Definition: Forfeiture of Shares or Share forfeiture is a process in which the company’s directors annul (cancel) the rights of a shareholder, who has not paid the call money due on time when the company demands and, even after receiving the notice for such non-payment.
Conditions for Forfeiture of Shares
Notice to the shareholder
According to Regulation 28 of Table F, prior to the forfeiture of any shares, the members who default in the payment of calls must be issued a notice, requiring them to pay the unpaid sum of shares along with the interest. Further, the notice needs to specify the day on or before which, the payment has to be made and also specify that in case of default in payment, it may lead to forfeiture of shares.
Further, as per regulation 29, the period of notice should not be less than 14 days, to pay the unpaid sum, right from the date on which the notice is received.
Here it must be noted that any kind of irregularity be it in the contents of notice or in service of notice would invalidate the forfeiture.
Authorization by Articles of Association
According to Regulation 29 of Table F, the shares can be forfeited by the directors only when the person defaults in the payment of shares or installment of shares. After that, the company’s directors are authorized to remove his name from the Register of Members, as well as to treat the amount, previously paid by him on the application or on the allotment, forfeited to the company. Hence, if the company’s articles of association do not provide for it, then forfeiture is void.
In general forfeiture of shares can be made for non-payment of shares, however, the company’s articles of association may state some other grounds on which shares are forfeited.
Resolution of the Board
According to Regulation 30 of Table F, in case if the requirements of the notice are not duly complied with, the shares may be forfeited by a resolution of the Board of Directors to that effect. The shares so forfeited by the company may be sold or disposed of in the manner in which the Board of Directors thinks fit. Also, the forfeiture can be canceled prior to its sale or disposal by the Board of Directors, on conditions they think fit.
According to Regulation 33 of Table F, a duly verified written declaration that the declarant is the director, manager, or secretary of the company and that the shares of the company are forfeited in the manner prescribed on the date specified in the declaration acts as a valid proof of the facts given therein against all the individuals who might claim the entitlement of shares.
The exercise of forfeiture of shares must be performed bonafide i.e. in good faith, and for the benefit of the company.
Reissue of Forfeited Shares
- Once the share is forfeited it becomes available to the company for sale. The reissue of shares does not imply allotment of shares but merely a sale. Hence, no return on allotment needs to be filed with the registrar for such a reissue. Additionally, a forfeited share in the company’s hands is subject to an obligation to dispose of it, which are practically disposed of by auction.
- The company can reissue the forfeited share at any price however, the total of the amount paid by the former shareholder and the amount paid on the reissue and the amount that remained unpaid should not be less than the face value of the shares. Or else it would result in the issue of shares at a discount. Hence, the discount on reissue should not be more than the amount forfeited on such shares.
- What if the forfeited shares are reissued at a price more than its face value? Well, the excess amount is a premium and so it is required to be transferred to the share premium account.
- After the reissue of shares, the new holder becomes the company’s shareholder and his name is added to the Register of Members. Moreover, the title remains unaffected due to any irregularity in the forfeiture or sale of shares.
Annulment of Forfeiture
This means cancellation of forfeiture. At the request of the former shareholder, the Board of Directors may annul (cancel) the forfeiture of shares. for this purpose, the Board of Directors must act bonafide and pass a resolution for annulment of forfeiture.
Upon cancellation of forfeiture, the shareholder must pay all the money due on calls along with the interest and then the name of the shareholder is restored in the Register.
Effect of Share Forfeiture
- Termination of Membership: The shareholder discontinues as a member of the company in respect of shares forfeited.
- Liability: There is no change in the liability for unpaid calls even after the forfeiture takes place as an ordinary debtor of the company for a term of three years from the date of forfeiture, if it is contained in the articles of association. However, the company cannot recover the amount exceeding the difference between the amount payable on shares at the time of forfeiture and the amount received if any from the new shareholders.
- List ‘B’ contributory: In case the company liquidates within a period of one year of the forfeiture of shares, the ex-shareholder can be added on ‘List B’ of the contributories. This means that the former shareholder remains a contributory as a past member, for the liabilities incurred till the date of his membership in the firm, subject to the present member is not able to pay and the process of liquidation begins within one year from the date of forfeiture.
Conclusiveness of Forfeiture
Once the process of forfeiture of shares is completed, it is conclusive and it cannot be revoked. Therefore, the requirements of shareholders must be complete so as to result in a valid forfeiture.
Remedy to Shareholder
A shareholder can file a suit against the company for his shares forfeited in an incorrect manner or by mistake. The shareholder can sue for damages in case the forfeited shares are reissued to another person.
A word from Business Jargons
Therefore, when a shareholder, defaults in the payment of calls made on him, the company’s directors have the power to forfeit shares held by the shareholders. If the company’s articles of association permit, the Directors have the power to forfeit the shares against which calls are in arrears. The articles of association of the company state the detailed process of forfeiture of shares.