Forfeiture of shares means cancellation of the shares held by the defaulting member.
Forfeiture of shares leads to compulsory termination of membership of the defaulting shareholder by way of penalty for non-payment of allotment or any call money and seizure of money already paid.
The following conditions are required to be fulfilled:
1) Articles of association must authorize the forfeiture of shares: Where power is given in the articles, it must be exercised in accordance with the regulation regarding notice, produce and manner stated therein, otherwise, the forfeiture will be void.
If the 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.
2) Proper notice: Before the shares of a member are forfeited, proper notice to that effect must have been served.
Clause 29 of table F of the companies Act, 2013 provides that notice shall name a further day on or before which the payments are to be a maid.
The notice will also mention that in the event of non-payment, the shares will be liable to be forfeited.
3) Resolution for Forfeiture: Clause 30 of Table F provides that 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.
4) Power of the forfeiture must be exercised bona fide and for the benefits of the company: The power to forfeit should be exercised bona fide and for the benefits of the company.
The power must be used in order to coerce reluctant shareholders not paying their calls.
The power of the companies to forfeit the shares are:
A) Companies Act, 2013: There is no specific provision in the Companies Act, 2013, regarding the forfeiture of shares.
Only a company has a right to file suit for the recovery of the amount due on a call.
However, Table F, of the companies Act, 2013 contains regulation on forfeiture of shares.
B) Articles of Association of the company: Regulations for internal management of a company limited by shares is contained in the articles of association of the company.
Normally every company should have their own articles of association but according to the companies Act, 2013, if a company does not have its own articles than Table F of the companies Act, 2013 shall apply.
Clauses 28 to 34 given in schedule to the Companies Act, 2013, states:
- The situation when the shares can be forfeited.
- The action to be taken before forfeiture.
- The procedure to be followed for forfeiture.
- Manner of disposal of forfeited shares.
- Liability of the shareholders whose shares have been forfeited.
C) SEBI Guidelines: SEBI guidelines on securities issued to be made fully paid up states that if the subscription money is proposed to be received in calls, the calls shall be structured in such a manner that the entire subscription money is called within 12 months from the date of allotment where the issue size is less than Rs. 500 crores.
If the investor fails to pay call money within 12 months, the subscription money already paid may be forfeited. From the above, it is clear that the SEBI guidelines also empowers a company to forfeit the shares for non-payment of call money.
A company must follow the following procedure for forfeiture of shares:
A) Issue of notice: A notice must be served on the defaulting shareholders asking them to pay the outstanding call money together with interest on the outstanding calls if any.
B) Period of notice: The notice must be mentioned a future date on or before which payment must be made by the defaulting shareholders. The date must be earlier than fourteen days from the date of serving the notice.
C) Contents of notice: The notice must state that the board of directors will forfeit the shares as stated in the notice if the required payment is not made within the prescribed date mentioned in the notice.
D) Resolution on forfeiture: If the defaulting shareholder fails to comply with the requirement of the notice, a resolution affecting the forfeiture of shares must be passed in the meeting of the Board of directors.
E) Communication of Forfeiture: The fact of forfeiture of shares must be communicated to the shareholder whose shares have been forfeited. A copy of the resolution of the Board of directors to this effect is generally sent along with the letter.
Different Effect of Forfeiture:
The following are the effects of forfeiture:
A) Termination of membership: On the forfeiture of shares, the membership of the shareholder is terminated. Such a member loses all his rights and interest on those shares.
B) Seizure of money already paid: The amount of money already paid by the defaulting shareholders on the forfeited shares is seized by the company.
C) Ownership of forfeited shares: Ownership of forfeited shares lies with the company.
D) Ownership of amount received on share forfeited: The money received on the forfeited shares becomes the property of the company.
E) A decrease in share capital account: On the forfeiture of shares, the share capital account is reduced to the extent of the number of such forfeited shares multiplied by the called up amount per share till the forfeited shares are reissued.
Point to be kept while recording the entry for forfeiture of shares:
- Amount called up in respect of the shares to be forfeited.
- Amount already received in respect of those shares.
- Amount due but has not been received in respect of such shares.