How are shares forfeited? Can forfeited shares be reissued at

How are shares forfeited? Can forfeited shares be reissued at discount?

Ans.

FORFEITURE OF SHARES

The Model Articles of Association of a Company Limited by shares as contained in Table-F of the Companies Act, 2013, provide as follows in regard to forfeiture of shares:

(1) Article 28 states that if a member fails to pay any call, or instalment of a call, on the day appointed for payment thereof, then at any time thereafter during such time as any part of the call or instalment remains unpaid, the Board may serve a notice on him requiring payment of so much of the call or instalment as is unpaid. together with any interest which may have accrued.

(2) Article 29 lays down that the notice as aforesaid shall (a) name a further day (not being earlier than the expiry of 14 days from the date of the service of the notice) on or before which the payment required by the notice is to be made; and (b) state that, in the event of non-payment on or before the day so named, the shares in respect of which the call was made shall be liable to be forfeited.

(3) Article 30 says that if the requirements of any such notice as aforesaid are not complied with, then any share in respect of which the notice has been given, at any time thereafter, may be forfeited by a resolution of the Board to that effect, before the payment required by the notice has been made.

(4) Article 31 states that (i) A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit. (ii) At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks fit.

Article 34 lays down that these provisions of the regulations concerning forfeiture shall apply In the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the nominal value of the share or by way of premium, as if the same had been payable by virtue of a call duly made and notified.

In fact, forfeiture of share means to forfeit that amount of the share which a company has already received from the concerned shareholders.

Normally, rules of forfeiture are mentioned in Articles of Association of the company. If no rules are given in Articles, the provision of Table-regarding forfeiture applies.

SURRENDER OF SHARES

When a shareholder gives up his shares to the company voluntarily and sacrifices all his rights, it is known as surrender of shares. There is no provision in the Model Articles of Association of a Company Limited by Shares, of the Companies Act, 2013 regarding surrender of shares and a company cannot possibly accept the surrender of fully paid up shares as it amounts to purchase of its own shares which is prohibited by Sec. 70. Sometimes Articles of Association empowers the directors to accept surrender of shares. Ultimate effect of surrender of shares and forfeiture of shares is the same because in both cases membership of the shareholder comes to an end. The main point of difference between the two is that surrender is at the initiative of the shareholders while forfeiture is at the initiative of the company. Accounting record for surrender of shares is the same as that of forfeiture.

Difference between Surrender of Shares and Forfeiture of Shares:

(1) Surrender of shares is the voluntary return of shares by the members to the company for cancellation, whereas forfeiture of shares is the compulsory termination of the membership of the company as penalty for non-payment of calls in arrears on shares.

(2) Surrender of shares is at the instance of shareholders (members) whereas forfeiture of shares at the instance of the company.

RE-ISSUE OF FORFEITED SHARES

As per Articles of Association, directors acquire power to reissue forfeited shares, they may do so by selling them to new purchaser for any amount they can obtain which together with the amount forfeited on shares is not less than the called up value of the shares on the date when they were reissued. The liability to pay future calls is taken up by the purchaser. A resolution is passed for reissue of shares and it is on the basis of this resolution that shares are reissued.

If, after reissue of forfeited shares, some balance is left in Forfeited Shares Account, this balance is transferred to Capital Reserve Account.

However, those forfeited shares which are not reissued the forfeited amount related to them are not transferred to Capital Reverse but are shown in Balance Sheet.

Can Forfeited shares be issued at discount?

Forfeited shares can be issued at a discount. But the discount on the issue of such shares cannot exceed the amount earlier forfeited on such shares. In other words, the amount received on re-issue plus amount already received on forfeited shares must not be less than the paid-up value of such shares.