Re-issue of Shares

Requirements of Companies Act

The following are the requirements of the Companies Act regarding the reissue of forfeited shares:

1. The forfeited shares are generally issued at a price lesser than their face value. But the discount so allowed to the new buyers should not exceed the amount already paid by the defaulting member.
2. A resolution sanctioning the reissue must be passed in the Board Meeting.
3. The forfeited shares are to be transferred in the name of the buyer and his name should be entered in the Register of Members.
4. A public notice in newspapers should be given stating that such and such shares have been forfeited due to the non-payment of calls.

Re-issue of Forfeited Shares

Forfeited shares are available with the company for sale. After the forfeiture of shares, the company is under an obligation to dispose off the forfeited shares.

The company requires to pass a resolution in its Board Meeting for the re-issue of forfeited shares. Re-issue of forfeited shares is a mere sale of shares for the company. A company does not make allotment of these shares.

The company auctions the forfeited shares and disposes them off. A company can re-issue these shares at any price but the total amount received on these shares should not be less than the amount in arrears on these shares. Here, total amount refers to the amount received from the original allottee and the second purchaser.

Notes:

• We show the Forfeited shares A/c under the heading ‘Share Capital’.
• When a company re-issues only a part of the forfeited shares, then it will transfer only the profit relating to this part to the capital reserve.
• When a company re-issues shares at a price more than their face value, it needs to transfer the excess amount to the Securities Premium A/c.

(a) Reissue of forfeited Share Originally Issued at Par:

When the forfeited shares are reissued at a discount, the amount of discount should not exceed the amount credited to Share Forfeited Account. If the discount allowed on reissue of shares is less than the forfeited amount, there will be some balance left in the Forfeited Account, which should be transferred to capital reserve, because it is a profit of capital nature.

Accounting entries:

On reissue of shares at discount:

Bank A/c … Dr. (With reissue price)

Share Forfeited A/c …Dr. (With the discount allowed on reissue)

To Share Capital A/c (With the amount called up)

Transfer to Capital Reserve:

The balance remaining in share forfeited account is in the nature of capital gain and would be closed by transfer to the capital reserve account.

The necessary journal entry will be:

Share forfeited a/c Dr. (with credit balance left in share forfeited account after reissue)

To Capital reserve a/c

(Being share forfeited account transferred)

(b) Reissue of forfeited shares originally issued at discount:

If the shares which were originally issued at a discount are forfeited and reissued, then on reissue the new allottee would get the advantage of discount, besides getting some additional discount from share forfeited account.

The requisite entry in this case will be:

Bank a/c Dr. (with amount received on reissue)

Discount on issue of shares a/c Dr. (with normal discount)

Share forfeited a/c Dr. (with extra discount on reissue)

To Share capital a/c Dr. (with total amount)

(Being forfeited shares reissued, originally issued at discount)

Journal Entries for Re-issue of Forfeited Shares:

Auditor’s Duty regarding reissue of forfeited shares

1. The auditor should ascertain whether the Articles authorize the Board of Directors to reissue the forfeited shares.
2. He should examine the resolution passed by the Board of Directors at their meeting under which the forfeited shares have been re-allotted.
3. He should vouch the entries made for re-allotment in the Cash Book.
4. He should see that the balance remaining in the forfeited shares account has been transferred to the Capital Reserve Account.
5. In case the shares were reissued at a price above par value, he should see that the excess has been transferred to the Share Premium Account.
6. He should vouch the copy of the return of allotment filed with the Registrar of Joint Stock Companies.