CA); Sahota v. Bains

[2006] EWHC 131 (Ch).

30Pennington, Company Law 416–417; see also Brenda Hannigan [186.53] in Justice Arden and D. Prentice (eds.), Buckley on the Companies Acts, 15th edn. (London: Butterworths, 2006).

30 E N G L I S H L A W

protection. Pennington propounds the view that the registration requirement has only contractual effect and has no bearing on the question when legal title to the shares vests in the transferee.31

Pennington’s remarks are expressed in terms of a historical observation which, presumably, goes back to the times when securities, like other choses in action, were not transferable at law. It has already been mentioned that securities and the rules governing their transfers developed at a time when the assignment of choses in action was generally prohibited; choses in action were transferable only by novation. Novation requires the consent of the issuer; the issuer, however, could waive the right to object to transfers by adapting articles to that effect. Pennington’s analysis receives support from the fact that if the issuer waived the right to approve every transfer, it seems logical that title to the securities would pass as between buyer and seller irrespective of the issuer’s involvement.

On the other hand, it is possible that the historical novation-based analysis also shaped the rules governing perfection of title to the securities between buyer and seller. If it is true that the starting point of the rules governing securities transfers was that a transfer could be effected only with the explicit consent of the issuer, it follows that the consent was also necessary to perfect title to the securities as between buyer and seller. If the law is based on the notion that the issuer needs to approve of a transfer for it to be possible, some involvement of the issuer would, conceivably, continue to be necessary even if transfers become possible by means of special clauses inserted in the issuing documentation, or by way of a general exception in the law. As the rule on the availability of transfers relaxes, the requirement for the issuer to participate in the transfer process relaxes accordingly. The issuer no longer has to approve of every transfer individually, but the requirement for registration in order for legal title to pass to the buyer continues to exist.

In any event, in light of CA 1985, s. 22 and in light of the dictum in J. Sainsbury, the more prudent view is to conclude that a buyer becomes the legal owner upon registration of her name in the securities register.32 Moreover, whichever view one prefers to adopt in relation to perfection of title to the securities as between buyer and seller, registration provides the transferee with a stronger position than she has prior to registration. Upon registration, the buyer becomes the issuer’s

31 Pennington, Company Law 417. 32 [1991] 1 WLR 963 at 977 (CA).

P A P E R T R A N S F E R S

31

shareholder or debtor. In the case of shares, the legal owner receives dividends and scrip, enjoys the right to vote at general meetings and is liable to pay for contributions. In other words, she is recognised as a shareholder of the company by the company itself. In the case of debt securities, the legal owner becomes entitled to receive payment of interest and capital.

Another implication of registration is that a transferee whose name has been registered has a better title then a transferee who bought her shares before the registered transferee had bought hers. This is true even if the second transferee to register was provided with a forged certificate, but obtained registration before the first transferee. It is irrelevant that the first transferee received a certificate with a blank transfer before the second transferee had bought her shares.33 If the second transferee is registered before the first transferee, she becomes the legal owner of the shares.34

Registration causes the buyer’s entitlement to be enforceable against the issuer and gives her priority over any other transferee who may have concluded a sales contract with the transferor earlier than the transferee. The orthodox view is that legal title as between buyer and seller vests in the buyer when her name is registered on the securities’ register.

The title of the buyer is, of course, subject to one important qualification. The transferee will become the legal owner of registered securities only if the transferor of the shares either had legal title herself or if she was authorised by the legal owner to transfer the securities. When the transferor of the securities is not the legal owner, the transferee will not acquire legal title to the securities even if her name has been entered on the register. An entry in the register does not provide the transferee with a title which is good against the securities’ legal owner. If securities are transferred without authority of the securities’ legal owner, she can enforce her claim and have the register rectified.35

It is possible that the fact that registration gives the transferee significant certainty as to her entitlement in English law is a function of English securities law having originated in the law of novation. This

33Colonial Bank v. Hepworth (1887) 36 ChD 36; Guy v. Waterlow Brothers and Layton (Limited)

(1909) 25 TLR 515.

34Colonial Bank v. Hepworth (1887) 36 ChD 36 at 43 and 54 per Chitty J.

35Re Bahia and San Francisco Rly Co. (1868) LR 3 QB 584.