Forfeiture of Shares Under Companies Act, 2013 with various illustrations by Ankita Mamtani


Introduction: What is Share Forfeiture ?

Share forfeiture is the process by which the directors of a company cancel the power of a shareholder if he does not pay his call money when the company demands for it.

The company will give 14 days' notice; after 14 days if the shareholder does not pay the company will forfeit his shares and strike his name from the register of shareholders.

The company will not repay the funds received from the shareholder. In order to do a share forfeiture the Articles of Association of the company should contain a provision for that.


For Example:

Suppose Mr. A buys 100 shares of a company but for the time being the company asks him to pay only 50% of that amount. The company makes a deal with Mr. A that whenever needed, the rest of the money will be asked for. Some months later when the company asks for the remaining 50% amount, Mr. A says that he is incapable of paying. The company gives him some more time to pay but he still can't pay. The company seizes his shares and he no longer is a shareholder of the company. He loses the 50% he had already paid. This seizure of shares is called share forfeiture.

Forfeiture of share issued at par:

Share capital A/C Dr. (a)

                                        To share forfeiture A/C (b)

                                       To share allotment A/C   (c)

                                       To share calls A/C           (d)

Note  

         (a) = No. of forfeited shares × Amount called per share

         (b) = Amount already paid by the shareholders on the shares

         (c) = Arrear on the allotment

         (d) = Arrear on the calls

For example: The directors of Dhungana Ltd. company forfeit 500 shares of Rs. 100 each for non-payment of Rs. 20 on first call and Rs. 30 on final call. The application and allotment money were paid. Required: entry for forfeiture of shares.

Share capital A/C   Dr. (500×100)                

                   50,000

        To Share forfeiture A/C (500×50)                      

                   25,000

        To Share first call A/C (500×20)                      

                   10,000

           To Share final call A/C (500×30)                      

                   15,000

Although forfeiture usually occurs due to non payment of calls, it can also be made for any other reason specified in the company’s articles. A company can forfeit shares according to the provisions given in its articles. If the articles do not contain such provisions, then regulations 29-35 of Table A of the Companies Act, apply. The provisions regarding calls and forfeiture are discussed in the following sub-sections.

As explained above, the company may call up the unpaid amount from the shareholders from time to time. The board is required to pass a resolution for making a call. The articles of the company have provisions regarding calls. If nothing is mentioned in the articles, then the provisions laid down in Articles 13-18 of Table A are applicable while making calls. These are listed below:

  • The amount called must not be more than one-fourth of the face value.
  • The dates of two consecutive calls must differ by at least a month.
  • A minimum of 14 days’ notice must be given to the members.
  • The notice must mention the time, place of payment and the amount called.

If a person fails to make call payment by the due date, then he / she may be liable to pay interest thereon. Further, the Board may also accept all or part of the money uncalled and unpaid upon the shares from a member. This is called calls in advance.

Illustration 1:

The shares of a company have a face value of Rs 100. Out of this, the shareholders have to pay Rs 25 on application and Rs 35 more on allotment. Further, the board of directors passes a resolution to make the first call of Rs 20, which is duly received by the company. Thus, on this share, a sum of Rs 80 has been called and paid up. However, a sum of Rs 20 still remains uncalled on the share. The company may call up this amount any time in the future.


On making a call if a member defaults in making payment by the due date, then the Board may send him / her a notice informing him / her that the payment must be made by a later date or else the shares will be forfeited. This new date cannot be earlier than the expiry of 14 days from the date of service of the notice. If the defaulter fails to make the payment even at such date, then the board will pass a resolution to forfeit the shares. The forfeited shares are usually reissued by the company. A valid forfeiture will have the following implications:

  • The defaulter ceases to be a member of the company.
  • The defaulter continues to be liable for all amounts which, at the date of forfeiture, were payable by him / her to the company in respect of the shares.
  • The defaulter is not entitled to a refund of the amount paid up by him / her in respect of the forfeited shares.

A valid forfeiture must be in accordance with the articles (or Table A) and must be made bona fide for the benefit of the company.

Illustration 2:

Mayur Ltd. has issued 10,000 equity shares of face value Rs 100 each to the public. The company duly receives Rs 10 per share on application, Rs 20 per share on allotment and Rs 30 per share on making the first call from Ketan who has been allotted 300 shares in the company. However, when the company makes the final call of Rs 40 per share, Ketan failed to pay the amount within the stipulated time and the company forfeits his shares. Thus Ketan ceases to be a member of the company and will not be refunded the money paid by him (Rs 60) in respect of the forfeited shares.

Once the shares are forfeited, they may be either cancelled or reissued to some other person. The person who purchases the forfeited shares becomes a member of the company. His / her title is not affected by any irregularity in the proceedings with reference to the forfeiture, sale or disposal of the share. While reissuing the forfeited shares the company should fix the price of reissue such that the total amount received in respect of the shares (i.e. price of the reissued of shares + amount paid by the previous owner in respect of the shares) is not below its face value. This is done to ensure that reissue does not amount to issue at a discount or the provisions of section 79 would become applicable.

Illustration 3:

In the previous Illustration, Mayur Ltd. reissues the forfeited shares to Pragya. The minimum price at which the shares can be issued to her as fully paid are Rs 40 since the amount of discount cannot be more than the amount forfeited (Rs 60) by Ketan. If the company issues the shares to Pragya for a price less than Rs 40, say for Rs 30 then the total amount recovered in respect of each share will be Rs 90 (Rs 60 received from Ketan + Rs 30 received from Pragya). But the face value of the share is Rs 100, so selling the share to Pragya for a price below Rs 40 amounts to issue of shares at a discount.

In case the previous shareholder (whose shares had been forfeited) requests the company to cancel the forfeiture, the board can nullify the forfeiture if it thinks that this is in the interest of the company. However, annulment of forfeiture can be done only if the forfeited shares have not been cancelled or reissued to someone else. The directors must pass a resolution to cancel forfeiture and the previous shareholder has to pay all the calls due with interest.

Illustration 4:

Continuing with the previous illustration, after the shares are reissued to Pragya, Ketan applies to the company to cancel the forfeiture and reissue the shares back to him. He pleads that he has resolved his financial problems and can now pay the call on shares along with any interest due on the calls. The company cannot accept his application now because the forfeited shares have been reissued to Pragya.

A lien is defined as “A legal instrument giving a person, business, etc. the legal right to take, hold or sell another person's property for debt or restitution of some sort.” - http://wiki.answers.com/Q/What_is_a_lien (Date: 21-02-2010, 13:01) If the articles of a company so provide or if the company adopts Table A of the Companies Act, 1956 , then it can have lien on partly paid shares for the uncalled amount as well as all debts payable by the shareholder (Article 9, table A). Thus, a company can sell shares held by a person for unpaid debts by giving him/ her 14 days notice (Article10, table A).

Lien appears similar to forfeiture because in both cases the company can take the shares back from the member. However, the two acts differ in a number of ways:

Surrender refers to an intentional and voluntary giving up of shares by the shareholder to the company. The Companies Act, 1956 does not have provisions regarding surrender of shares. However, if the articles of the company allow a shareholder to surrender the shares, then the company can accept such surrender but only in case where forfeiture is unavoidable. Thus, where otherwise the shares are bound to be forfeited by the company, surrender may be allowed to reduce procedural difficulties. Usually, partly paid

shares are surrendered by members who fail to pay the amount due on calls or otherwise in respect of the shares. But even fully paid shares may be surrendered if they are to be exchanged for new shares having the same face value.

Illustration 5:

Tarmeen holds 100 shares in Amrit Motors Ltd. When the company makes its last call on shares, Tarmeen is not in a position to pay the money due on the shares. Stating this fact she applies to the company to allow her to surrender her shares. The articles of the company allow it to accept the surrender of shares. Thus, Amrit Motors Ltd. can accept Tarmeen’s request for surrender of shares

 
Author
Ankita Mamtani
She can be reached at 
mamtaniankita@gmail.com

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