Once the minimum subscription has been reached, the shares can be allotted. Letters of Allotment are sent to those who have been allotted their shares. This results in a valid contract between the company and the applicant, who will now be a part owner of the company. If any applications were rejected, letters of regret are sent to the applicants. After the allotment, the company can collect the share capital as it wishes, in one go or in instalments called calls. If the shareholder fails to pay the calls, then it may result into forfeiture of shares. In this article, we shall study the provisions in the Companies Act, 2013 related to forfeiture of shares.
Forfeiture of Shares:
We know that the company does not require the shareholders to pay the full amount of shares in one instalment. It makes calls on them as and when the money is needed. If a shareholder fails to pay a valid call within the stipulated time, the company has two options:
(1) the company may file a suit for the recovery of the amount, or
(2) the company may forfeit the shares.
The first option is a lengthy process. Therefore, the company generally decides to forfeit such shares. The term ‘forfeiture’ means taking them away from the member. It deprives the shareholder of his property. The shares can be forfeited only if there is a provision to this effect in the articles of the company. You should note that as per Regulation 28 of Table ‘F’, shares can be forfeited only for non-payment of any call or instalment of a call and not for any other debt due from a member. However, the Articles of a company may lawfully incorporate any other grounds of the forfeiture.
Table ‘F’, which is generally adopted by the companies with respect to forfeiture of shares, contains the following rules:
- The power to forfeit shares must be given in the Articles of the company. If Articles authorize, the forfeiture shall include forfeiture of all dividends declared in respect of the forfeited shares and such dividend is not actually paid before the forfeiture of the shares.
- Shares can be forfeited only for non-payment of calls.
- The company must serve a proper notice on the defaulting member asking him to pay the amount within a fixed period, failing which the shares shall be forfeited. The shareholder must be given at least fourteen days’ notice to pay the amount, notice must indicate the exact amount to be paid. If there is a slight defect in the notice, the forfeiture will become invalid.
- The Board of directors must pass a resolution for the forfeiture of shares. If the defaulting shareholder does not pay the amount within the specified time as required by the notice, the directors may pass a resolution forfeiting the shares.
- The power for forfeiture must be exercised in good faith and for the benefit of the company. Thus, forfeiture for the purpose of relieving a friend from liability shall be invalid.
Effect of Forfeiture of Shares:
- A person whose shares have been forfeited ceases to be a member in respect of the forfeited shares.
- The liability of the person whose shares have been forfeited ceases if and when the company receives payment in full of all such money in respect of the shares forfeited. Thus, notwithstanding the forfeiture, he remains liable to pay to the company all moneys which, at the date of forfeiture, were payable by him to the company in respect of the shares forfeited.
- On forfeiture, the forfeited shares become the property of the company.
In Naresh Chandra Sanyal vs. Calcutta Stock Exchange Assn. Ltd. AIR 1971 SC 422 case, the Court held that according to Regulation 28 of Table F of Schedule I to the Companies Act, 2013, shares can be forfeited only against non-payment of any call, or instalments of a call. However, the Articles of a company may lawfully incorporate any other grounds of forfeiture. Court further held that the right of the company upon forfeiture is only to dispose of the share and use the proceeds for discharging the liability for which the forfeiture was effected, and if there is any balance it belongs to the defaulter and, cannot be appropriated by the company.
Re-Issue of Forfeited Shares:
When the shares are forfeited, they become the property of the company and, to that extent, the paid-up capital of the company stands reduced. Therefore, the forfeited shares are generally reissued by the company. The total sum paid by former holder of shares, together with amount paid on reissue and the amount unpaid on shares is not less than par value.
The forfeited shares can be reissued at any price i.e., even at discount. But the amount of discount must not exceed the amount forfeited on such shares.
The reissue is done by a resolution of the Board of directors. After the reissue, the buyer of such shares shall become liable to pay all the future calls due on shares, including the calls for which the shares were forfeited. The name of the buyer shall be recorded in the register of members and if the original shareholder has surrendered the share certificate, the same shall be transferred in the name of the buyer, otherwise a new share certificate shall be issued.
The title of the buyer shall not be affected by any irregularity or invalidity in proceedings with reference to forfeiture. It should, however, be noted that reissue of forfeited shares is a sale of shares and it does not amount to an allotment. Therefore, return of allotment need not be filed with the Registrar.
In Re. Calcutta Stock Exchange Assn. case, the Court held that if the shares are re-issued at a price more than the face value, the excess of the proceeds of sale is not payable to the former owner, if the Articles so provides.
In Naresh Chandra Sanyal vs. Calcutta Stock Exchange Assn. Ltd. AIR 1971 SC 422 case, the Supreme Court held that, where the articles are silent with regard to such surplus, the right of a company upon the forfeiture and sale of forfeited shares is to use the proceeds for discharging the liability for which the forfeiture was effected and if there is any balance, it belongs to the defaulter and cannot be appropriated by the company.
Surrender of Shares:
Surrender is a voluntary act of the shareholder under which the shares are returned to the company for purposes of cancellation. Neither the Companies Act nor Table ‘F’ provides for the surrender of shares. But the articles may provide for the surrender of the partly paid-up shares under circumstances where forfeiture seems to be justified. You must note that when shares are surrendered to the company, no amount is refunded to the shareholder. It is so, because if some money is refunded it will amount to a purchase by the company of its own shares which is prohibited by Section 67 of the Companies Act.
Surrender of shares may be allowed in the following cases if its acceptance is authorised by the Articles of the company:
- When shares are surrendered in exchange for new shares of the same nominal value, as it does not amount to any reduction of capital.
- When the circumstances are such where forfeiture is justified, because surrender is a short-cut to forfeiture.
If the surrender of shares is accepted by the company for any other reason, other than the reasons given above, it will be invalid. On a valid surrender of shares, the member ceases to be a member of the company, but his name can be placed on list of contributories. Thus, if the company is wound up within twelve months of the surrender of shares, he shall be liable as a past member.
If the surrender of shares is proved to be illegal, the shareholder may apply for the rectification of register of members after lapse of any number of years, provided the shares have not been reissued in the meantime. Forfeiture and surrender of shares, both lead to the termination of membership. But in case of forfeiture, it is compulsory or a forced action, while in case of surrender it is a voluntary act on the part of the member to avoid the disgrace of forfeiture.
In Bellerby vs. Rowland and Marwood’s S.S. Co. Ltd., 17 T. L. R. 510 case, the Court held that a company cannot accept a surrender of its shares “as every surrender of shares, whether fully paid-up or not involves a reduction of capital which is unlawful…forfeiture is a statutory exception and is the only exception”.
Conclusion:
Forfeiture of shares is referred to as the situation when the allotted shares are cancelled by the issuing company due to non-payment of the subscription amount as requested by the issuing company from the shareholder. There must be provision for forfeiture of shares in the Articles of the company. In the event of forfeiture of shares, the shareholders lose the rights and interests of being a shareholder and ceases to be a member of the organization. When the shares are forfeited, they become the property of the company and, to that extent, the paid-up capital of the company stands reduced. Therefore, the forfeited shares are generally reissued by the company. Surrender is a voluntary act of the shareholder under which the shares are returned to the company for purposes of cancellation.