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You have read the introductory and procedural part on Forfeiture of shares under my earlier article in Part I posted on this CCI club. In continuation on the above subject, Part II deal with Board Powers on Forfeiture of shares and re issue of forfeited shares.

Forfeiture can be effected by a Board resolution

Forfeiture will be affected by means of a Board resolution. Notice precedent to forfeiture must be given to the defaulting shareholder. In the matter of forfeiture of shares, technicalities must be strictly observed. "The defect in the notice, though slight, invalidates it and is fatal to the forfeiture", as held by the Supreme Court in Public Passengers Service Ltd. v Khadar AIR 1966 SC 439.

In Sulochana Nathany v Hindustan Malleables & Forgings Ltd. (2001) CLC 448 (CLB), it was held that to constitute a valid forfeiture articles should give such powers to the directors. There should be notice of forfeiture and power should be exercised following the procedure prescribed in the articles.

Intimation for forfeiture of shares

Further, articles generally provide that after the shares have been forfeited, an intimation is sent to the shareholder concerned and for sufficient reasons, the forfeiture may be annulled at the discretion of the Board of directors.

Whether High Court has jurisdiction to entertain a shareholder's application questioning the action of company?

There is no provision in the Companies Act enabling the High Court to entertain an application relating to forfeiture of shares. [Tej Prakash Dangi v Coramandal Pharmaceuticals Ltd. (2001) 43 CLA 21 (AP)].

Forfeiture must be bona fide and in the interest of a company

The power of forfeiture must be exercised bona fide and in the interest of the company. It should not be collusive or fraudulent. In Re. Esparto Trading Co. (1879) 12 Ch. D. 791, the forfeiture of shares was set aside, because it was found to have been carried out at the request of a shareholder to relieve him of liability. Such a forfeiture amounts to an abuse of power to forfeit and a fraud on other shareholders.


Board may cancel the forfeiture of shares

In case defaulting shareholder approaches after forfeiture to cancel the forfeiture, the Board has been empowered to cancel such a forfeiture and claim due amount with interest.

A forfeiture solemnly resolved upon and enforced for a long time, should not be set aside, nor can ex-member be reinstated without his consent. [Dhunraj Keshrimal v N.H. Wadia (1933) 57 ILR Bom 413].

Once forfeiture has been enforced, the contract between the company and the member comes to an end; there can be no subsequent recession of forfeiture without the shareholder's consent. [Exchange Trust Ltd., In re (1903) 1 Ch. 711].

If shares were forfeited for non-payment of a call which was invalid, the company could withdraw forfeiture and issue a fresh call. [Bhagirath Spg. & Wvg. Co. Ltd. v Balaji Bhavani Power AIR 1930 Bom. 267].

Mere waiver, acquiescence or laches does not disentitle a shareholder from challenging forfeiture. [Sha Mulchand & Co. v Jawahar Mills Ltd. (1953) 23 Comp Cas 1 (SC)].

Original shareholders shall be liable for unpaid calls

If the articles so provide, the original shareholder shall remain liable for payment of unpaid calls for a period of three years from the date of forfeiture. However, a company cannot recover from him more than the difference between the amount payable and the amount received on forfeited shares.

Meanwhile the original shareholder may be discharged from all liability on the share, except that he will be put on the 'B' list in the event of the company going into liquidation within one year of the cessation of his membership. Articles, usually provide that where a share has been forfeited the member shall be liable for payment of the call, and this created a new obligation, he can be sued as an ordinary debtor.

Forfeited shares becomes property of a company

Forfeited shares become the property of the company, to this extent forfeiture involves a reduction in the paid-up capital till the shares are re-issued. Normally, therefore, companies re-issue them.

Re-Issue of Forfeited Shares

Where a company had lien on fully paid shares belonging to the deceased shareholder, it is obligatory on the company to give notice of its sale to the legal representative of the deceased shareholder, but if this is not done the sale would nevertheless be a valid sale.

Shares forfeited by a company may either be cancelled or re-issued to another person at the discretion of the Board. Generally, such shares are re-issued at a discount which cannot exceed the amount already paid on such shares provided that the total of the sum paid by the original owner of the shares together with the re-issue price is not less than the par value. This is done by a Board resolution.

After the money due is received from the new allottee, the company executes a transfer deed and issues a share certificate, and if the original holder has already surrendered the share certificate, it is duly transferred, otherwise after a public notice in a newspaper, a new share certificate is issued.

Re-issue/Disposal of Forfeited Shares: No Allotment Return (Form-2) to be Filed

According to section 75 (1) of the Companies Act, 1956, a company is required to file a return of allotment of shares and not for-reissued of forfeited shares. Allotment is, appropriation of the previously un appropriated  capital of the company, of a certain number of shares to certain person. Till such allotment, the shares do not exist as such. However, in the case of forfeited shares, they had already been allotteed and they had come into existence at the time of their allotment and their forfeiture is a proof of their existence. Therefore, no return of allotment is required to be filed with ROC by a company at the time of re-issue or disposal of forfeited shares. [Sri Gopal Jalan and Co. V. Calcutta Stock Exchange Association ( 1963) 33 Com. Case 862: AIR 1964 SC 250].

You can read Part I of this article on below mentioned link:

Note on Forfeiture of Shares - Part I


CS Ajay Mishra

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Ajay Mishra
(Company Secretary)
Category Corporate Law   Report

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