Forfeiture and Reissue of Shares

The concept of forfeiture and reissue of shares plays an important role in company law and corporate finance. Companies often raise capital by issuing shares to the public, and the payment for these shares is usually collected in instalments such as application money, allotment money, and calls. However, situations may arise where shareholders fail to pay the amount due within the prescribed time.

In such cases, the company is empowered to forfeit the shares of the defaulting shareholder. Once forfeited, these shares can be reissued to other investors. This process ensures that the company’s capital structure remains stable and that financial discipline is maintained among shareholders.

Understanding forfeiture and reissue of shares is essential for students and professionals dealing with company law, accounting, and financial management.

Meaning of Forfeiture of Shares

Forfeiture of shares refers to the cancellation of shares by a company due to non-payment of allotment money or call money by the shareholder. It results in the termination of membership of the defaulting shareholder.

When shares are forfeited:

• The shareholder loses all rights associated with the shares
• The amount already paid by the shareholder is not refunded
• The shareholder is relieved from the obligation to pay future calls

Forfeiture serves as a mechanism to enforce financial discipline and ensure fairness among all shareholders.

Legal Conditions for Forfeiture

Forfeiture of shares is not an automatic process. It must strictly comply with the provisions laid down in the company’s Articles of Association.

The following conditions must generally be satisfied:

• Authority in Articles of Association: The Articles must contain a provision allowing forfeiture of shares. Without such authority, forfeiture cannot be validly carried out.
• Proper Notice to Shareholder: The company must send a notice to the defaulting shareholder demanding payment of the unpaid amount. The notice should clearly specify the amount due and provide a reasonable time, usually around 14 days, to make the payment.
• Failure to Comply with Notice: If the shareholder fails to pay within the stipulated time, the company may proceed with forfeiture.
• Resolution by the Board: The Board of Directors must pass a resolution to forfeit the shares.

Non-compliance with these conditions may render the forfeiture invalid.

Effects of Forfeiture

Forfeiture of shares has significant consequences for both the shareholder and the company.

On the Shareholder

• The shareholder ceases to be a member of the company in respect of the forfeited shares.
• All rights attached to the shares, including voting rights and dividend rights, are lost.
• The amount already paid on the shares is forfeited and is not refunded.
• The shareholder is generally not liable for future calls on those shares.

On the Company

• The company retains the amount already received from the shareholder.
• The forfeited shares become the property of the company.
• The company gains the right to reissue these shares to new investors.

Types of Forfeiture of Shares

Forfeiture of shares can take place under different circumstances depending on the terms of issue.

Forfeiture of Shares at Par

In this case, the shares are originally issued at their face value. When forfeited, the accounting treatment involves:

• Debiting the Share Capital Account with the called-up value of the shares
• Crediting the Calls in Arrears Account with the unpaid amount
• Crediting the Share Forfeiture Account with the amount already received

This type of forfeiture is relatively straightforward as no premium is involved.

Forfeiture of Shares at Premium

When shares are issued at a premium, the treatment becomes slightly more complex.

• The Share Capital Account is debited with the called-up value excluding the premium
• If the premium has not been received, the Securities Premium Reserve Account is debited
• The Calls in Arrears Account is credited with the total unpaid amount including premium
• The Share Forfeiture Account is credited with the amount received

This ensures that both the share capital and premium components are properly accounted for.

Accounting Treatment of Forfeiture

The accounting treatment of forfeiture involves recognising the cancellation of share capital and the adjustment of amounts received and unpaid.

Journal Entry for Forfeiture

• Debit: Share Capital Account (called-up value)
• Credit: Calls in Arrears Account (unpaid amount)
• Credit: Share Forfeiture Account (amount received)

The Share Forfeiture Account represents the amount already paid by the defaulting shareholder and is treated as a capital receipt.

Reissue of Forfeited Shares

Once shares are forfeited, the company may reissue them to other investors. This process is known as reissue of forfeited shares.

Reissue helps the company to:

• Recover unpaid capital
• Maintain its capital base
• Attract new investors

Reissued shares are treated as fresh issues, but they carry the history of forfeiture in accounting records.

Conditions for Reissue of Shares

The company must adhere to certain conditions while reissuing forfeited shares:

• Shares can be reissued at par, premium, or discount
• If issued at a discount, the discount must not exceed the amount forfeited on those shares
• The total amount received from the original shareholder and the new shareholder together should not be less than the face value of the shares

These conditions ensure that the company does not suffer a loss on capital.

Accounting Treatment of Reissue

The accounting entries for reissue depend on the price at which the shares are reissued.

When Shares are Reissued at Par or Premium

• Debit: Bank Account (amount received)
• Credit: Share Capital Account

If issued at premium, the Securities Premium Reserve Account is also credited.

When Shares are Reissued at Discount

• Debit: Bank Account (amount received)
• Debit: Share Forfeiture Account (discount allowed)
• Credit: Share Capital Account

The discount is adjusted against the amount forfeited earlier.

Transfer to Capital Reserve

After the reissue of forfeited shares, any balance remaining in the Share Forfeiture Account represents a capital gain.

This balance is transferred to the Capital Reserve Account.

• It is considered a capital profit
• It cannot be distributed as dividend
• It strengthens the company’s financial position

Illustrative Example

A shareholder applies for a share of ₹100, payable as ₹25 on application, ₹25 on allotment, and ₹50 on the final call. The shareholder pays the application and allotment money but fails to pay the final call.

In such a case:

• The company issues a notice demanding payment
• Upon failure, the shares are forfeited
• The shareholder loses ownership and the amount already paid
• The company reissues the shares to another investor

This example highlights how forfeiture and reissue operate in practice.

Relationship Between Forfeiture and Reissue

Forfeiture and reissue are closely connected processes.

• Forfeiture results in the cancellation of shares due to non-payment
• Reissue restores these shares to active circulation

The process ensures that:

• The company’s capital is not permanently reduced
• Financial discipline is enforced
• New investment opportunities are created

Conclusion

Forfeiture and reissue of shares are important mechanisms under company law that help maintain financial discipline and stability within a company. Forfeiture acts as a corrective measure against defaulting shareholders, while reissue allows the company to recover and utilise its capital effectively.

The process is governed by strict legal and procedural requirements to ensure fairness and transparency. Proper accounting treatment ensures that all financial aspects are accurately recorded, including the use of Share Forfeiture Account and Capital Reserve.