Discuss the Law relating to Forfeiture of Shares and the Re-issue of Forfeited Shares.
Forfeiture of Shares
Forfeiture of Shares means the termination of membership of a shareholder and taking away his shares by way of a penalty for not paying any call or installment or premium on the shares. Whenever a company makes any , call on the shares, then shareholders have to pay the call money within a stipulated time. If any shareholder fails to pay any such call money even after reminders and notices, the company has got a right, usually under its Articles of Association, to forfeit his shares. In such a case the company has got a right to forfeit the amount already paid by the shareholder.
Rules Relating to a Valid Forfeiture Shares :
If the Articles permit for forfeiture of shares, then relevant regulations of ‘Table F’ shall apply (unless provided otherwise in the Articles of the company). which provide the following rules relating to a valid forfeiture of shares.
Shares can be forfeited only for nonpayment of call due in respect of the shares and not for other debts,
Proper notice must be given to the defaulting member requesting him to pay the outstanding amount of call. This notice must . give at least 14
days time for payment of such amount and must inform the member that in the event of non-payment, his shares will be forfeited.
If the member does not comply with the notice, the Board of Directors will pass a formal resolution of forfeiture and a notice of the same will
be served on the defaulting shareholder. If this resolution is not passed, the forfeiture is invalid.
The power to forfeit shares must be exercised by the directors in good faith and for the benefit of the company.
If a company is wound up after one year from the date of forfeiture, the member whose shares have been forfeited cannot be held liable as a contributory.
Effects of a Valid Forfeiture Shares
The defaulting shareholder, whose shares are forfeited, ceases to be a member of the company and his name is struck off the register of
The liability of the person whose shares have been forfeited ceases only when the company receives payment in full of all such moneys in respect
of the shares forfeited. Therefore, a member remains liable to the company for all such moneys, which at the time of forfeiture, were payable by him to the company in respect of shares forfeited.
The former shareholder shall remain liable as a past member to pay calls, if liquidation takes place within one year of the forfeiture.
On forfeiture, the forfeited shares become the property of the company and they are either re -issued or disposed of.
Re -issue of Forfeited Shares
Forfeited shares become the property of the company. They may be cancelled or re -issued for any price they will fetch, but the amount of discount cannot exceed the actual, amount forfeited on these shares, otherwise it would amount to issue of shares at a discount which is prohibited under Section 53. After the re -issue, the new holder becomes a shareholder of the company and his name will be registered in the register of members. For the re -issue of shares, the Board has to pass a resolution.
The title of the purchaser to the forfeited shares is not affected by any irregularity or invalidity in the forfeiture or sale of the shares. The re -issue of forfeited shares is treated as re -sale and not the allotment, and therefore, no return of allotment of re -issue of forfeited shares need be filed with the Registrar of Companies.