What is Forfeiture of Shares ?

Forfeiture of shares is the process by which a company cancels the shares held by a shareholder who has failed to pay the amount due on those shares. The forfeiture process is governed by the provisions of the Companies Act, 2013, and the articles of association of the company.

Illustration

Suppose there is a company called XYZ Pvt Ltd, and Mr. X is a shareholder in the company. Mr. X has 1,000 shares in the company, but he has failed to pay the due amount of Rs. 10 per share. As per the provisions of the Companies Act, 2013, and the articles of association of XYZ Pvt Ltd, the company can forfeit Mr. A's shares.

Forfeiture of share in case other than failure to pay the due amount

Forfeiture of shares can also happen in cases other than the failure to pay the due amount. For example, a company may forfeit shares if a shareholder has violated any of the terms and conditions of the shareholding agreement or articles of association. Some examples of such violations are:

1. Breach of the lock-in period: The articles of association of a company may contain provisions for a lock-in period, during which shareholders are prohibited from selling their shares. If a shareholder sells their shares during the lock-in period, the company may forfeit their shares.

2. Non-compliance with regulations: Shareholders are required to comply with various regulations, such as the Securities and Exchange Board of India (SEBI) regulations. If a shareholder violates any of these regulations, the company may forfeit their shares.

3. Fraudulent activities: If a shareholder is found to have engaged in fraudulent activities, such as insider trading or misrepresentation of information, the company may forfeit their shares.

4. Non-disclosure of information: Shareholders are required to disclose certain information, such as their beneficial ownership, to the company. If a shareholder fails to disclose this information, the company may forfeit their shares

Manner of Forfeiture of shares

• Voluntary forfeiture: This occurs when a shareholder voluntarily surrenders their shares to the company.

• Compulsory forfeiture: This occurs when a company is forced to forfeit a shareholder's shares due to a violation of the terms of the shareholding agreement, such as non-payment of fees or failure to comply with certain conditions.

• Right of first refusal: In this case, if a shareholder intends to sell their shares, the company may have the right of first refusal to purchase the shares before they are offered to a third party. If the company declines to exercise this right, the shares may be forfeited.

The process of forfeiture of shares in India involves the following steps:

1. Notice of forfeiture: The company must give notice to the shareholder of its intention to forfeit their shares. This notice must be in writing and must specify the reasons for the forfeiture and the terms and conditions under which the shares will be forfeited. The notice must be served on the shareholder either by registered post or by personal service.

2. Opportunity to cure the default: The shareholder must be given an opportunity to cure the default or breach that led to the forfeiture. This gives the shareholder the chance to rectify the issue and avoid forfeiture. The period of time allowed for curing the default will be specified in the notice of forfeiture.

3. Confirmation of forfeiture: If the default or breach is not cured within the specified time frame, the company may proceed with the forfeiture by confirming the forfeiture in writing. This confirmation must be signed by two directors of the company or by a single director if authorized by the board of directors.

4. Cancellation of shares: Upon confirmation of forfeiture, the company must cancel the shares and remove the shareholder's name from the register of shareholders. The company must also make a note of the forfeiture in its books of account.

5. Reissue of shares: If the forfeiture is confirmed, the company may reissue the forfeited shares or offer them for sale to other shareholders or to the public. Any proceeds from the sale of the forfeited shares must be credited to the company's account.

Forfeiture of shares is a serious matter and hence it is imperative that the same must be carried out in accordance with the provisions of the Companies Act, 2013 and other relevant laws in India. The company must also ensure that the forfeiture does not violate any provisions of the company's articles of association or shareholding agreement. In case of any disputes regarding forfeiture, the matter may be resolved through legal proceedings.