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A public company issues shares to raise share capital. Shares are issued, but the money is collected in instalments. When the shareholder cannot pay the instalments on time, the company forfeits the shares, and the shareholder loses ownership upon shares of the company. The money the shareholders submitted in the past goes to the company, and they no longer owe any money towards the company. These shares, which are now taken back by the company and are again issued in public known as the reissue of forfeited shares.
Calls on Shares
companies collect the share price in instalments when the shares are being issued initially. This helps in the easy collection of money. Also, the company can call up the shares if it require capital.
A call on shares is a collection of the due amount on such a share. If a shareholder cannot pay this due amount, their shares could be forfeited by the company. The company will then reissue forfeited shares. Forfeited shares are issued at a premium and at par.
Calls in Arrears
The called amount that is unpaid by the shareholder by the due date is called calls in arrears.
Calls in Advance
The uncalled amount that the company receives is known as calls in advance.
Forfeiture of Shares
A company can issue forfeited shares at a premium or at par only if its Article of Association contains the provision of forfeiture of shares. The shareholder subscribes to the company’s shares by sending an application with the application amount. When the company accepts the application, it allots the shares to the persons, and the pending subscription amount is received in instalments or calls. If a shareholder is unable to pay this pending subscription amount, then his shares are forfeited by the company. That is, he is no longer an owner of the shares of the company.
Here is an example of the forfeiture of shares:
Mr.Preet is willing to buy a share for Rs 100. The due amount is to be paid as follows: Rs 25 with the application, payable on 1st June, Rs 25 on the allotment, payable on 1st September 2019, and Rs 50 on the first and final call, payable on 1st February 2019. Mr.Preet submits the application along with the application money. He also pays the allotment money but is not able to pay the first and final call. The company will forfeit his share and the subscription amount he already paid. He will no longer owe the unpaid amount to the company, and the company will go for a reissue of forfeited shares. Two types of forfeiture can be done:
• Forfeiture of shares at a premium
• Forfeiture of shares at par
Forfeiture of Share at Par
In case of forfeiture of shares at par, the subscription amount that the company has received till the date of forfeiture will be debited to the Share Capital A/c.
The journal entry will be:
Forfeiture of Shares at a Premium
In case of forfeiture of shares at a premium, the amount that the company has received till the date of forfeiture will be debited to the Share Capital A/c, excluding the premium. The amount of premium will be debited to the Security Premium Reserve A/c.
The journal entry will be:
Conclusion
When a shareholder is unable to pay the full subscription amount within the due date, his shares are forfeited by the company. These shares are then again issued in public, or a reissue of forfeited shares is done. Shares can both be forfeited at par and at a premium. The company will not only forfeit the share but also the subscription amount the shareholder already paid. The shareholder will no longer owe the unpaid amount to the company, and the company will go for a reissue of forfeited shares.
