Apart from that, Rule 11 of the Companies (Share Capital and Debenture) Rules, 2014 also provides the rules for the transfer of shares. Because shares are transferable, it is a viable option for the businesses to raise funds by issuing shares rather than relying on debts to manage their finances. This feature is also beneficial to the investor since if a person no longer wants to hold shares they can easily transfer them to another individual and become free. When a person transfers their share to another person, he/she also transfers all the rights and liabilities associated with such shares.
The person who transfers the share is known as the ‘Transferor’ and the person who receives such shares is known as the ‘Transferee’. It must be noted that the company has the complete power to either accept or reject any proposal for transfer of shares. Section 58 provides for the procedure to be followed by a company to reject a transfer of its share.
Like for any valid transfer the free will of the parties is important, similarly for the transfer of shares both the parties must be willing to execute such transfer deed and such transfer must not be coerced. But what happens when such a transfer is falsified or carried out without the knowledge of the actual shareholder. In this article we will be discussing the Forged Transfer of shares in detail.
Topics Covered in this article
Meaning of Forged Transfer
When a property is transferred from one person to another through an instrument on which the signature of either of the parties is forged or fabricated then such transfer is known as a “Forged Transfer” and the instrument through which such transfer is carried out is known as the “Forged Instrument.” In such a transfer, the original shareholder has no knowledge of the transfer of his shares. The transferee can then obtain a share certificate in his name from the company. A share certificate is a written document signed on behalf of the company and issued as a receipt indicating the valid transfer of shares from one person to another. If a person loses his/her share certificate then they can request the company to issue another share certificate to them for the same number of shares. It is important that every person in possession of a share certificate must take its proper care and keep it at a safe place.
Illustration: For a better understanding, let us understand the concept of ‘Forged Transfer’ with the help of an illustration. Suppose, Mr. Dave has purchased 200 shares of a company for Rs. 50 each. Mr. Dave is therefore a registered shareholder of the company. Upon the purchase of these 200 shares the company issued a share certificate to Mr. Dave as a proof that the transfer is a valid transfer and Mr. Dave is a shareholder of the company holding 200 shares. Now, by mistake Mr. Dave misplaced the share certificate and it was found by another person named, Mr. John. Now, rather than returning the share certificate back to Mr. Dave, Mr. John decided to execute a transfer deed in his name by forging Mr. Dave’s signature.
After furnishing the forged instrument for the transfer of shares to the company, Mr. John succeeds in getting himself registered as a shareholder and receives a share certificate from the company. Although, the share certificate issued to Mr. John by the company is valid but the transfer of shares is null and thus no ownership of shares is transferred to Mr. John in real sense. Further, Mr. John sells those 200 shares to Ms. Ria by fraud who is an innocent purchaser and is acting in good faith without noticing Mr. John’s fraud. The company then registers Ms. Ria as a shareholder of the company and issues a share certificate to her in respect of the shares purchased by her. Although the share certificate is with Ms. Ria now and she is receiving the dividend from the company, she is not the original owner of those 200 shares. The original owner i.e., Mr. Dave can claim his rights over the shares from the company and the company will be liable to Mr. Dave and Ms. Ria. The shares will be transferred back to Mr. Dave and damages will be paid by the company to Mr. Dave and Ms. Ria. On the other hand, Mr. John, will be liable to pay the damages to the company for committing such fraud.
The wrongful or deceitful intention of the person forging the documents is of paramount importance. If a person transfers some shares thinking they are his own then the person would not be liable for the same. In the case of Venkat Narayan v/s State of Andhra Pradesh, the court was of the view that if any act is said to be a theft but lacks dishonest intent of the person committing such act, then theft cannot be held to have been committed.
If the shares are held jointly by two or more persons, then in that case, all the people must have given their approval for the transfer of shares. Even if one of the parties’ signatures is forged the transfer would be considered null.
Is Forged Transfer a valid transfer?
The answer is no. The transfer of shares takes place with a valid transfer deed. A transfer deed is a binding contract between two parties and like any other contract it can be enforced in the court of law. Therefore, all the elements of a valid contract should be present in a transfer deed. One such essentials of a valid contract is free consent of the parties performing it. In a forged transfer of share, there is no consent of the original shareholder at all. Therefore, absence of consent of the original owner of the shares makes this transfer null and therefore no title is conferred on to the transferee. Such transfer is void-ab-initio i.e., invalid from the very beginning. As a result, there is no legal transfer of ownership to the transferee even though such transferee acquires a valid share certificate from the company and gets his name registered as a shareholder of the company.
But this type of forged transfer is only possible in case of physical transfer of shares when a share certificate is issued in favor of the shareholder. With the advent of Demat account, all the transactions take place online and therefore there can be no theft or forgery of physical share certificates. Trading in shares through a Demat account is therefore a better and secure method as compared to the traditional method of dealing in shares.
Position of Parties in a Forged Transfer of Shares:
There are three parties involved in a share transfer:- the ‘Transferor,’ the ‘Transferee’ and the ‘Company’ whose shares are being transferred. But in the instance of a forged transfer there is no transferor, instead there is an original shareholder whose shares are being transferred without his knowledge. The other two parties remain the same.
Also, in certain circumstances the transferee transfers the shares to another person who is not aware of the fraudulent intentions of the transferee. Then in that case, such person also becomes a party to the forged transfer of share and is known as an ‘Innocent purchaser.’
The person whose shares are being transferred without his consent is known as the ‘Original shareholder.’ Even though his shares are being transferred to another person through a valid share certificate and his name is struck off from the register of the company he still remains the true owner of those shares. Upon knowledge of such transfer, he can claim his rights back from the company and the company is liable to do the same. An original shareholder has the right to-
- Instruct the company to put his name back in the register as the shareholder
- Claim the dividend which was not paid to him as a result of the forged transfer
In the case of People Insurance Co. Ltd. v/s Wood and Co. Ltd. it was held that a forged transfer of shares is void ab initio and therefore the original shareholder remains the owner of the shares. There is no transfer of rights to another person and the original shareholder can claim those rights back from the company and even compel the company to put his name back in the register as a shareholder.
The company is liable to compensate the original shareholder for any loss suffered by him due to the forged transfer of his shares.
The person who transfers the shares in his own name through a forged instrument is known as the ‘Transferee.’ Such a transferee has no legal right over the shares even though he has a valid share certificate issued to him by the company. No matter how genuine the share certificate is, it does not confer any title on the transferee.
After getting the shares transferred in his own name the transferee either keeps the shares with himself and receives the dividend from the company or he passes it to another person for a consideration. If the shares are with the transferee, then the company on the orders of the original shareholder cancels his share certificate and transfers the shares back to the original shareholder by issuing a certificate in his name but if the transferee has already sold the shares to a third person then the company can claim damages from him to compensate the third party who purchased those shares in good faith.
In the case of Sheffield Corporation v/s Barclay, the transferee who fraudulently transfers a share in his name and receives a share certificate is obligated to compensate the company against any responsibility it may have to the original owner of the shares whose name was removed from the register of shareholders of the company.
Therefore, the transferee must not obtain a share certificate from the company on a forged transfer of share to protect himself from paying any damages to the company.
If upon furnishing a forged instrument by the transferee the company transfers the shares of such transferee to a third person without any due diligence then the company is also held to be liable. In the case of Barton v/s North Staffordshire Railway Corporation, it was held that it is the responsibility of the company to reinstate the original shareholder’s name in the company’s shareholders register in case his shares were transferred to another person through a forged instrument and pay him the dividend for the interim period which would have been paid to him if such forged transfer was not carried out.
In another case there is a further transfer of share by the transferee to a third person. Therefore, the court held that the company is also liable to pay the compensation to such third person who acted in good faith and is innocent. The company can however, recover such compensation from the person who fraudulently transferred the shares in his own name.
To avoid such kinds of wrongful acts, the company before transferring the shares of a shareholder to another person, sends a ‘transfer notice’ to the shareholder seeking his approval for the transfer of such shares. The shareholder has to give his approval within a specific period of time and if the shareholder does not send any reply to such notice, it would be considered that the shareholder has no objection from the transfer. However, in such a scenario, the shareholder can claim his shares back after the transfer has been performed.
In the sequence of forged transfer, the innocent purchaser is also the ultimate purchaser. Even though the buyer behaved in good faith, he or she did not receive any ownership right of the shares. He does not receive any title because forged transfers are null and void and no legal transfer of rights may result from such a transfer. However, if the purchaser acted in good faith and had no knowledge about the fraudulent intentions of the transferee or the seller in this case, then he is eligible to get compensation from the company.
In the case of Balkis Consolidated Company v/s Tamkinson; it was held that as the innocent purchaser acted in good faith and has a valid share certificate issued by the company the company cannot deny his title. Therefore, the company can either register him as a shareholder or pay him compensation for the loss suffered by him.
In another case of Kaushalya Devi v/s National Insulated Cable Company of India, the court was of the view that even though the purchaser was unaware of such fraud and has purchased the shares acting in a bona fide manner then also he is bound to return the shares to the original owner.
Punishment as per the Companies act, 2013:
Section 57 states that if any individual impersonates another person with the intent to fraudulently acquire the shares of that person or even seeks to acquire such shares or obtains the money that is supposed to be received by the original shareholder then that person is subject to the penalties given under this section which is:-
- Imprisonment for not less than one year but not exceeding three years, and
- Fine which shall not be less than one lakh rupees but not more than five lakh rupees.
Transfer of shares through a forged instrument and without the consent of the original shareholder is a White Collar Crime. In India, there are strict penalties for committing any crime to deceit a person for one’s own gains or profits. Like in all other white collar crimes, presence of wrongful intention of the person committing the crime is also necessary in case of forged transfer of shares. Any transfer done in negligence would not attract the penalties as prescribed under section 57 of the Companies act, 2013. In earlier times, theft and unlawful transfer of shares used to be fairly easy when share certificates were issued as a receipt for the transfer of shares.
To avoid the burdensome paperwork and to ensure the secure transfer of shares, online share trading began in 1996 in India. It eliminated the risks associated with the wrongful transfer of shares and made trading more secure. The physical transfer of shares through share certificates completely stopped in the year 2019, and no corporation can currently transfer shares in physical form. This has prevented forged transfer of shares to a large extent.