Forfeiture And Surrender Of Shares Under Company Law

                                                                                                                   

  •  INTRODUCTION
  • Forfeiture of Share

When the shares are issued by the company, generally the shareholders are not asked to pay the whole amount of share at once. It happens in instalments. The company makes these calls on shares when it requires further capital.

Besides the forfeiture of shares is process in where the company forfeits the shares of a members or shareholders who fails to pay the call on shares or instalments of the issue price of his shares within a certain period of time after they fall due. So in other words, when the shareholders fails to pay the full amount of share which he agreed to pay in instalments the company can cancel his shares. But articles of association however provide that in such a case that a company may proceed to forfeit his shares. Shares cannot be forfeited unless there is a clear power to that effect in the articles. Thus in Madhwaa Rarnchandra Kamath Vs Canara Banking Ltd the articles of a company only authorized it to expel a member. It was held to be not sufficient to enable the company to deprive to remove member of his shares. Because the forfeited shares become the property of the company. To the extent forfeiture involves a reduction of the company’s capital. This shares can, however, be re-issued, even at a discount, but that is not the same thing as an allotment. The right must be exercised bona fide for the purpose for which it is conferred. The power of removal is a trust the execution of which will be narrowly scanned by the courts.

  • Surrender of Share

Further surrender of shares, like forfeiture, amounts to reduction of capital. But, while forfeiture is recognized by the Act, surrender is not. So there is nothing in the Act to surrender of shares but these have been admitted by the courts, upon the principle, that they have practically the same effect as forfeiture, the main difference being that one is a proceeding in invite and the other a proceeding taken with the acceptance of the shareholder who is unable to retain and pay future calls on the shares. So a company can only accept surrender under conditions and limitations subject to which shares can be for acceptance. Either on  valid call and a default must exist and the directors may, instead of going to the length of forfeiture, in good faith accept surrender from the shareholder. Besides the surrender should not be used as a device for relieving a shareholder from his liability cases of bad surrender of shares Collector of Moradabad vs Equity Insurance Co, AIR 1948 Oudh 197. this case explains as after the death of a Raja who held several shares in a company, his shares were surrendered to the company and the surrender was accepted by the secretary of the company. So it was held that even if the secretary intended to accept the surrender. There transaction would be ultra virus. So under our law it is not open to a shareholder to surrender the shares held by him or to the company to accept the surrender, unless the Act of the company can be brought within the rules relating to forfeiture of shares under Company  law.

  • PROCEDURE
  • Forfeiture of Share

As Forfeiture of shares is a serious step since it involves in depriving a person of his property as a penalty of some act or omission. So accordingly, shares of members cannot be forfeited unless the articles of the company conferred to  such power on the directors. So the  forfeiture of a share should happen only for the non-payment of the call on shares by the members and in accordance with articles of the company. But forfeiture can also be made for another reasons which are specified in the articles of the company. So the  Companies normally have their own rules and guidelines regarding the forfeiture of shares by procedure of as in accordance with articles, proper notice and resolution of forfeiture.

  • Surrender of Shares

But no shares has to be surrendered in case of the company in consideration of the payment of money or money’s worth by the company. But such a surrender shall be acting beyond the legal rights of the company since it would amount to purchase by the company of its own shares. But 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.. (A) As 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 (B)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. The Provisions in the articles, for the acceptance of surrender of shares in all other cases except the above A and B, will be void. So the 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.

  • CONCLUSION

As was concluded that the forfeiture is withdrawal of shares due to non payment of any call by the shareholders or for any other ground as may be provided in the articles. So on forfeiture of shares the member loses the amount paid thereon and his interest in the ownership of the shares. Further notice should be served by the company on the defaulting member by registered post acknowledgment due. It was held that a company can only accept a surrender under condition and limitations which shares can be forfeited, which did not exist earlier .

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