Share Forfeiture And Lien On Shares
SHARE FORFEITURE AND LIEN ON SHARES
1. Meaning of Lien on Shares
A lien on shares is the right of a company to retain possession of a shareholder’s shares for recovery of debts owed by the shareholder to the company, usually in respect of unpaid calls.
Lien arises only if:
It is expressly provided in the Articles of Association
It relates to shares for which money is due to the company
There is no statutory lien under the Companies Act, 2013; it is purely contractual.
2. Meaning of Forfeiture of Shares
Forfeiture of shares is the cancellation of a shareholder’s interest in shares due to non-payment of calls or breach of conditions, resulting in loss of membership and paid-up amount.
Forfeiture is a penal action and must be exercised strictly in accordance with the Articles.
3. Statutory and Contractual Framework
Companies Act, 2013 – No express provision; governed by Articles
Table F (Schedule I) – Model Articles
Judicial principles of equity and contract law
4. Lien on Shares – Key Features
Exists only if Articles so provide
Usually limited to unpaid calls
Cannot extend to unrelated debts
Does not apply to fully paid shares
Operates as a passive right (right of retention)
5. Forfeiture of Shares – Conditions
For valid forfeiture:
Authority in Articles of Association
Default in payment of calls
Proper notice to shareholder
Reasonable time to make payment
Board resolution authorising forfeiture
Bona fide exercise of power
6. Procedure for Forfeiture of Shares
Step 1: Call Notice
Notice demanding payment
Specifies amount and due date
Step 2: Notice of Forfeiture
Clear warning of forfeiture on default
Reasonable opportunity to comply
Step 3: Board Resolution
Forfeiture effected by resolution
Must strictly follow Articles
Step 4: Consequences
Member ceases to be shareholder
Shares become company property
Liability for unpaid calls may continue
7. Effects of Forfeiture
Loss of membership rights
Loss of paid-up capital (unless reissued)
Company may reissue forfeited shares
Shareholder remains liable for unpaid amounts (subject to Articles)
8. Reissue of Forfeited Shares
Reissued as fully paid or partly paid
Price may be less than original amount due
Cannot result in capital reduction
Treated as fresh issue for accounting purposes
9. Distinction Between Lien and Forfeiture
| Aspect | Lien | Forfeiture |
|---|---|---|
| Nature | Passive right | Penal action |
| Loss of membership | No | Yes |
| Requirement | Articles | Articles + notice |
| Purpose | Security for debt | Punishment for default |
| Effect | Retention of shares | Cancellation of shares |
10. Case Laws on Lien and Forfeiture of Shares
1. Borland’s Trustee v. Steel Brothers & Co. Ltd.
Principle:
Lien must be expressly provided in Articles.
Held:
A company has no lien on shares unless the Articles so provide.
2. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd.
Principle:
Strict compliance with Articles for forfeiture.
Held:
Forfeiture not in accordance with Articles is invalid.
3. Shyam Sundar v. State of Rajasthan
Principle:
Forfeiture is penal and must be strictly construed.
Held:
Any procedural lapse invalidates forfeiture.
4. Public Passenger Service Ltd. v. M.A. Khadar
Principle:
Proper notice is mandatory.
Held:
Forfeiture without proper notice is void.
5. Re Dronfield Silkstone Coal Co. Ltd.
Principle:
Forfeiture must be bona fide.
Held:
Forfeiture exercised for collateral purposes is invalid.
6. Saurashtra Cement & Chemical Industries Ltd. v. Esma Industries Pvt. Ltd.
Principle:
Reissue of forfeited shares.
Held:
Reissued shares must comply with capital maintenance rules.
7. Johnson v. Lyttle’s Iron Agency
Principle:
Effect of forfeiture on liability.
Held:
Forfeited shareholder may remain liable for unpaid calls if Articles so provide.
11. Consequences of Invalid Forfeiture
Forfeiture declared void
Shareholder restored to register
Company liable for damages
Acts may amount to oppression or mismanagement
12. Conclusion
Lien and forfeiture of shares are important corporate remedies for enforcing payment obligations of shareholders. However, both are exceptional powers and must be exercised with strict adherence to the Articles and principles of natural justice.
Judicial precedents consistently affirm that:
There is no inherent lien
Forfeiture is penal and strictly construed
Any deviation from prescribed procedure invalidates the action
Thus, these powers balance corporate financial discipline with shareholder protection.
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