Lien1

WHAT IT IS:

A lien is a lender's claim against a collateral asset that may be legally sold should the
borrower fail to repay a loan.

HOW IT WORKS (EXAMPLE):

When someone takes out a sizeable loan, such as a home mortgage or an auto loan,
the lender often requires an asset that can be held as collateral against the loan. Thus,
the collateral has a lien placed upon it. In the event of non-payment on the part of the
borrower, the lending institution can exercise the lien and sell the collateral asset
to offset the unpaid loan. Once the loan is repaid in full, the collateral asset is returned
to the borrower and the lien dissolved.

To illustrate, suppose someone takes out a $10,000 loan for a new car. As part of the
loan's terms, the bank gets to hold the title to the car as a lien against the car until the
loan is fully repaid. Should the borrower, at any point, default or refuse to repay the
balance of the loan, the bank can use the title to the car to sell it in order to recover
the money that was lent.

WHY IT MATTERS:

A lien protects lenders in the event of non-payment. Since loans with collateral are less
risky for the lender, they can lead to lower interest rates for the borrower.

When purchasing a used car, for example, it's important to check for liens against the
vehicle. If there is an outstanding debt on the car, the buyer runs the risk of having it
repossessed by the lender.

1
http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/lien-775
Lien of shares :
A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a company
lien on a share means that the member would not be permitted to transfer his shares unless he pays
his debt to the company. The articles generally provide that the company shall have a first lien on the
shares of each member for his debts and liabilities to the company. The right of lien is not inherent
but must be clearly provided for in the articles. The articles may give the right of lien over share
either for unpaid calls or for any other debt due by the member of the company. The company may
have lien on fully paid-up shares. The lien also extends to the dividends payable on the shares.

The death of a shareholder does not destroy the lien. The right of lien can be exercised even through
the claim has become barred by law of limitation. Where the liability of the shareholder towards the
company is disputed by him, it does not deprive the company of its right of lien on the shares. But a
company will not be able to exercise its right of lien where the shareholder has mortgaged his shares
before he has incurred any liability to the company and the company has notice of it. Similarly, a
company will loose its lien if registers a transfer of shares subject to the lien2.

2
http://www.preservearticles.com/201104085058/brief-notes-on-lien-of-shares-surrender-of-shares-a-forfeiture-
of-shares.html
Blacks 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 companys 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
companys dividend.3

This article analyzes the problems which banks as security holders face when exercising their rights
under a security agreement that establishes a lien on shares in limited liability companies. When
providing a loan, repayment security is vital for the lender. The bank or other financing institution wants
to ensure fulfillment of the borrowers obligations to the maximum, usually by creating a lien on the
borrowers property. A lien on real estate must be registered in the cadaster. A lien on movable
property (such as machinery) and claims must be registered in the Notarys central register of pledges. A
lien on a borrower companys shares must be registered with the Company Register (the agreement
creating a lien is entered into between the bank as lien holder and the shareholders in the borrower
company). If the borrower fails to repay, the bank as security holder is authorized by law to satisfy its
claims from the collateral. This means that the bank is free to sell individual parts of the borrowers
property until the claim is satisfied to the full extent. Thus, the bank can sell real estate and movable
property, collect claims, and sell shares in the borrower company. During these activities, the bank acts
by law on behalf of the person that provided the bank with the security interest. When exercising the
rights under the agreement that establishes a lien on shares, the shares are sold, i.e., transferred.
According to legal regulations valid before 30 September 2012, share transfers were not limited by the
state (unless the transfer was prohibited by the Memorandum of Association/Deed of Foundation), and
registration of a share transfer with the Company Register was a mere formality, with the transfer
coming into force even before registration. However, Amendment No. 246/2012 to the Commercial
Code introduced several new provisions mainly concerning the transfer of majority shares in limited
liability companies owned by Slovak natural and legal persons (a majority share according to law is a
share representing at least 50% of all shareholder votes). The most important change is that the transfer
of a majority share is effective only on registration with the Company Register. The applicant must
simultaneously file the consent form of the tax administrator with the Company Register. The tax
administrator will not give consent if either the transferor or acquirer of the shares owes tax arrears
exceeding EUR 170. And herein lies the problem. If, during preparation for registration of the transfer
with the Company Register, it appears that the shareholder owes tax arrears exceeding EUR 170, (i) the
tax administrator will not consent to the transfer, and, therefore, (ii) the Company Register will not

3
http://corporatelawcorpus.blogspot.in/2010/03/whether-companys-lien-can-be-extended.html
register the share transfer. The transfer then will not come into force, and the lien holders rights cannot
be effectively exercised. It is also interesting to note that the lien holder cannot apply to register the
share transfer with the Company Register even if it obtains the consent of the tax administrator, as only
the companys directors can file the application. However, we emphasize again that the above only
applies to transfers of majority shares of Slovak natural and legal persons. Although the consent of the
tax administrator is not required for the transfer of shares owned by foreign persons, the bank as lien
holder must file a written declaration by the foreign person-shareholder that the obligation to file
consent does not apply. Without the company directors cooperation, the banks claim will not be
satisfied by way of executing a lien on the shares in the company. A lien on share will then become
meaningless for the bank. Whether increased tax controls and administrative burdens on the
registration of transfers of majority shares of Slovak natural and legal persons with the Company
Register will have an effect on tax fraud remains to be seen. This article has analyzed the issue from the
point of view of lenders as they will suffer administrative burdens and further costs if the shareholder
owes tax arrears, or if the company refuses to cooperate with the lien holder.4

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