by Forfeiture of shares refers to the cancellation of shares by a company when a shareholder fails to pay the amount due on shares, such as allotment money or call money, despite the company following the prescribed procedure. The power to forfeit shares must be authorised by the company’s Articles of Association and exercised in accordance with applicable legal requirements. Upon forfeiture, the shareholder loses membership rights relating to those shares, and the company may subsequently re-issue them.
Accounting Treatment of Forfeiture of Shares Issued at Par
When shares are issued at par, their issue price equals their face value. If a shareholder fails to pay the amount due, the company cancels the shares and transfers the amount already received on those shares to the Share Forfeiture Account.
Illustration: A company issues 1,000 equity shares of ₹10 each. A shareholder holding 100 shares has paid ₹6 per share but fails to pay the remaining ₹4 per share.
Amount received = 100 × ₹6 = ₹600.
Amount unpaid = 100 × ₹4 = ₹400.
Journal entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Equity Share Capital A/c Dr. | 1,000 | — |
| To Share Allotment/Call A/c | — | 400 |
| To Share Forfeiture A/c | — | 600 |
The Share Capital Account is debited with the called-up capital on the forfeited shares, while unpaid amounts are credited to the relevant allotment or call account and amounts already received are credited to Share Forfeiture.
Forfeiture of Shares Issued at a Premium
When shares are issued at a premium, the accounting treatment depends on whether the premium has already been received. If the premium was received, the Securities Premium Account is not reversed merely because the shares are forfeited. If the premium became due but remains unpaid, the corresponding Securities Premium Account entry must be reversed when the shares are forfeited.
Illustration: A company issues shares of ₹10 each at a premium of ₹2. A shareholder holding 100 shares has paid ₹6 per share, including ₹2 premium, but fails to pay a further ₹6 per share, comprising ₹4 capital and ₹2 premium.
Assuming the premium was due but unpaid, the entry is:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Equity Share Capital A/c Dr. | 1,000 | — |
| Securities Premium A/c Dr. | 200 | — |
| To Share Allotment/Call A/c | — | 600 |
| To Share Forfeiture A/c | — | 600 |
The entry assumes ₹10 face value per share has been called up, ₹200 premium is unpaid, and ₹600 has been received toward the shares. The unpaid premium is reversed because it was not received. The actual entry must reflect the precise amounts called up, paid, and unpaid.
Re-issue of Forfeited Shares
Re-issue of forfeited shares means offering previously forfeited shares to new or existing investors. Since the company has already received some money from the original shareholder, the forfeited shares may be re-issued at par, at a premium, or at a discount, subject to applicable law. The amount received on re-issue is recorded in the relevant accounts. Any permissible surplus remaining in the Share Forfeiture Account after accounting for a discount on re-issue is transferred to the Capital Reserve Account.
Re-issue of Forfeited Shares at Par
When forfeited shares are re-issued at their face value, the company receives an amount equal to the nominal value of the shares. The Bank Account is debited, and Share Capital is credited. The amount previously received from the original shareholder remains in the Share Forfeiture Account until the related shares are re-issued and the appropriate surplus is determined.
Illustration: A company forfeits 100 shares of ₹10 each on which ₹6 per share was received. It re-issues all 100 shares at ₹10 each as fully paid.
Journal entries:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 1,000 | — |
| To Equity Share Capital A/c | — | 1,000 |
| Share Forfeiture A/c Dr. | — | — |
The re-issue entry is complete with the Bank and Share Capital accounts. The forfeiture balance of ₹600 is then transferred to Capital Reserve because the shares have been re-issued at par and no discount has been allowed.
Capital Reserve entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Share Forfeiture A/c Dr. | 600 | — |
| To Capital Reserve A/c | — | 600 |
Re-issue of Forfeited Shares at a Discount
Forfeited shares may be re-issued at a discount, subject to the applicable legal framework. Under the conventional accounting treatment, the discount allowed on re-issue cannot exceed the amount forfeited in respect of those shares. The amount forfeited is credited to the Share Forfeiture Account, and the discount is debited to that account when the shares are re-issued.
Illustration: A company forfeits 100 shares of ₹10 each on which ₹6 per share was received. The shares are re-issued at ₹8 per share as fully paid.
Amount received on re-issue = 100 × ₹8 = ₹800.
Discount on re-issue = 100 × ₹2 = ₹200.
Journal entries:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 800 | — |
| Share Forfeiture A/c Dr. | 200 | — |
| To Equity Share Capital A/c | — | 1,000 |
| Share Forfeiture A/c Dr. | 400 | — |
| To Capital Reserve A/c | — | 400 |
The original forfeiture balance is ₹600. Of this amount, ₹200 is used to cover the discount, leaving ₹400 to be transferred to Capital Reserve.
Re-issue of Forfeited Shares at a Premium
When forfeited shares are re-issued above their face value, the premium received is credited to the Securities Premium Account. The face value is credited to Share Capital, and the total amount received is debited to Bank. The amount in Share Forfeiture Account is dealt with separately, after considering any discount allowed. Re-issue at a premium increases the funds received by the company, but the premium must be recorded separately from share capital.
Illustration: A company re-issues 100 forfeited shares of ₹10 each at ₹12 per share as fully paid.
Journal entry:
| Particulars | Debit (₹) | Credit (₹) |
|---|---|---|
| Bank A/c Dr. | 1,200 | — |
| To Equity Share Capital A/c | — | 1,000 |
| To Securities Premium A/c | — | 200 |
The Bank Account is debited with ₹1,200, Share Capital is credited with ₹1,000, and Securities Premium is credited with ₹200.
Partial Re-issue of Forfeited Shares
A company may re-issue only a portion of the forfeited shares. In such cases, the Share Forfeiture Account balance relating to the shares re-issued is calculated proportionately. The amount attributable to the shares that remain unissued is retained until those shares are dealt with. Only the surplus relating to the shares actually re-issued, after deducting any discount, is transferred to Capital Reserve.
Illustration: A company forfeits 200 shares on which ₹5 per share was received. It re-issues 100 shares at ₹8 per share, with a face value of ₹10.
Forfeiture balance relating to 100 re-issued shares = 100 × ₹5 = ₹500.
Discount on re-issue = 100 × ₹2 = ₹200.
Amount transferred to Capital Reserve = ₹500 − ₹200 = ₹300.
This ensures that the capital profit recognised relates only to the shares re-issued.
Transfer of Balance to Capital Reserve
The Share Forfeiture Account represents amounts received from shareholders before their shares were forfeited. When forfeited shares are re-issued, the amount available after deducting any discount on re-issue is treated as a capital profit under the conventional accounting approach. This surplus is transferred to Capital Reserve. The transfer is made only for the shares re-issued and must not exceed the forfeiture amount attributable to those shares. Any amount relating to shares still awaiting re-issue remains in the Share Forfeiture Account.
Reasons for Forfeiture of Shares
1. Non-Payment of Allotment Money
One of the main reasons for forfeiture of shares is the failure of shareholders to pay allotment money within the specified period. After shares are allotted, the company requires shareholders to pay the amount due on allotment. If a shareholder fails to make the payment despite receiving the required notice, the company may forfeit the shares, provided its Articles of Association authorise forfeiture and the prescribed procedure is followed.
2. Non-Payment of Call Money
Companies often collect share capital in instalments through first call, second call, or final call. If a shareholder fails to pay any amount due on a call, the company may initiate forfeiture proceedings. The unpaid amount creates a financial shortfall for the company and may affect its planned activities. However, forfeiture must comply with the company’s Articles of Association and applicable legal requirements.
3. Failure to Pay the Final Call
The final call represents the last instalment payable on shares when the entire share capital is not collected at the time of application or allotment. Some shareholders may fail to pay this amount due to financial difficulties or negligence. If the final call remains unpaid after the prescribed notice and procedure, the company may forfeit the shares where legally permitted.
4. Financial Difficulties of Shareholders
Shareholders may experience financial problems because of reduced income, business losses, unexpected expenses, or other personal circumstances. Such difficulties can prevent them from paying allotment money or calls when they become due. If the default continues and the company follows the required procedure, forfeiture may result. Financial hardship is a possible underlying reason for non-payment, although the company must still comply with the applicable rules before forfeiting shares.
5. Negligence or Carelessness of Shareholders
Some shareholders fail to pay amounts due because they overlook payment deadlines, ignore company communications, or do not monitor their investment obligations. Such negligence may lead to default even when the shareholder has sufficient financial resources. When payment remains outstanding, the company may issue the required notice and proceed with forfeiture if the default is not remedied and the company’s governing documents permit the action.
6. Failure to Respond to Payment Notices
A company generally follows the notice procedure prescribed by its Articles of Association before forfeiting shares. If a shareholder does not respond to a valid notice requiring payment of outstanding allotment or call money, the default may remain unresolved. Failure to comply with the notice can therefore lead to forfeiture proceedings. The company must ensure that the notice, time allowed for payment, and subsequent action satisfy the applicable requirements.
7. Breach of Share Payment Conditions
When subscribing to shares, shareholders agree to pay the amounts due according to the issue terms. Failure to comply with these payment obligations may constitute a breach of the conditions governing the shares. Where the Articles of Association authorise forfeiture and the prescribed process is followed, the company may cancel the defaulting shareholder’s shares. The action helps enforce payment obligations while protecting the company’s financial interests.
8. Protection of the Company’s Financial Interests
Non-payment of share instalments can reduce the funds available for business operations, investment, expansion, and other financial commitments. Forfeiture may allow the company to re-issue the affected shares and seek payment from another investor. This can help the company manage unpaid capital commitments. However, forfeiture is not automatic, and the company must follow its Articles of Association, provide the required notice, and comply with applicable law.
