Transfer of Shares in a Private Company: Misstep from the Supreme Court
It is standard practice that for a share transfer in a private limited liability company to be effective, the transferor and transferee must execute a share transfer form, pay stamp duty on it and present it to the company for registration, together with the related share certificate, if any.
The Ugandan Companies Act, 2012 prohibits the transfer of shares unless a proper instrument of transfer has been delivered to the company. The standard articles of association for a private limited liability company permit the transfer of shares in any usual or common form executed by the transferor and transferee and approved by the Board of Directors. The Stamps Act, 2014 requires payment of stamp duty on the instrument of transfer of shares.
In the curious case ofJaspal Singh Sandhu v Noble Builders, (S.C.C.A No. 13 of 2002)(decided 22 Feb 2005), the Appellant endorsed a Notification of Change of Directors (then Form 8, now Form 20) with the words:
“with effect from 12thJanuary 1984, Mr. Jaspal Singh Sandhu ceased to be a director/member of the company. On the same day/date, Mrs. Balwinder Kaur is appointed new director/member of the Company.”
The Appellant contested his subsequent exclusion from the affairs of the company. It was argued by the company that by reason of the above endorsement, the Appellant had ceased to be a director and member of the company. The Supreme Court held the above endorsement to have been a valid transfer of the Appellant’s shares, notwithstanding the clear statutory requirements relating to the transfer of shares. In so far as the Supreme Court failed to address the requirements for a transfer of shares in the Companies Act and the Stamps Act, the decision of the court is contrary to the law.
Unfortunately, the error was compounded by the Court of Appeal inNobel Builders v Balwinder Kaur Sandhu. (C.A.C.A NO. 709 2009)(decided 4 September 2013).
In this case, the Respondent, as a beneficiary of the Supreme Court’s error in theJaspaldecision, sought a court order to be entered on the register of members of the company. Interestingly, the same company that had previously argued that the endorsement byJaspalon the Notification of Change of Directors, was effective as a transfer of shares, now argued that the transfer was ineffective, and criticised the finding of the Supreme Court in theJaspaldecision asobiter dicta. The High Court applied the principle of estoppel to hold that the transfer of shares had already been decided by the Supreme Court and the company was now estopped from contesting it. This again was in error, as estoppel cannot operate against a statute.
On appeal, the Court of Appeal again wrongly applied the principle of estoppel. The court did not examine the requirements of the Companies Act for a proper instrument of transfer, nor did it inquire on the tax obligations on a transferee of shares under the Stamps Act. In addition, the court did not inquire on the requirements under the articles of association of the company for a transfer in common form or other form approved by the Board of Directors and signed by both the transferor and the transferee. The Court of Appeal dismissed theobiterargument and followed the Supreme Court’s decision that the endorsement was effective to transfer shares.
The decisions of both the Supreme Court and the Court of Appeal are contrary to law and are unfortunate. Both in law and in practice, a Notification of Change of Directors is not used to transfer shares. Fortunately, these decisions are confined to their own facts and are unlikely to disturb the settled law and practice on transfer of shares.
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