UK: England and Wales: a representation that shares are fully paid

Judgment was given yesterday by HHJ David Cooke in Blomqvist v Zavarco Plc & Ors [2016] EWHC 1143 (Ch). The decision is interesting and noteworthy because of what is said about the representation made by a company when its shares are traded on an exchange: that they are fully-paid. To quote the trial judge (at paras. [86], [89] and [90]):

In modern markets, share transactions are likely to be uncertificated. The reality of the market is that [it] is assumed by participants that all listed shares are fully paid. Some will know that it is a condition of listing that shares must be fully paid. Others will give no thought to the point, because the concept of the unpaid share is wholly alien to the system of public share markets.

It is in my view wholly necessary that market participants should be able to assume that shares are fully paid unless specifically informed otherwise. Given the way in which market transactions are now conducted, it is in my judgment unsatisfactory to provide this assurance by a legal mechanism (estoppel by representation) that derives from the conduct of individual transactions between identified persons ... In the absence of statutory protection however, the available legal mechanism must be interpreted and adapted to modern conditions.

In my judgment, a company that applies to have its shares or other securities listed on an exchange, or traded through a system such as Crest, which in either case requires that the securities be fully paid, is to be taken as thereby representing to potential acquirers of its shares that they are fully paid. That representation should be taken as relied upon, unless the company proves the contrary, by any purchaser or transferee who buys or acquires the securities with knowledge that the shares are so listed or traded. An acquisition through the market would clearly demonstrate such knowledge. But an off-market purchaser is very likely also to have the requisite knowledge".