Kazi Bure borrowed Shs.50,000 from Tumaini Bank and deposited his XYZ Supermarket Ltd,s share certificate with a blank transfer as a security. Subsequently he bought goods from the supermarket on credit. The goods were worth Shs.15,000. The articles of association of XYZ Supermarket Ltd claimed a first and paramount lien on its members shares on debts due to the supermarket. However, before the supermarket lien arose the bank gave the supermarket notice of Kazi Bure’s share certificate having been lodged with the bank as a security for the loan. Kazi Bure is unable to pay for the goods he obtained from the supermarket and has also defaulted on the loan. XYZ Supermarket Ltd wants to exercise its lien and the bank wants to exercise its equitable right to have the shares transferred to into its name.
In this situation discuss the rights of
i) The Bank
ii) XYZ Supermarket Ltd
ANSWER
i) Bank
In law if a third party advances money on the security of shares and the third party gives notice of his security to the company before the company‟s lien arises the third party will have priority.
In Bradford Banking Co. v Briggs and Co. (1886) a shareholder created an equitable mortgage of his shares depositing the share certificate with a blank as security for an overdraft and the bank gave notice of the notice of the deposit to the company. The shareholder subsequently became indebted to the company whereupon a lien arose in favour of the company t was held that the bank had priority as the company’s lien arose after notice of the equitable mortgage.
The bank is entitled to enforce the lien on the shares since its lien has priority over that of the company. This position is consistent with the holding in Bradford Banking Co. v Briggs and Co. (1886)
ii) XYZ Supermarket Ltd
• The Articles of association of XYZ Supermarket Ltd claimed a first and paramount lien on its members shares on debt due to the supermarket. However before the supermarket lien arose, the bank gave the supermarket notice of Kazi Bure’s share certificate having been lodged with a bank as security for the loan
• The issue of notice the bank therefore operates to defeat the companies the company’s lien on Kazi Bure shares.
• The Bank has priority in this case and XYZ Supermarket Ltd will have to pay the amount due to it through pursuit of an alternative legal remedy