The pledging of shares

Abstract

The significance of the concept of pledging of shares in our law and the provision of adequate legislation to regulate its constitution, termination and effects, lies in the fact that it has opened new venues for solving liquidity problems for shareholders by borrowing money on the security of their shares. The creditor, on the other hand, is protected because in default of payment he can enforce his security according to the provisions in section 122 of the Company's Act, 1995. In this thesis I will not go deeply into the essential elements of pledge and the basic cardinal principles that are found in the Civil Code, dealing with the general notion of pledge. This is because these concepts have been amply tackled by Dominic A. Cassar in his LLD. thesis, The Institute of Pledge in Maltese Law: a proposal for reform 1986. Therefore I will concentrate on the Company's Act provisions dealing with pledge on shares and only refer to Civil Code for the purposes of comparing and contrasting the provisions of the former with the latter and when it is necessary to refer to the traditional concept of pledge, in order to better comprehend the concept of pledge on shares. It would perhaps be appropriate to consider the raison d'etre of the provisions for the constitution of pledge on shares; how these will affect the most directly interested parties within the Maltese societal structure for only against a broad background would the expounding of doctrine in its regard acquire relevancy and consistency. I have had already occasion above to hint, in an incidental manner, at one of the possible reasons for the creation of an institute of pledge on shares, namely the ability to generate cash, or rather liquidity within a commercial scenario of cash flow problems resulting in a constraint on capital investment for development. Of course, there is always the danger that the facility will engender cash which goes into domestic expenditure. However, eve·n so the effect should be beneficial in promoting elasticity within a mainly stagnant world market, living under the threat of deflation. Closely allied to this is the possible expansion in the share market. This could be achievable through making the investment on shares potentially easier to liquidate into cash. The investor therefore becomes more confident in considering the purchase of shares in a company (or even, as I shall endeavour to demonstrate later, in a partnership) as safeguard for a rainy day. This has to be examined in a Maltese context where the stock exchange is only of very recent origin and only a marginal number of companies are being quoted on the stock exchange. From the point of view of companies, these can also benefit through reasonably better prospects of expansion since issue of further share capital for expansion will, predictably, be taken up more quickly and readily by would-be investors. Basically there are three interested parties in a pledge on shares transaction, namely the pledger, the pledgee and the company or partnership. The pledger is the credit seeker. The pledgee could possibly be a private individual or individuals, the bank or a financial institution. Of these, the banks and financial institutions will probably play the major role. It is not that there are no loan transactions in Malta conducted between private individuals, However, the bank and financial institutions play the major role in this context because they have the money, they know their clients and they are in a position to check and investigate the financial and commercial stability of the company. Nonetheless, considering that only a few companies in Malta have a long enough track record to inspire confidence in their present and continued performance, the position is not a happy one. However, with the establishment of the Stock Exchange and with a number, albeit very small, of Maltese companies going public, the situation is gradually changing and it is forecast, with some trepidation, that trust in shares as an investment and guarantee for the constitution of a pledge will gradually consolidate. Finally, if companies in Malta aim at taking full benefit of the provisions on pledge in the Companies Act, they should endeavour to restructure themselves to present day market exigencies in such a way as to inspire confidence in the Maltese investor and possibly to be quoted on the Stock Exchange.