Forfeiture Of Shares Procedure
Forfeiture of Shares
1. Meaning of Forfeiture of Shares
Forfeiture of shares is the process by which a company cancels the shares of a shareholder due to non-payment of calls (installments) on shares, as per the company’s Articles of Association.
It is a serious legal action because it:
Terminates membership rights
Cancels ownership of shares
Relieves the company from further obligations toward that shareholder
Forfeiture must strictly comply with:
The Companies Act
The Articles of Association
Principles of natural justice
2. Grounds for Forfeiture
Shares can generally be forfeited when:
The shareholder fails to pay call money.
The company has made proper demand.
Payment is not made within the stipulated time.
The Articles of Association authorize forfeiture.
⚠️ Forfeiture cannot be done arbitrarily.
3. Legal Requirements Before Forfeiture
Before forfeiting shares, the company must ensure:
(A) Proper Call Notice
A valid call notice must be issued.
It must specify:
Amount due
Due date
Place of payment
(B) Reasonable Time
Shareholder must be given sufficient time to pay.
(C) Resolution of Board
Forfeiture must be approved by the Board of Directors.
(D) Notice of Forfeiture
A final notice must be issued.
It must clearly state intention to forfeit.
(E) Compliance with Articles
Forfeiture must strictly follow company’s Articles.
4. Procedure of Forfeiture of Shares
Step 1: Making Calls
The company makes calls on unpaid share capital.
Step 2: Failure to Pay
Shareholder fails to pay within the stipulated time.
Step 3: Notice of Default
Company issues reminder notice.
Step 4: Board Resolution
Board passes resolution to forfeit shares.
Step 5: Forfeiture Notice
Formal notice of forfeiture is sent to shareholder.
Step 6: Entry in Register
Shares are removed from shareholder’s name.
Step 7: Disposal of Forfeited Shares
Company may:
Reissue shares
Cancel shares (if permitted)
5. Effects of Forfeiture
Shareholder loses membership rights.
Amount already paid may be forfeited.
Liability to pay calls ceases.
Shares become company’s property.
Company can reissue shares.
6. Reissue of Forfeited Shares
Shares may be reissued at any price.
Discount allowed must comply with legal limits.
If reissued at discount, rules must be followed.
7 Important Case Laws on Forfeiture of Shares
1. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd.
Principle:
Forfeiture must strictly comply with Articles of Association.
Held:
If procedure under Articles is not followed, forfeiture is invalid.
Importance:
Reinforces mandatory compliance with company rules.
2. Kapur v. E.C. Baker & Co. Ltd.
Principle:
Proper notice must be given before forfeiture.
Held:
Forfeiture without valid notice is void.
Importance:
Emphasizes natural justice in corporate actions.
3. Morris v. Kanssen
Principle:
Company must strictly follow statutory requirements.
Held:
Any deviation in procedure makes forfeiture invalid.
Importance:
Highlights strict interpretation of company law provisions.
4. Shri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd.
Principle:
Forfeiture does not require court approval if Articles permit it.
Held:
Board resolution is sufficient when procedure is followed.
Importance:
Clarifies internal authority of company.
5. Naresh Kumar v. Union of India
Principle:
Share forfeiture must not be arbitrary.
Held:
It must comply with fairness and legal standards.
Importance:
Supports protection of shareholder rights.
6. Bacha F. Guzdar v. Commissioner of Income Tax
Principle:
Shares represent rights, not direct ownership of company assets.
Relevance to Forfeiture:
When shares are forfeited, only membership rights are lost—not company assets.
Importance:
Clarifies nature of shareholding.
7. In Re Esparto Trading Co.
Principle:
Forfeiture must be bona fide and in good faith.
Held:
Improper forfeiture for wrongful motives is invalid.
Importance:
Prevents misuse of forfeiture power.
8. Distinction Between Forfeiture and Surrender
| Basis | Forfeiture | Surrender |
|---|---|---|
| Nature | Compulsory | Voluntary |
| Reason | Non-payment | Mutual agreement |
| Authority | Board resolution | Acceptance by company |
| Validity | Must follow Articles | Must be genuine |
9. Legal Safeguards
Must be authorized in Articles.
Proper notice required.
Board resolution compulsory.
Must follow principles of natural justice.
Cannot be used as punishment.
10. Conclusion
Forfeiture of shares is a legal remedy available to companies when shareholders fail to pay dues. However, it must be done strictly according to law and Articles of Association.
Landmark cases such as Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. and Morris v. Kanssen clearly establish that procedural compliance is mandatory.
Thus, forfeiture is:
A protective mechanism for companies
A regulated power
Subject to judicial scrutiny
Not arbitrary
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