A forfeited share is an investment in equity shares which the issuing company cancels. When the shareholder fails to pay the subscription money called for by the issuing company, a share is forfeited. It is a process where the company forfeits the shares of a member or shareholder who, within a certain period of time after they fall due, fails to pay the call on shares or instalments of the issue price of his shares. In other words, the company can cancel its shares if the shareholder fails to pay the full amount of shares he has agreed to pay in instalments. In general, when the shares are issued by the company, the shareholders are not required to pay the entire share amount at once. In instalments, it happens. When it requires further capital, the company makes these calls on shares. If it is needed from time to time, the company may call up the unpaid money from the shareholders. In order to make a call for shares, the board of directors must pass a resolution. The provisions relating to this call for shares should be contained in the company's articles and, if nothing is stated in the articles, then Regulations 13-18 of Table F of Schedule I of the Companies Act, 2013 shall apply. These provisions stipulate that:
The company will generally give 14 days' notice to the shareholder and will forfeit the shares of that shareholder after 14 days if the shareholder is not prepared to pay the money due to the company.
The forfeiture of shares is a serious step because, as a penalty for some act or omission, it involves depriving a person of his property. Accordingly, members' shares cannot be forfeited unless the company's articles confer such authority on the directors. The forfeiture of a share should take place only in the event of non-payment by the members of the call for shares and in accordance with the provisions of the company. But for any other reasons which are specified in the company's articles, forfeiture can also be made. Companies normally have their own rules and regulations relating to the forfeiture of shares and Regulations 28-34 of Table F of Schedule 1 of the Companies Act 2013 will apply if those provisions are not present.
It is the procedure that follows:
The forfeiture of shares must be treated as valid forfeiture in accordance with the provisions contained in the company's articles. In the interest of the company, the power of forfeiture of shares must be exercised bona fide. Thus, where the articles of the company authorize the directors to forfeit the shares of a shareholder who, by paying the full amount of his shares, initiates an action against the company or the directors, it was held that such a clause was invalid as it was against the rights of the shareholder.
The defaulting shareholder must be served with appropriate notice under the authority of the board. It should be stated in the notice that the shareholder must pay the amount on the specified date, which is not earlier than 14 days from the date of the notice served. Under Regulation 29 of Table F, this is provided. The notice should also mention that the shares will be liable for a forfeiture in the event of non-payment.
The goal of sending the notice is to give the defaulting shareholder the opportunity to pay the call money, interest, and any other costs, and therefore the notice should disclose sufficient information to the shareholder with details.
If the defaulting shareholder fails to pay the amount within the specified period referred to in the notice duly served on him, the company's directors may, pursuant to Regulation 30 of Table F, pass a resolution forfeiting the shares. The forfeiture shall be invalid in the absence of such a resolution unless the notice of forfeiture also incorporates the resolution of the forfeiture. For example, the notice may state that the shares are considered to have been forfeited in the event of a default.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts that have been made to ensure the accuracy and correctness of the information published, White Code Legal and Tax shall not be responsible for any errors caused due to human error or otherwise.
