Forfeiture of Shares: Guide to the Process and Implications

MEANING

Share forfeiture can be defined as the process of a cancelling the shares allotted to the defaulting investors by the company. The shares thus cancelled, which were earlier allotted, are termed as forfeited shares. This means the company cancels or takes away the shares that the person owns.

The Companies Act doesn't explicitly cover forfeiture of shares, but it does allow companies to provide for it in their articles. A company may if authorised by its articles, forfeit shares for non-payment of calls and the same will not require confirmation of the Tribunal.

Where power is given in the articles, it must be exercised strictly in accordance with the regulations regarding notice, procedure and manner stated therein, otherwise the forfeiture will be void. Forfeiture will be effected by means of Board resolution.

The forfeiture of shares in valid manner is for the bona fide interest of company. It is supposed to be carried out as the last option and only and only for the interest of company that is considered to be valid otherwise if any forfeiture is done will be considered collusive forfeiture made by directors to enable their own favored to escape from their liability. This is abuse of power that board got and also a fraud done by board towards their own shareholder. This should be used as compromising their shareholder due to the default of payment.

Once the company forfeits the share, the investor/ shareholder does not owe any further amount to the company against the share/s. The potential gains and losses are also reverting to the issuing company.

The company can further reissue the forfeited share to new shareholders at any price set by them, however, it has been usually seen that these shares are reissued at a discounted price.

CASE LAWS

In Re Jubilant Clinsys Ltd. CA No. 94/ALD/2016, NCLT-Allahabad Bench

In this case, the Court held that where proposed reduction of share capital did not prejudicially affect interest of any shareholder nor it had any adverse effect on public at large and all requisite statutory requirements in respect to said reduction had been complied, reduction of share capital was to be allowed.

Sha Mulchand & Co. Ltd. v. Jawahar Mills Ltd

In this case, the Court held that the right that a shareholder has before his share is being forfeited if they fail, they can still challenge such forfeiture in the law tribunals as right to challenge is still not abandoned as long as it is within the limitation period specified.

MAIN CAUSE FOR SHARE FORFEITURE

The most common cause of share forfeiture is the non-payment of calls. A 'call' is a demand made by the company for the payment of the amount due on the shares. If a shareholder fails to pay this amount within the specified period, the company may choose to forfeit their shares.

EFFECT OF FORFEITURE

When the shares have been forfeited, the defaulting shareholder ceases to be member of the company and he loses all rights or interests in his shares. But notwithstanding the forfeiture he remains liable to pay to the company all monies which at the date of forfeiture were payable by him to the company in respect of the shares.

STEPS TO BE FOLLOWED FOR FORFEITURE OF SHARE

1. Issue Notice to defaulting shareholder

The company must provide 14 days a written notice to the shareholder stating the amount due, including any interest, and give them a specific date by which they must make the payment.

2. Hold Board Meeting and Pass Board Resolution

If shareholder fails to pay the amount due, including any interest thereon, then the Board has to hold Board Meeting and need to pass Board resolution which must clearly state the number and details of the shares being forfeited, and the name of the shareholder. It must be noted that once the resolution is passed, the forfeiture is complete, and the shareholder loses all rights related to the forfeited shares.

3. Records in Registers of members

The forfeiture must be recorded in the company's register of members, and a notice of share forfeiture must be sent to the shareholder

4. Re-issue of forfeited shares

The Company may re-issue the forfeited shares to any willing buyer after having specific powers to that effect in the Articles. The shares are generally issued at a price at par with other shares as reduced by amounts already received in respect of the said shares.

Reissue of forfeited shares is a sale of shares and it does not amount to an allotment. The company should duly record the particulars of the members who acquire those shares as if it were a transfer of shares.

The directors would fix a price for the forfeited share that should not be lower than the amount of the call(s) due and unpaid on the share at the time of forfeiture.

In the case of a company whose shares are listed in a recognized stock exchange, re-issue of forfeited shares shall be as per Guidelines for Preferential Issue of the Securities and Exchange Board of India and the listing agreement.

EFFECT OF RE-ISSUE

• On reissue, the transferee should be registered as the holder of the share.
• A new share certificate should be issued in the name of the transferee who shall be registered as the holder of the shares.
• The title of the transferee should not be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture, sale or disposal of the share.
• There is no return nor any further action to be followed except recording the new shareholder name in the records