What is forfeiture of shares? How is it different from surrender of shares?

 There are circumstances under which the shares of a stakeholder can be forfeited by the company under the provisions of the law. So what is done with the forfeited shares? And how are the  previous accounting entries reversed? Let us take a look at the meaning and effect of forfeiture of  shares.

Forfeiture of Shares

When shares are allotted to an applicant, he and the company enter into a contract automatically. Then such an applicant is bound to pay the allotment money and all the various call monies till the  shares are fully paid up. But if the shareholder fails to pay any of the calls (one or more) on the authorization of the board of Directors, the said shares can be forfeited. Forfeiture essentially means cancellation.

Before such forfeiture is done a notice must be given to the shareholder. The notice must provide the shareholder with a minimum of 14 days to make the payment due, or his shares will be forfeited. Even after such notice if the shareholder does not pay, then the shares will be canceled. When the said shares are forfeited the shareholder ceases to be a member of the company. He loses all his rights and interests that a shareholder might enjoy. And once his name is removed from the register of shareholders he also losses all the money he has already paid towards the share capital. 

Such money will not be refunded.

Surrender of shares means the return of shares by the shareholder to the company for cancellation. Holder in this case voluntarily abandons all his shares in favour of the company. A mere refusal to take up newly issued shares, to which a shareholder is entitled to, is not a surrender of shares. The power to accept surrender of shares cannot be exercised by a company unless expressly given by the Articles of Association.

But no shares can, in any case, be surrendered to the company in consideration of the payment of money or money’s worth by the company. Such a surrender shall be ultra-vires the company since it would amount to purchase by the company of its own shares. There are only two cases where surrender of shares will be valid provided its acceptance by the company is authorised by the Articles of Association—

1. When shares are surrendered in exchange of the new shares of the same nominal value. There would be no reduction of share capital in such a case; and

2. When shares are surrendered as a short cut to forfeiture of shares when all the circumstances for forfeiture have arisen. Reduction of capital in such a case shall be valid.

Provisions in the articles, for the acceptance of surrender of shares in all other cases except the above two, will be void.

A member validly surrendering his shares to the company can nevertheless be held liable as a list B contributory in the event of winding up of the company within twelve months of his surrender of shares. Court may order for the restoration of the plaintiff’s name in the Register of Members after lapse of any number of years if the surrender of shares is proved to be illegal and provided that the shares have not been reissued in the meantime or otherwise dealt with by the company.

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