Whether Company's lien extends to dividends?

Whether Company’s "Lien" can be extended to the "Dividends" payable on such Shares?

Clause (46) of Section 2 of the Companies Act, 1956 defines the word share as follows:

"“SHARE” means share in the share capital of a company, and includes stock except where a distinction between stock and shares is expressed or implied."

In Lindley on Companies, 6th edition, page 1, Shares have been defined as follows:

“The common stock’ (contributed by the members) is denoted in money, and is the capital. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each member is entitled is his share."

A Share in a company does not denote rights only, but denote obligations as well. A share is not a sum of money, but is an interest of a shareholder in the company measured by a sum of money for the purpose of liability and made up of various rights. When a member transfers his share, he transfers all his rights and obligations as a shareholder as from the date of the transfer. The rights attached to ordinary shares (equities) may be stated in brevity. Except so far as the memorandum, articles or terms of issue provide otherwise, an equity shareholder is entitled to receive dividends when declared, to have his appropriate proportion of the company’s assets after payment of creditors paid or transferred to him on a winding up and to exercise one vote for each share that he holds at the general meetings of the company.

Clause (14A) of Section 2 of the Companies Act, 1956 defines 'dividend' as follows:

“’Dividend’ includes any interim dividend”.

The Supreme Court of India, in Cf. CIT v Girdhardas & Co. (Private) Ltd., AIR 1967 SC 795 held as follows:

"The expression ‘dividend’ has two meanings. As applied to a company which is a going concern, it ordinarily means the portion of the profits of the company which is allocated to the holders of shares in the company. In the case of a winding up, it means a division of the realized assets among the creditors and contributories according to their respective rights.”

Black’s Law Dictionary, 6th Edition defines the term “Lien” as a claim, encumbrance or charge on property for payment of some debt, obligation or duty. The word ‘lien’ originally means “binding” from the Latin ligamen. Its lexical meaning is “right to retain”. Meaning of the term 'lien' has been explained by the Supreme Court in Triveni Shankar Saxena v. State of U.P., (1992) Suppl 1 SCC 524. In different contexts the word 'lien' can refer to 'contractual lien, equitable lien, specific lien, general lien etc.'. In legal sense 'lien' means 'right of a man to retain it rightfully and continuously in his possession belonging to another until the present and accrued claims are satisfied. (Refer, Halsbury's Law as quoted in the said judgment). Lien implies that there is something in existence to which it attaches. It includes right of retention. Lien was defined in Paresh Chandra Nandi v. Controller of Stores, AIR 1971 SC 359, with reference to Railway Fundamental Rules as title of a railway employee to hold substantively a permanent post to which he has been permanently appointed. In principle, a lien is no more than the right to retain the shares until the debt is satisfied. A lien on shares is a security and makes the company a secured creditor in the bankruptcy of a shareholder. Indeed, the word ‘Lien’ has not succeeded in attaining any fixed application as a technical term of both Indian as well as English Law. Its use appears to be capricious and uncertain. Apparently, this being the reason, its meaning, nature, effect of exercise and enforcement are all to be construed through the wide foray of case law and judicial decisions that has developed on this aspect of the company law.

Though the Companies Act, 1956 does not directly deal with the right of lien of a company on its shares held by members, Regulations 9 to 12 of Table A, Schedule I contain detailed provisions which a company may adopt to exercise lien as follows:

9. (1) The company shall have a first and paramount lien :-

(a) on every share (not being a fully-paid share), for all moneys (whether presently payable or not) called, or payable at a fixed time, in respect of that share ; and

(b) on all shares (not being fully-paid shares) standing registered in the name of a single person, for all moneys presently payable by him or his estate to the company : Provided that the Board of directors may at any time declare any share to be wholly or in part exempt from the provisions of this clause.

(2) The company's lien, if any, on a share shall extend to all dividends payable thereon.

10. The company may sell, in such manner as the Board thinks fit, any shares on which the company has a lien : Provided that no sale shall be made :- 

 (a) unless a sum in respect of which the lien exists is presently payable; or 

 (b) until the expiration of fourteen days after a notice in writing stating and demanding payment of such part of the amount in respect of which the lien exists as is presently payable, has been given to the registered holder for the time being of the share or the person entitled thereto by reason of his death or insolvency.

11. (1) To give effect to any such sale, the Board may authorise some person to transfer the shares sold to the purchaser thereof.

(2) The purchaser shall be registered as the holder of the shares comprised in any such transfer.

(3) The purchaser shall not be bound to see to the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the sale.

12. (1) The proceeds of the sale shall be received by the company and applied in payment of such part of the amount in respect of which the lien exists as is presently payable.

(2) The residue, if any, shall, subject to a like lien for sums not presently payable as existed upon the shares before the sale, be paid to the person entitled to the shares at the date of the sale.

These regulations are not mandatory and a company may make its own regulations to govern its Lien on shares. Unless the Articles of the company provide for Lien, a company primarily has no Lien on members’ shares. A lien, if appropriate words are used in the articles, extends to all liabilities, not only to those in respect of shares, it also may authorize retention of any dividends due to the shareholder. A lien clause may be adopted by special resolution. The effect of Lien on shares is that, on exercise of the right of lien, the member ceases to be a member of the company. It was held in Hague v Dandeson (1848) 2 Exch 741 that, a lien imposed by the Articles of a company attaches not only to the shares in question but also to dividends payable in respect of them. In view of the above, it may be concluded that the company’s lien on share extends to the dividend payable. Accordingly, the holder of the shares, whose shares are in lien by virtue of his default in payment of the called up and un-paid share capital, can not have the benefit of the company’s dividend.