forfeiture of shares and its procedure

Meaning: Forfeiture means termination of membership as a sort of penalty for the non-payment of calls on the due date.




To forfeit means to take away or to withdraw the rights of a person. Forfeiture of share refers to the cancellation or termination of membership of a share holder by taking away the shares and rights of membership.



Procedures regarding forfeiture of shares:



(1) Provision in the Articles of Association: The secretary has to check if there is a provision in the Articles of Association regarding forfeiture of shares. If there is a provision in the Articles, the company can go ahead regarding forfeiture of shares. If there is no provision in the Articles, the company cannot go ahead regarding forfeiture of shares.



(2) Preparing the list of defaulters: As soon as the due date of payment of call money is over, the secretary prepares a list of defaulting members. He, then calls a meeting of the Board of Directors and places the list of defaulters for consideration and suitable decision and action by the Board.



(3) Board Meeting and Resolution by Directors: The secretary arranges the meeting of the Board Directors and in this meeting a resolution will be passed whereby the secretary will be authorized to send reminders to the defaulters. Such call reminders contain a request to pay the call amount due, within a specified period with interest. This letter also intimates the defaulters that his shares are liable for forfeiture in case the default in payment of the amount continues.



(4) Issue of Warning Letter: Even after reminders have been sent to the defaulters, no heed has been taken to pay the call money, the secretary has to issue a warning notice under the authority of the Board's resolution and the Articles. The warning notice is for asking the defaulting members to pay the dues within 14 days from the date of notice. Warning is also given that failure to pay within the stipulated time will make the shares liable for forfeiture.



(5) Board Meeting for resolution on forfeiture: If the default continues even after 14 days warning notice, the secretary has to arrange a meeting of the Board of Directors. In this meeting a resolution will be passed by the Board of Directors to forfeit the shares of the defaulting members.



(6) Notice of the forfeiture: The secretary has to send a formal notice to the defaulting members informing them about the forfeiture and asking them to surrender the forfeited shares. Such notice of forfeiture or letter of forfeiture is required to be sent by registered post to the individual share holders concerned. Usually, the fact of forfeiture is also notified in the press and the public is cautioned against dealing in the said shares. The amount of forfeited shares is transferred to a Forfeited Shares Account in the financial books of the company.



(7) Removal of names from the register of members: Finally, the secretary has to remove the name of defaulters, from the register of members and enter the same with other particulars in the register of forfeiture of shares.



These were the procedures by which the company forfeits the shares of a defaulting share holder.