NOTE ON FORFEITURE OF SHARES –PART I
Introduction
To forfeit means to lose the right to, be deprived of; to lose or become liable to lose, as in consequence of fault or breach of promise or contract. It is a penalty for a breach of contract or neglect; a fine that is imposed for not complying with the stipulated condition, obligation or duty. For example, in the case of shares of a company, if a call money payable on partly paid shares is not paid by shareholders, the company can forfeit the shares for the obligation of paying the call money not being fulfilled by the shareholders. The article on forfeiture is divided in two parts. Part I deal with preliminary compliances and procedure on forfeiture of shares where as Part II deal with Board Powers on Forfeiture of shares.
A forfeited shares is a partly paid share in the company that the shareholders has to forfeit because he has failed to pay a subsequent part or final payment; a shares to which the right is lost by the shareholder who has defaulted in paying call money.
The Companies Act, 1956 does not contain any provision in respect f forfeiture of shares in the company. However, articles of associations of almost all the company contain detailed provisions regulating forfeiture of shares. These provisions are based on the regulation 29 to 35 in Table A of Schedule I to the Companies Act, 1956 or recast based on the regulations.
Table A of Schedule I to the Companies Act, 1956 contain the following regulation in this respect:
Notice for Payment of Call on defaulting Members
Regulation 29 provides that if a member fails to pay any call, or installment of a call, on the day appointed for payment thereof, the Board may, at any time thereafter during such time as any part of the call or installment remains unpaid, serve a notice on him requiring payment of so much of the call or installment as is unpaid, together with any interest which may have accrued.
Regulation 30 lays down that the notice aforesaid shall -
(a) name a further day (not being earlier than the expiry of fourteen days from the date of 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 will be liable to be forfeited.
Regulation 31 provides that if the requirements of any such notice as aforesaid are not complied with, any share in respect of which the notice has been given may, at any time thereafter, before the payment required by the notice has been made, be forfeited by a resolution of the Board to that effect.
Effect of Forfeiture
A person whose shares have been forfeited shall cease to be member in respect of the forfeited shares, but shall, shall, notwithstanding the forfeiture, remain liable to pay to the company all moneys which, at the date of forfeiture, were presently payable by him to the company in respect of the shares. The liability of such person shall cease if and when the company shall have received payment in full of all such moneys in respect of the shares. [Regulation 33]
The only effect of the forfeited of shares is that the shares pass out of the hands of the holder; the liability incurred prior to forfeiture of shares to pay the allotment and call money still remains.
Regulation 32 provides that a forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks fit. At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks
PROCEDURE FOR FORFEITURE OF SHARES
1. A forfeiture of any share must be done on the authority of the Board of Directors, or of committee thereof, if authorised by articles of associations for the purpose, by its resolution. The resolution should provide for a notice to be given to the shareholder concerned before the forfeiture is actually effected in pursuance of the resolution, requiring payment of so much of the calls as is unpaid, together with any interest which may have accrued.
2. The notice threatening forfeiture in pursuance of the Board Resolution must be given in accordance with the provisions of the articles. The notice aforesaid shall:
- name a further day (not being earlier than the expiry of 14 days from the date of service of notice) on or before which the payment required by the notice is to be made; and
- 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 will be liable to be forfeited.
3. The notice must;
- specify clearly the amount payable on account of unpaid call money as well as interest accrued , if any, and other expenses.
- mentioned the day on or before which the amount specified ought to be paid, not being earlier than 14 days from the date of service of notice
- contain an unambiguous statement to the effect that in the effect of failure to pay the specified amount latest on the appointed day, the shares in respect of which the amount remain un paid would be liable to be forfeited.
4. The notice threatening forfeiture as contemplated in Regulation 29 of Table A must be served in accordance with the provisions of section 53 of the Companies Act, 1956.
5. If the call money is not paid in response to such notice threatening forfeiture, the company may, at any time thereafter, before the payment required by the notice has been made, forfeit the shares by a resolution of the Board to the effect.
6. It is common practice to publish a notice of forfeiture in newspapers so that the members of the public are made aware of the forfeiture and cautioned not to deal in the forfeited shares.
7. A further notice after the shares are forfeited is not necessary. However, it is advisable and a common practice to give a notice of the shares having been forfeited to the concerned shareholders by registered post.
8. Regulation 34 of Table A provides for a verified declaration in writing to be issued under the signature of director, manager or secretary of the company that a share in the company has been duly forfeited on a date stated in declaration. The declaration so made shall be conclusive evidence of the facts stated therein as against all persons claiming to be entitled to the shares forfeited. The accidental not receipt of notice of forfeiture by the defaulter is not a ground for relief against forfeiture regularly effected.
9. The fact of the forfeiture will be entered in the Register of Members and the name of the concerned shareholder as a member of the company will be deleted from the register.
10. Notify the Stock Exchange at which the securities of the Company are listed about such forfeiture of shares.
Circumstances in which Forfeiture of shares cannot be made
The shares can be forfeited only of non-payment of calls and not for any other debt due from a member. Non-payment of calls is not the only reason for which shares can be forfeited; a company by its articles may provide for other grounds also. [Naresh Chandra Sanyal v Calcutta Stock Exchange Association Ltd. (1971) 41 Comp Cas 51 (SC)].
Shares of the shareholders who were running business of the company, cannot be forfeited for losses suffered by company. [Dilbhajan Singh v New Samundri Transport Co. (P) Ltd. (1985) 58 Comp Cas 247 (P&H)].
CLB (now Tribunal) cannot direct forfeiture of shares acquired in violation of Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations. [Aska Investments (P) Ltd. v Grob Tea Co. Ltd. (2005) 61 SCL 134 (Cal)]. You can read Part I of this article on below mentioned link:
/articles/note-on-forfeiture-of-shares-part-i-18296.asp#.Ui1VaBenyVE
Regards
CS Ajay Mishra
CAclubindia
