If a shareholder, who is called upon to pay any call fails to pay the amount, even after sending several reminders, the company may forfeit his shares. Forfeiture of shares results in a permanent reduction of the share capital.
A company can forfeit its shares only when the following conditions are satisfied:
1. Authority to Forfeit: The power to forfeit must be expressly given in the Articles. Accordingly, if no power is given in the Articles, no forfeiture can be made.
2. Default in Payment of Calls: The shares can be forfeited only for the non-payment of calls and not for the default in payment of any other debts.
3. In Accordance with the Articles: Forfeiture shall be valid only when the provisions of the Articles are strictly complied with. Even a slight deviation from the provisions shall render the forfeiture invalid.
4. Bonafide and for the Benefit of the Company: The right to forfeit shares is in the nature of trust and so it can be exercised bonafide and only for the benefit of the company. The power cannot be exercised hastly or for private ends.
5. Board Resolutions: Forfeiture will be effected only by means of a Board resolution.
6. Notice to Defaulting Shareholder: Notice precedent to forfeiture must be given to the defaulting shareholder. In the matter of forfeiture of shares, technicalities must be strictly observed.
The following procedure must be followed for forfeiture of shares:
1. The secretary shall prepare a list of defaulters i.e., the list of members who have not paid the call money up to the last date, and place it before the Board of Directors for necessary action.
2. The Board of Directors then passes a resolution instructing the secretary to send call notices to such defaulters.
3. As per Board’s resolution, the secretary dispatches the notices under registered post to the defaulting shareholders asking them to pay the call dues within 14 days with interest at a specified rate.
4. If any defaulting member does not comply with the requirements of such notice, a second warning notice may be sent stating that if the call money is not received within 14 days from the date of notice, the forfeiture of shares will follow.
5. If this notice also proves ineffective, the secretary convenes a meeting of the Board of Directors and places the facts before it. The Board then passes a formal resolution to forfeit the shares.
Annulment of Forfeiture
After the forfeiture of shares, if the defaulting shareholder likes to pay the amount due and requests the company to cancel the forfeiture of his shares, the secretary should take the following steps:
1. Board meeting is to be convened to settle the terms of annulment or cancellation of the forfeiture. This will be done by passing a resolution. Such resolution generally calls upon the defaulting member to pay off calls due together with interest.
2. A letter should be sent to the shareholder informing that on fulfillment of the conditions laid down by the Board, his name will be entered in the register of members.