Forfeiture and Re-issue of Shares

Forfeiture of Shares refers to the cancellation or termination of shares when a shareholder defaults in payment of calls on shares (installments). Companies may require shareholders to pay for shares in stages (application money, allotment money, and calls). If any of these payments are not met on time, the company can forfeit the shares, reclaiming them from the shareholder.

Legal Framework Governing Forfeiture:

The process of forfeiture is governed by provisions laid out in the Companies Act, 2013, and the company’s Articles of Association (AoA). The AoA usually specifies the conditions under which shares can be forfeited, the procedure, and the consequences of forfeiture. Without clear provisions in the AoA, the company cannot legally forfeit shares.

Steps Involved in the Forfeiture Process:

1. Issuance of Notice:

Before forfeiture, the company must issue a notice to the defaulting shareholder. This notice typically specifies the amount due, the time frame for payment, and the consequences of failure to pay, which include forfeiture. The notice period must provide the shareholder sufficient time to make the payment.

2. Board Resolution for Forfeiture:

If the shareholder fails to pay within the specified period, the company’s board of directors can pass a resolution to forfeit the shares. The resolution must include details like the shareholder’s name, the number of shares forfeited, and the amount outstanding.

3. Recording the Forfeiture:

Once the resolution is passed, the company records the forfeiture in its books of accounts and registers. The shareholder’s name is removed from the register of members, and the company cancels the shares.

4. Effects of Forfeiture:

Forfeiture results in the cancellation of shares, and the defaulting shareholder loses their rights, including voting rights, dividend claims, and share transfer rights. The company does not refund any payments already made by the shareholder. However, the liability of the defaulting shareholder remains until the forfeited shares are re-issued and fully paid.

Accounting Treatment of Forfeiture

Forfeiture affects the company’s equity and share capital accounts. The accounting treatment typically involves debiting the share capital account and crediting the forfeited shares account. If any amount has been received from the shareholder before forfeiture, that amount remains credited to the forfeited shares account.

For example, if a shareholder holding 100 shares of ₹10 each, with ₹7 paid-up, defaults on the final call of ₹3 per share, the forfeiture entry would be:

• Debit: Share Capital Account ₹1,000 (100 shares x ₹10)
• Credit: Forfeited Shares Account ₹700 (100 shares x ₹7)
• Credit: Calls-in-Arrears Account ₹300 (100 shares x ₹3)

Re-issue of Forfeited Shares

Once shares are forfeited, the company can re-issue them to new buyers. The re-issue of forfeited shares is typically done at a price lower than their face value, as the company seeks to recover its losses. However, the discount on re-issue cannot exceed the amount forfeited.

Legal and Procedural Aspects of Re-issue:

1. Board Resolution for Re-issue:

Like forfeiture, the re-issue of shares requires a board resolution. The board decides the re-issue price, which should not exceed the amount forfeited, to ensure that the company does not incur a loss.

2. Issuance of Share Certificates:

Once re-issued, new share certificates are issued in the name of the buyer, and their details are entered in the register of members. The buyer enjoys the same rights as any other shareholder, including voting rights, dividend entitlements, and transfer rights.

3. Accounting Treatment of Re-issue:

The re-issue of forfeited shares affects several accounts. If the re-issue price is lower than the face value, the discount is adjusted against the forfeited shares account. Any balance remaining in the forfeited shares account after re-issue is transferred to the capital reserve account.

For example, consider the re-issue of 100 shares forfeited earlier, at ₹8 per share. The face value is ₹10, with ₹3 forfeited. The re-issue entry would be:

• Debit: Bank Account ₹800 (100 shares x ₹8)
• Debit: Forfeited Shares Account ₹200 (100 shares x ₹2)
• Credit: Share Capital Account ₹1,000 (100 shares x ₹10)

Impact of Forfeiture and Re-issue:

Forfeiture and re-issue of shares have several implications for both the company and shareholders:

• Company’s Capital:

Forfeiture and re-issue enable the company to maintain its capital base despite payment defaults. Through re-issue, the company recovers a significant portion of the unpaid amount.

• Shareholder Relations:

The process of forfeiture, although necessary, can strain the relationship between the company and its shareholders. Issuing notices, enforcing payments, and taking legal actions can be contentious.

• Investor Confidence:

Transparent and legally compliant forfeiture and re-issue processes help maintain investor confidence in the company. It demonstrates the company’s commitment to sound financial practices.

• Legal Ramifications:

If not conducted according to the AoA and legal provisions, forfeiture and re-issue can lead to disputes and legal challenges. Courts have often intervened in cases where shareholders allege wrongful forfeiture.