23 March 2018
Facts of the Case
Shareholders of Cadbury Schweppes PLC and Unilever PLC (‘the Companies’) were defrauded when fraudsters procured a false change of address on the members’ Register and then obtained duplicate share certificates by stating falsely that their share certificates had been lost. Thereafter, they forged transfers into other names chosen by the fraudsters so that they received dividends. Finally the fraudsters sold ‘their’ shares and were paid the sale proceeds in the usual way.
To perpetrate this fraud, two fraudulent documents had to be produced.
- A share certificate in the name of the fraudster; and
- A transfer to the innocent incoming shareholder.
Lindsay J identified, correctly, that this fraud relied on a company’s procedure for verifying a member’s change of address not being complied with due to the inertia of a shareholder who failed to respond to a letter seeking to verify a notice of change of address.
In this case, the Companies reimbursed (without any shareholder having to take proceedings) the original shareholders for lost dividends and purchased replacement shares in the open market. The Companies sought to recover their outlay from the stockbrokers.
The Companies’ claimed an implied indemnity against the stockbrokers, relying on the principle enunciated by Lord Halsbury in Sheffield Corporation v Barclay  AC 392 when he approved the proposition set out in Dugdle v Lovering LR10 CP 196 that:
“It is a general principle of law when an act is done by one person at the request of another which act is not in itself manifestly tortuous to the knowledge of the person doing it, and such act turns out to be injurious to the rights of a third party, the person doing it is entitled to an indemnity from him who requested that it should be done.”
The implied indemnity was accepted, but the stockbrokers challenged to whom it was owed, maintaining it was owed to the shareholders as certified by the share certificates which stated:
“This is to certify that the under-mentioned is/are the registered holder(s) of ordinary shares or [the appropriate sum] … each, fully paid, in [the company] as stated below, subject to the memorandum and articles of association of the company.”
On that basis, the stockbrokers asserted an estoppel against the Companies arguing that the Companies could not deny the representations that the owners of the false shares were the fraudsters.
The share certificates and the stockbrokers’ actions in selling the shares established the representations made by the Companies and the stockbrokers reliance upon it. Detriment suffered by the stockbrokers loss was another matter, as the Companies had suffered the loss (by compensating the original shareholders) while the stockbrokers had not suffered any such loss. Lindsay J decided that the correct approach was to look at what position the stockbrokers would be in if the Companies could resile from the statements in the false share certificate that the fraudsters were the shareholders. In that event the stockbrokers would become liable to the Companies on the implied indemnity.
The Court held that the stockbrokers’ estoppel argument succeeded, thus putting the stockbrokers in the position they would have been in had the representation in the false share certifications been true.
Points of Interest
Had Cadbury Schweppes or Unilever PLC not acted so sympathetically to the original shareholders, and the duped individual shareholders had instead brought claims against the stockbrokers and the Companies, the stockbrokers’ estoppel argument would not have stood up against the original shareholders.