Meaning
A transaction remains legally binding and effective unless and until it is set aside or annulled by one of the parties or a court order. In equity and corporate transactions, a voidable transfer arises from situations involving duress, misrepresentation or mistake. It governs the period during which the transferee holds valid title before any rescission is exercised.
The status of being voidable stops applying if the party with the right to rescind ratifies the transaction or if a third party acquires the shares in good faith.
Right to Rescind
The power to cancel the transaction belongs exclusively to the injured party whose consent was defective. In executing a voidable transfer, the transferor can choose to confirm the trade or take legal action to recover the shares. This option must be exercised within a reasonable time to prevent the loss of the right.
The delay can otherwise be interpreted as an implied confirmation of the sale.
Registry Procedure
The registrar must maintain the transferee’s name on the register of members until a formal notice of rescission is delivered. During the life of a voidable transfer, the transferee exercises all the voting rights and receives dividends as the legal owner. The register is only updated once the transaction is cancelled, either by mutual agreement or judicial decree.
Third Party Protection
A structural limit on the right to rescind occurs when the shares are sold to an innocent buyer.
