Surrender of shares is a process in which a shareholder voluntarily returns their shares to the company, usually because they cannot pay for future calls on the shares. It is similar to forfeiture, but instead of the company taking action to reclaim the shares, the shareholder initiates the process.
Surrender of shares can only be accepted by a company under certain conditions and limitations, such as when the articles of association authorise it or in cases where it is a shortcut to the forfeiture of shares.
In other cases, the provisions for the surrender of shares in the articles will be void and the court may order the restoration of the shareholder’s name in the Register of Members if the surrender of shares is deemed illegal.
The act of forfeiting shares occurs when shareholders fail to make instalment payments, leading to the cancellation of their share allotment. In contrast, surrender of shares takes place when shareholders return their shares to the company for cancellation.
Surrender of shares can be a quick process to prevent the forfeiture of shares. If shareholders default on payment and anticipate forfeiture, they can choose to voluntarily surrender their shares.
The company can accept such surrendered shares if there is a provision for it in the Articles of Association (AoA) of the company.
The surrender of shares is considered a reduction of capital, similar to forfeiture. While forfeiture is recognised by the Act, surrender is not.
However, the courts have accepted surrender based on the principle that it has the same effect as forfeiture, with the main difference being that it is a proceeding taken with the acceptance of the shareholder who is unable to retain and pay future calls on the shares.
A company can only accept surrender under conditions and limitations subject to which shares can be forfeited and it should not be used to relieve a shareholder of their liability.
The Collector of Moradabad vs Equity Insurance Co, AIR 1948 Oudh 197 case illustrates the importance of surrender being legal and not used as a device to avoid liability. Under company law, a shareholder cannot surrender their shares or the company accept the surrender unless it falls within the rules relating to forfeiture of shares.
In terms of procedure, shares need not be surrendered in consideration of payment of money or money’s worth by the company. Such a surrender would be beyond the legal rights of the company and would amount to the purchase of its own shares.
There are only two cases where the surrender of shares is valid, provided it is authorised by the articles of association. The first case is when shares are surrendered in exchange for new shares of the same nominal value and the second is when shares are surrendered as a shortcut to forfeiture of shares when all the circumstances for forfeiture have arisen.
The provisions in the articles for the acceptance or surrender of shares in all other cases, except for the above two, will be void. If the surrender of shares is proved to be illegal, the court may order the restoration of the plaintiff’s name in the Register of Members after the lapse of any number of years, provided the shares have not been reissued or otherwise dealt with by the company.
Surrender of shares provides an alternative solution to forfeiture of shares for shareholders who cannot make future calls on their shares. It is a voluntary process where shareholders return their shares to the company for cancellation. While the Companies Act does not specifically provide for the surrender of shares, courts have recognized its legality under certain conditions and limitations.
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