The forfeiture of shares occurs when a shareholder fails to pay the required call money on shares allotted to them. When shares are forfeited, the shareholder loses their rights to the shares, and any amount they have already paid is retained by the company. Forfeiture is a common legal remedy that companies use to enforce payment obligations on shares. It results in the cancellation of the allotment, and the company treats the amount already received on such shares as forfeited to the company.
What is Forfeiture of Shares?
Forfeiture of shares is the legal process by which a company cancels the shares of a shareholder who has failed to pay the amount due to them. Forfeiture is governed by the company’s Articles of Association, which typically follow Table F of the Companies Act. Once shares are forfeited, the shareholder loses all rights to the shares, including any dividends or voting rights. The company retains any amount paid before the forfeiture as a forfeited amount and may reissue the shares to recover the unpaid call money.
Share forfeiture happens when a company cancels shares of a shareholder for not paying for those shares according to the requirements of the company. The result is that the shareholder loses title over the shares as well as the amount previously paid, but the company keeps such funds. The forfeited shares can either be reissued to other investors or be cancelled by the company.
In simple terms, suppose you purchase shares in a firm but fail to pay for them as you had agreed. The firm can now reclaim the shares from you, and you forfeit your shares as well as any payment that you had already made.
Accounting Entries on Forfeiture of Shares
The accounting treatment of forfeited shares requires reversing certain previous entries. The following general journal entries are made in the books of accounts when forfeiture occurs:
Forfeiture of Shares
Debit share capital account with the value of shares called up and credit the amount unpaid to the relevant unpaid call accounts when shares are forfeited.
Journal Entry:
| Share Capital A/c Dr. (called-up amount) To Share Forfeiture A/c (Paid-up amount) Cash Calls in Arrears A/c (Unrealized Amount) |
Reissue of Forfeited Shares
If previously forfeited shares are reissued, the bank account is debited by the amount received. The share capital is credited by the face value of the reissuable shares. The balance in the share forfeiture account should be transferred to the Capital Reserve as profit on the reissue.
Reissue Journal Entry:
| Bank A/c Dr. (Re-issue amount) Share Forfeiture A/c Dr. (Discount Allowed) Share Capital A/c (Face Value of issued shares) |
Transfer of Forfeiture Profit to Capital Reserve
Any excess amount in the share forfeiture account is transferred to the capital reserve account.
Journal Entry:
| Share Forfeiture A/c Dr.(Profit On Reissue) To Capital Reserve A/c (Profit transferred) |
Reasons for Forfeiture of Shares
Forfeiture of shares is a legal procedure where a company can reclaim shares from a shareholder who has failed to pay the required calls or installments on those shares. This typically occurs when a shareholder is unable or unwilling to meet their financial obligations to the company.
1. Non-Payment of Call Money: The most usual and common cause of loss arises from the default of a shareholder in paying any amount due upon shares, application, allotment, or call money.
2. Breach of Contract: Shareholders can be forfeited upon breaching the provisions and terms as set out in the company’s Articles of Association.
3. Non-Compliance with Legal Requirements: Even less frequently, failure on the part of a shareholder to comply with some statutory obligations or responsibilities as spelled out by the bylaws or agreements of the company incurs forfeiture of the shares.
4. Voluntary Forfeiture: Shareholders sometimes demand forfeiture even when it is not required. This mostly occurs because of financial constraints or any other means, but it is not a very frequent action.
Effects of Forfeiture of Shares
The consequence of a forfeiture of shares has both the effect on a shareholder and the company to which this share is allotted. Such consequences include;
1. Loss of ownership rights: All rights of shareholders over the shares, including voting rights, dividend entitlements, and claims on assets, cease to exist.
2. Reduction of Share Capital: Forfeiture effectively leads to the cancellation of the issued shares; therefore, the paid-up share capital decreases for the company.
3. Profit on Reissue of Shares: If forfeited shares are issued at a premium or price other than that of the balance remaining unpaid. The excess amount is transferred to the company’s capital reserve as profit.
4. Shareholder Relationships: Forfeiture can prove detrimental to the relationship of a company with its shareholders in terms of the perception it has regarding the management and the practices of the company itself.
5. Financial Reporting: Until the shares are reissued, this balance is presented in the company’s balance sheet under the ‘Share Capital’ section.
Forfeiture of Shares FAQs
What is the forfeiture of shares in a company?
Forfeiture of shares is the cancellation of shares of a company by canceling a shareholder’s shares due to non-payment of dues like an allotment or call money.
What is the concept of forfeiture?
Forfeiture refers to a loss of any property, money, or assets without consideration or compensation in return. A forfeiture generally occurs due to default in complying with repayment obligations under a contract. It can also be used as a penalty for an illegal way of conducting business.
What are the accounting entries for the forfeiture of shares?
The main entries comprise a debit to the share capital account and crediting the share forfeiture account along with any other unpaid calls account.
What is redemption of shares?
Redemption of shares, particularly preference shares, refers to a company repurchasing its own shares from shareholders at a predetermined time or after a specific period. This process effectively reduces the number of shares outstanding and returns the share value to the investors.
Can forfeited shares be reissued?
Yes, shares that have gone forfeited can be reissued many times for a lesser amount, as well as collect any unpaid out of the reissue.
What is an example of a forfeiture?
Forfeiture is the loss of a right, property, or money, typically due to a failure to fulfill an obligation or a breach of a contract. A common example is failing to make payments on a loan or credit agreement, resulting in the loss of the asset pledged as collateral. In the context of a business, a company may forfeit shares if a shareholder fails to pay the required amount for those shares.
What happens to the monies already paid on forfeited shares?
The amount already paid is retained by the company and credited to the share forfeiture account. After the re-issue of the shares, the balance is transferred to the capital reserve.
