Forfeiture of shares is a process of cancellation of shares by the company. In fact, sometimes, the shareholders have to pay installments for owning the shares. If the shareholder fails to pay these installments, his shares may be forfeited. However, the reasons and process of forfeiture of shares must be included in the article of association.
Shareholding is a process of ownership of a company. Forfeiture of shares is an action taken by the board of directors of a company to cancel the ownership of a shareholder when they fail to pay the dues for owning the shares. By owning shares, a shareholder owns a part of the company issuing the share. The Companies Act 2013 offers the rules and regulations related to different types of shares, such as preferential and equity shares. The shareholders must pay all dues they owe to maintain the ownership of the company.
Shares are forfeited if a shareholder fails to meet the holding, buying, or selling criteria. There may be numerous requirements like transfer of Shares over a restricted period, payment of call money, or even avoiding selling. In the case of Forfeiture of Shares, neither the shareholder has any balance left on it, nor any profit from the share is offered to him. Moreover, the forfeited share becomes an asset of the enterprise that issued it.
Forfeiture of shares may take place for numerous reasons, such as delay in installments, non-payment of dues, etc. However, for a company to forfeit shares, it must allow such action under its Article of Association.
A shareholder’s shares are forfeited when he/she is unable to pay the call money owed. Call money is the money that has to be paid by the shareholders as due on their shares. The following impacts are seen immediately on the forfeiture of shares.
The shareholder’s personal shares and thereby, the ownership is cancelled and forfeited.
Each entry related to a forfeited stock is converted into its respective accounting records. For shares that are associated with premiums, this is not applicable.
Amounts called up for the relevant shares are then debited from the associated and relevant share capital account.
It is essential to understand the accounting entries while shares are forfeited. Shares may be at par or premium for which the accounting entries differ. Here are the details of the accounting entries for the forfeiture of shares.
When shares that are issued at par are forfeited, the company may take the following actions. It is due to Forfeitures made for non-payment of call money even when making calls on Shares and stocks is done.
The called-up amounts on the shares as of the current date of Forfeiture are debited from the share capital account of the firm. The arrears out of allotments and call accounts of these Shares are managed. The called-up amount is credited to its relevant account.
The accounting entries for the Forfeiture of Shares issued at par are as follows.
| Date | Particular | Amount (Dr) | Amount (Cr.) | |
|---|---|---|---|---|
| Share capital account (Called up amount) | Dr. | xyz | ||
| To share forfeiture account (Paid up amount) | Cr. | xyz | ||
| To share allotment account | Cr. | xyz | ||
| To share call accounts (Individual accounts) | Cr. | xyz |
There are two possible situations in this case. The situation may differ depending on the clearance of the security premium amount.
On receipt of the security premium amount − The called-up amount along with its share capital amount is debited from its relevant account. It is also directly credited to every relevant account. This includes Shares allotment which includes an amount not received during its process, First call and Final call accounts and Forfeited Shares which have a received amount with a lower premium.
| Particular | Amount | Credit (Cr.) | |
|---|---|---|---|
| Share capital account | Dr. | 10,000 | |
| To share allotment account | Cr. | 6,000 | |
| To Forfeiture share allotment account | Cr. | 2,000 | |
| To first call account | Cr. | 2,000 |
On non-receipt of security premium amount − The security premium amount is not received in this case. This, therefore, involves an additional step of crediting the amount. The called-up and share capital amount are debited to the First call and Final call accounts, share allotment including its related charges, and finally Forfeited Shares with a received amount. Moreover, the security premium is debited from the share capital account.
| Particular | Amount (Dr.) | Amount (Cr.) | |
|---|---|---|---|
| Share capital account | Dr. | 10,000 | |
| Share premium account | Dr. | 10,000 | |
| To share allotment account | Cr. | 6,000 | |
| To forfeiture calls account | Cr. | 4,000 | |
| To first call account | Cr. | 4,000 |
The first and foremost effect of forfeiture of shares is that the owner of the shares ceases to remain the opener. His ownership gets diluted and he cannot claim any part of the income from the company that he used to do when he held the shares. Forfeiture sachets the power of ownership away.
It is done due to delays in payments of the dues, but there is a set period of time to pay the dues. When the due time is over, the power of ownership is taken away from the shareholder.
The shareholder is not however released from any liability he might have with the company. He is liable to pay all the liabilities even after his ownership has been removed. So, he must pay all dues even after the forfeiture of shares according to the law of the company.
The process of forfeiture starts with the identification of defaulters by the company secretary, the list of whom is sent to the board of directors. The board then sends notices to the defaulters to pay the dues within two weeks. If the defaulters do not pay the call money within the given time, a second and final notice is given. If the defaulters still do not pay the dues, the shares are forfeited.
Forfeiture of shares is a legal procedure and it is seen many a time in business organizations. If shareholders do not pay the dues, they have no right to remain the owners of the organizations, and hence, it is a justified process from a legal point of view.
Forfeiture of shares is, however, not the end of troubles from the estranged shareholders. They must pay any legal due that the company owes to them even after the forfeiture of shares. Therefore, although forfeiture of shares takes away the ownership, it is not a getaway from the liabilities though.
Q1. What is the obligation for the firms in order to carry out the forfeiture of shares?
Ans. The firms must mention the process of forfeiture in the article of association to carry out the option later on.
Q2. What is the aim of the process of forfeiture of shares?
Ans. The aim of the forfeiture of shares is to motivate and notify the defaulter to pay the dues on time.
Q3. Who initiates the process of forfeiture of shares in a company?
Ans. The process of share forfeiture is initiated by the company secretary who creates a list of defaulters and sends it to the board of directors for further action.
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