Archer and another v Fabian Investments Limited and others

An agreement to assign shares by way of deposit as security can create an equitable mortgage and pass a beneficial interest, even without a formal assignment or the creditor’s physical possession. If the agreement is specifically enforceable, equity treats the beneficial interest as transferred by way of security. On default after a fixed repayment date, the mortgagee may exercise the implied power of sale. The purchaser’s legal title remains subject to the company’s articles: where registration is required before a transfer is recognised and given effect, complete legal title is not acquired until registration. A court must scrutinise a claim for declaratory relief on its merits; defendants’ non-participation does not justify judgment by default.

The proceedings, commenced in 1994, concerned shares in Petroleum Products Limited. The individual plaintiffs sought a declaration that they were the beneficial owners. On a preliminary issue, the Supreme Court held on 26 February 2009 that they held the legal title but not the beneficial ownership, and dismissed the action. On 3 April 2013 the Court of Appeal of the Commonwealth of the Bahamas held that Fabian Investments Limited owned the shares both legally and beneficially and dismissed the appeal. The appellants appealed to the Privy Council. The central issues were whether a 1988 rescheduling agreement created an equitable mortgage with an implied power of sale, and whether registration under the company’s articles was required to transfer legal title.

The Board, in a single judgment delivered by Lord Reed, unanimously dismissed the appeal, but varied the declaration so that it referred only to Fabian’s beneficial ownership.

1. Declaratory relief and fraud. The court could not grant a declaration of beneficial ownership by default merely because the defendants had not participated. It had to be satisfied that the order was proper. The allegation that the 1986 mortgage deed had been fraudulently altered was a rejected finding of fact with which the Board had no proper basis to interfere. In any event, the 1988 rescheduling agreement governed the issues on appeal.
2. Equitable security. The agreement by which the individual plaintiffs agreed to assign their shares by way of deposit created an equitable mortgage with an implied power of sale, applying the principle in Stubbs v Slater [1910] 1 Ch 632 at p 639. The absence of a formal assignment and Gulf’s lack of direct physical possession did not prevent that result. Under Palmer v Carey [1926] AC 703 at pp 706–707, a specifically enforceable contract for valuable consideration to transfer or charge property passes a beneficial interest by way of security.
3. Sale of the shares. After the fixed repayment period had expired, Gulf was entitled to realise its security by selling the shares. The notice objection therefore failed. Gulf did not require legal title or physical possession to exercise the power of sale. The shares were not Petroleum’s assets, so the sale was by Gulf; Mr Maynard’s involvement was as Gulf’s agent, not as receiver of Petroleum’s assets.
4. Legal title. The purchaser took subject to Petroleum’s articles. Those articles required the transfer to be entered in the register and the certificate to be surrendered and cancelled before the transfer could be recognised and given effect. There was no evidence of registration, and the Registrar General’s receipt of annual statements did not verify their accuracy. The individual plaintiffs therefore remained the legal owners. The distinction between an unregistered transfer and a legal estate in shares was supported by Société Générale de Paris v Walker (1885) 11 App Cas 20 at p 28.

• Privy Council — [2017] UKPC 9, 10 April 2017: appeal dismissed, with the declaration limited to Fabian’s beneficial ownership.
• Court of Appeal of the Commonwealth of the Bahamas — 3 April 2013: held that Fabian owned the shares both legally and beneficially and dismissed the appeal.
• Supreme Court of the Bahamas — Adderley J, 26 February 2009: held that the individual plaintiffs held the legal title but not the beneficial ownership and dismissed the action.