FORFEITURE OF SHARES :

If a shareholder fails to pay the allotment money and/or calls made on him, his shares are liable to be forfeited. Forfeiture of shares may be said to be the compulsory termination of membership by way of penalty for non payment of allotment and/or any call money.

The Companies Act does not contain any specific provisions regarding forfeiture. The directors must follow certain procedure for forfeiting the shares. They have to give notice to the defaulting shareholder calling upon him to pay the amount due from him together with interest before a specified date (not being earlier than the expiry of fourteen days from the date of service of the notice). This notice must also state that if the shareholder fails to pay the amount along with interest due within the specified date, the shares will be forfeited. If the payment is not received within the specified time, the directors meet to consider the forfeiture and they can proceed to forfeit the shares. The directors must pass a resolution for forfeiting the shares at a duly constituted meeting of the Board of Directors and the defaulting shareholder should be informed about the forfeiture of his shares.

The effect of forfeiture of shares is that the defaulting shareholder loses all his rights in the shares and ceases to be a member. The name of the shareholder is removed from the Register of Members and the amount already paid by him is forfeited. He is not entitled in future to dividends and the rights of membership.

Forfeited shares account is to be shown in the balance sheet by way of addition to the paid-up share capital onthe ‘liabilities’ side, until the concerned shares are reissued.

 

FORFEITURE OF SHARES ISSUED AT PAR

Journal entries

The forfeiture of shares can be recorded in two ways:

2. Where the unpaid calls have not been transferred to Calls-in-Arrear A/c and the respective call accounts are showing balances representing unpaid amounts:

Share Capital A/c             Dr. with the amount of called up value of shares forfeited i.e., no. of shares forfeited x                                                          the called up value per share.

To Shares Forfeited A/c               with the amount already paid up by the shareholders on the shares forfeited.

To Share Allotment A/c                with the amount failed on allotment, if any.

To Share First Call A/c                  with the amount failed on first call, if any

To Share Final Call A/c                 with the amount failed on final call, if any.

FORFEITURE OF SHARES ISSUED AT A PREMIUM

Case 1: Where shares to be forfeited were issued at a premium and the premium money remained unpaid:

In this case the credit already given to the ‘Securities Premium A/c’ will be cancelled at the time of forfeiture of the shares by debiting “Securities Premium A/c”.

Journal Entries

Share Capital A/c                Dr. with the amount of called up value of shares forfeited, i.e., no. of shares forfeited x                                                          called up value per share. (excluding premium).

Securities Premium A/c       Dr. with the amount of premium money remaining unpaid on shares forfeited.

To Shares Forfeited A/c                 with the amount already paid by the shareholders on the shares forfeited

To Calls-in-Arrear A/c                      with the amount unpaid on calls

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Share Capital A/c                    Dr. with the amount of called up value of share forfeited, i.e., no. of shares forfeited x                                                          called upvalue per share. (excluding premium).

Securities Premium A/c         Dr. with the amount of premium money remaining unpaid on shares forfeited.

To Shares Forfeited A/c                with the amount already paid by the shareholders on the shares forfeited.

To Share Allotment A/c                with the amount failed on allotment, if any.
To Share First Call A/c                  with the amount failed on first call, if any.
To Share Final Call A/c                 with the amount failed on final call, if any.

Case 2: Where shares to be forfeited were issued at a premium and the premium money was duly received on the shares to be forfeited:

In this case Securities Premium Account is already credited at the time of making call will not be cancelled at the time of forfeiture of the shares. In such a case, the accounting entry on forfeiture will be the same as the one passed in case of shares issued at par.