Forfeiture of Shares

What is the Forfeiture of Shares?

Shares are the units of ownership of a company or equity. Shareholders buy shares from a company or let’s say invest in a company by buying their shares. The shares usually have a subscription price. The company calls for advance instalment payments from the shareholder for the share purchased; this is called call- money which usually refers to the subscription amount set by the company for buying their shares. The non-payment of this call money results in the forfeiture of shares.

The bottom line is that, if an investor invests money in XYZ Corporation or buys shares of a corporation, this corporation will ask for instalments. If there is a default in payment of any of the call money the corporation has the right to forfeit the shares and keep any invested amount as collateral. So if the stake were worth Rs. 10,000 when the party invested and failed to pay 1st instalment of Rs. 2000 on the call, shares can be forfeited.

The company has the right to forfeit shares that were issued to a shareholder in case of any non-payment of share instalment or call money that was requested by the company. This resulted in forfeiture of the shares and the company retains all rights to the share thereafter and all the instalments already paid.

When shares have forfeited the rights of the shareholders is lost. Any instalment amount paid by the shareholder is also retained by the company. These shares can be again launched to the market and be bought by the new shareholders but few changes are made to them by the company. These shares are issued at a discount because the previous shareholder already paid some of its prices in instalments. These shares are changed a bit and then issued with a discount price for better marketing to the new shareholders.

The company needs the permission of the article of association to forfeit shares. It needs to send notices before the actual forfeiture happens. This notice has the information regarding call money and interests also the date till forfeiture. 

What effects do the Forfeiture of shares have and on whom?

Forfeiture of shares affects all the parties involved in the contractual process that is trading of shares. In Case there is a forfeiture the following happens:

Membership Revocation: 

The subscription membership of the shareholder is retained and the shareholder can no longer have any access to the share or any rights in acquiring it.

Call-money: 

The shareholder is no longer liable to pay the future instalment amounts but is still liable to pay the uncalled money that was recorded by the company.

Liquidation:

In case the company gets liquidated in near future the shareholder who was forfeited is mentioned as a list-b contributor to the company.

Forfeiture of Shares Examples

Let’s suppose a company XYZ is issuing shares in the market and as a curious citizen, I bought one single share for a price of  Rs. 2,00,000. You paid the company at face value for about 25% of the amount i.e Rs. 50,000 and the rest will be called in three instalments. The other instalments are called by the company as call money, any failure in payment of the said instalments will result in forfeiture of shares. The company hence retains all the rights to that single share. Let us assume the first instalment of Rs 50,000 was paid but there was a fault in the 2nd instalment. The company will forfeit the shares as well as keep the amount of Rs. 1,00,000 that has been paid previously.

Conclusion

The general principle of corporate law states that companies can only forfeit shares when the Articles of Association of the company contains a provision declaring the rules regarding share forfeiture. The shareholder owes the company share money so the company has all the rights to call for their money and non-payment will result in forfeiture. This needs to be avoided or else all the money already paid in form of application and call-money and all the rights to the shares are revoked from the shareholder.