Prohibited Transactions DADA AFA

The ruling in Trevor v Whitworth and its codification in the

Companies Act save exceptions. What is the rationale behind
these prohibitions? Are there any exceptions? What safeguards
have been put in place to ensure that the prohibitions are not
defeated.
Answer
The rule in Trevor v Whitworth states that a company is not allowed to
purchase its own shares even if there is an express power to do so in the
Memorandum of Articles as this would amount to a reduction in capital.
There are two of such types of prohibited transactions in shares:
a. Totally prohibited and
b. partially prohibited transactions.
Section 56(1) of the Companies Act prohibits various transactions in
shares but in several subsequent sections the Act makes exceptions to
some of the prohibited transactions.
Section 56(1) of the Act provides that:
1. The company shall at no time alter the amount remaining payable
on its shares-section 56(1)(a).

2. The company shall not release any shareholder or former

shareholder from any liability on the shares-section 56(1)(b).

3. The company shall not alter the number of its shares-section 57.

4. Under section 56(1)(c), the company shall not provide financial

assistance directly or indirectly for the subscription or purchase of
its shares or the shares of a holding company.

5. By section 56(1)(d), the company cannot acquire by way of

purchase or otherwise any of its issued shares or shares of its
holding company.

Totally Prohibited Transactions in Shares

These are:
1. A company shall not alter the amount remaining payable on its
shares
Prohibited Transactions DADA AFA

2. A company shall not release any shareholder or former

shareholder from liability on the shares.
Rationale
If one owes on his/her shares, the company should not be able to alter the
amount. It will be unfair and burdensome to a shareholder for the
company to increase the amount that she owes, or that remains payable
on her shares.
The company would have short-changed itself and deprived itself of
potential additional working capital as well as enhanced finance stream to
meet its liability, if it reduces the amount payable on its shares.
The same rationale applies to prohibiting the release by a company of the
shares of a shareholder or a former shareholder from liability.
Partially Prohibited Transactions
The following are partially prohibited transactions in shares:
1. Altering the number of company’s shares.
2. Providing financial assistance, directly or indirectly, for the
subscription or purchase of a company’s shares or the shares of
the holding company.
3. The company acquiring, by way of purchase or otherwise, any of
its issued shares or any shares of its holding company.
Altering the number of a company’s shares
Under section 57(1), the company may by altering its regulations
increase or decrease the number of shares.
The company must alter its regulations before it can issue or create new
shares-Section 57(1)(a).
Rationale
There is a good reason for this prohibition. If subscribers, in their own
wisdom, have a set ceiling on the number of shares in the Regulations,
this ceiling must not be increased or lowered without first amending the
Regulations.
Exception
The company may reduce its shares by cancelling shares which remain
unsold. i.e. it may cancel shares which have not been taken or agreed to
be taken by any person or by consolidating its existing shares, whether
issues or not, into a smaller number of shares-section 57(1)(b).
Providing financial assistance, directly or indirectly, for the subscription or
purchase of shares.
Prohibited Transactions DADA AFA

The company shall not provide financial assistance directly or indirectly

for the subscription or purchase of its shares or the shares of a holding
company.
Rationale
This prohibition is in furtherance of the objective capital conservation by
the company, and it affirms the rule in Trevor v. Whitworth.
Section 58 of the Act permits the following transactions in shares
which, at first blush, may seem like financial assistance.
They include;
1. The payment of commission and brokerage fees for the
subscription or procuring of shares-section 58(a)
Rationale: Commission levels are set at 10% or lower; and the
idea is to serve as inducement or motivation for one subscribe for
shares. This transaction is permitted where it is authorised by the
Regulations and does not exceed 10% of the price at which the
shares are issued or such lesser rate as may be specified in the
regulations.
2. Lending money by a money-lending institution in its ordinary
business to a customer who uses the funds to subscribe for or to
purchase its shares-section 58(b)
Rationale: Where the lending of money is part of its ordinary
business, the company may lend money in its ordinary course of
business notwithstanding that the money may be used to
subscribe or purchase the shares of the lending company or its
holding company.
3. Lending money to the employees for the purchase of its shares-
section 58(c) and (d)
Rationale: This is done to motivate and increase productivity of
the employees since their interests are at stake.
4. Applying dividends for the purchase of new shares-section
58(e)
Rationale: This is used to discharge any liability on his shares or
to repay money borrowed for the purpose of subscribing shares.

Company acquiring, by way of purchase or otherwise, any of its issued

shares or any share of its holding company
The company cannot acquire by way of purchase or otherwise any of its
issued shares or shares of its holding company.
The reason behind this a company cannot act as its own shareholder by
repurchasing shares absorbed by the company.
Prohibited Transactions DADA AFA

Sections 59 to 63 make significant inroads to this prohibition. In

particular, if company’s Regulations authorise, the Act permits
redemption, purchase, voluntary transfer and forfeiture of shares.
Section 59 is to the effect that the company may undertake any of the
following but must comply with sections 60 to 63.
a. purchase its own shares;
b. acquire its own shares by a voluntary transfer to it or to nominees
for it provided that no shares shall be redeemed, purchased or
acquired by the company so long as there is an unpaid liability
thereon.
c. Where authorised by its Regulations a company may forfeit any
shares issued with an unpaid liability for non-payment of any sums
due and payable thereon.
The law in Section 60(1) of Act 179 is that notwithstanding any
provision in the Regulations, a company shall not redeem any of its
redeemable preference shares except,
(a) out of a credit balance on the share deals account referred to in
section 63 of this Code or out of transfers to that account in the
manner referred to in that section from income surplus as defined in
section 70 of this Code; or
(b) out of the proceeds of a fresh issue of shares made for the purposes of
the redemption not more than twelve months before the date of
redemption.
By section 61 of Act 179 a company is allowed to purchase its own
shares provided that:
(a) shares shall only be purchased out of a credit balance on the share
deals account referred to in section 63 of this Code or out of transfers to
that account in the manner referred to in that section from income surplus
as defined in section 70 of this Code;
(b) redeemable preference shares shall not be purchased at a price
greater than the lowest price at which they are then redeemable or will be
redeemable at the next date thereafter at which they are due or liable to
be redeemed;
(c) no purchase shall be made in breach of section 62 of this Code.
Voluntary transfer
A company may acquire its own shares by voluntary transfer to it or
nominees for the company-section 59(1)(c).
A holder of a share is at liberty to transfer it. If the company is private,
there may be restrictions on the right to transfer. Existing shareholders
Prohibited Transactions DADA AFA

may be given the option of first purchasing the shares; and the directors
may resolve to accept or refuse a transfer to someone else.
Forfeiture of Shares
Where authorised by the Regulations, a company may forfeit any shares
issued with an unpaid liability for non-payment of any sums due and
payable thereon-section 59(2).
A company may also acquire its shares by forfeiture of shares already
issued by unpaid for despite calls having been made on them-section
59(1) and (2). Section 59(2) of the Act provides that where authorised
by its Regulations, a company may forfeit any shares with an unpaid
liability for non-payment of any sums due and payable thereon.
If therefore, under section 58(c) or (d), an employee of a company,
obtains a loan from a company to buy shares with the term that the sum
advanced be repaid by a specified amount monthly and this is not done, if
Regulations permit forfeiture, it is within the company’s right to forfeit the
shares and treat the employee in question as no longer owning those
shares.
Case for reference is Adehyeman Gardens Ltd v. Assibey, per Sophia-
Akuffo JSC.
Sanctions, s. 56(4).

In the event of any breach of section 56(1)(a) and (b), the purported
alteration or release shall be void and every officer of the company who is
in default shall be liable to a fine not exceeding one hundred pounds.

If such breach is of section 56(1)© and (d)

(i) the transaction concerned shall, except in favour of a bona fide

purchaser or seller of shares without knowledge of the breach, be
voidable by the company and any payment made by the company in
respect thereof shall be immediately repayable with interest at the rate of
five per centum per annum, or such higher rate as the Court may think
fit to order.

(ii) whether or not such transaction is avoided, every officer of the

company who is in default shall be liable to a fine not exceeding one
hundred pounds or twice the amount of any provision or payment
made by the company in respect of such transaction, whichever is
the greater.