12.8.13 (Forfeiture of Shares)

Forfeiture of shares means taking them away from the member. This is a serious step for not only does it deprive the shareholder of his property but also, unless the shares are re-issued, it involves a reduction of capital.

Shares cannot be forfeited unless authorised by the Articles: The following rules should be noted in connection with forfeiture of shares:

            (1) In accordance with the articles. The forfeiture to be valid must be in accordance with the provisions contained in the articles. As per Table A, shares can be forfeited only against non-payment of calls. The articles of the company may, however, lawfully incorporate any other grounds of forfeiture [Per Shah J. in Naresh Chandra Sanyal v. The Calcutta Stock Exchange Assn. Ltd AIR(1971)SC 422].But it cannot be for the non-payment of the other debts; that would amount to unauthorized reduction of share capital [Hopkinson v. Mortimer Harley & Co. (1917) 1 Ch. 646]. Where the articles authorised the directors to forfeit the shares of a shareholder, who commences an action against the company or the directors, by making a payment of the full market value of his shares . Held such a clause was invalid as it was against the rights of a shareholder [Hope v. International Finance Society (1876)4 Ch. D.598].

            (2) Proper notice. Articles of a company normally follow ‘Table A’ with regard to forfeiture of shares. Table A provides that a notice requiring payment of the amount due together with any interest accrued must be served. The notice must mention a further day (not less than 14 days from the date of service of the notice) on or before which the payment is to be made. The notice must also mention that in the event of non-payment the shares will be liable to forfeiture.

Any irregularity either in contents or in service of notice would invalidate forfeiture of shares [Bhawandas Garg v. Canara Bank Ltd. (1981) 51 Comp. Cas, 38(A.P.)]

            Examples. (i) Where the notice on which the forfeiture was founded was inaccurate in requiring payment of interest from the date of the call instead of   the date when the call was payable, the forfeiture was Held invalid [Johnson v. Lyttle’s Iron Agency (1877) Ch.D.687].

            (ii) Where a notice for the forfeiture was sent by registered post A.D and was returned unserved, the forfeiture was Held invalid [Promilla Bansal v. Wearwell Cycle Co. (India) Ltd. (1978) 48 Comp. Cas.202(Delhi)].

            (iii) Resolution for forfeiture. A resolution of the directors is necessary to   enable the shares to be forfeited.

            (iv) Bona fide. The power to forfeit is in the nature of trust and must, therefore, be exercised for the benefit of the company. Thus, forfeiture for the purpose of relieving a friend from liability was Held to be invalid (Lord Walls Court’s case).

Even a slight irregularity in effecting a forfeiture would be fatal and render the forfeiture null and void. The aggrieved shareholder may bring an action for setting aside the forfeiture as well as for damages. His demand for damages can be proved even in a winding up [Re New Chili, etc. Co. (1890) 45 Ch. D.598].

Effect of forfeiture. The effect of forfeiture of shares is as follows:

            (1) The holder ceases to be a member of the company.

            (2) Liability for unpaid calls remains even after forfeiture of shares [Shiromani Sugar Mills v. Debi Pb. (1950) 20 Comp. Cas.296 (All). However, the payment of such amount cannot be enforced as a call but be sued for as a debt [Ladies Dress Assn. V. Pulbrookn (1909)2Q.B. App.376]. Similar view was expressed in the case of Bhagwati Pd. v. Shiromani Sugar Mills Ktd. (1949) 19 Comp. Cas.286 (All). The Court in this case observed that after forfeiture, a member does not pay as a contributory but he pays as a debtor. In the event of his shares being forfeited the shareholder would be liable to pay to the company all money that was due from him for allotments, calls and further calls made on the shares allotted to him with interest. There was thus a new obligation giving the company a fresh cause of action against the shareholder and thus, the period of limitation for a suit to enforce this new obligation begins to run from the time the shares were forfeited. Thus, the suit must be brought within three years from the date on which the shares were forfeited.

The company, however, cannot recover more than the difference between the sum due to the company in respect of the shares and the sum received by the company [Re Belton (1930) 2 Ch.48].

            (3) The former holder shall remain liable as a past member to pay calls if

liquidation takes place within one year of the forfeiture.

Re-issue of forfeited shares. It must be noted that the directors are not bound to forfeited sell shares forfeited for non-payment of calls [Bishambhar v. Agra Electric Stores Ltd. (1990) 1Ch.5661. This reduction of capital would not require sanction of the Court. It can be concluded from the above decision that if the shares are forfeited for reasons other than the non-payment of calls, re-issue of such shares should be obligatory.

Normally a company re-issues forfeited shares. The forfeited shares may be re-issued at any price provided that the total of sum paid by the former holder of the shares, together with the amount paid on re-issue and the amount remaining unpaid on shares is not less than the par (face) value because if it were, this would amount to an issue at a discount. This means that the discount on re-issue should not exceed the amount forfeited on those shares.

If the shares are reissued at a price more than their face value, as is normally the case, the excess is a premium and must, therefore, be transferred to the share premium account.

No Return of Allotment of the shares reissued need be filed with the Registrar [s.75(5)]. Such re-issue, however, cannot be called allotment.

Annulment of forfeiture. The Board of Directors may, if the former shareholder so requests annul (cancel) the forfeiture. The directors must, however, act bona fide and must pass a suitable resolution to that effect. On cancellation of the forfeiture the former holder is required to pay all calls due with interest and then his name is restored in the Register of members.