Forfeiture of shares occurs when a shareholder loses ownership of their shares because they fail to pay the required amount on time.
This usually happens when the shareholder does not pay allotment money, call money, or other dues as stated by the company.
Once forfeited, the shareholder’s rights on those shares are cancelled, and the amount already paid remains with the company.
The purpose of forfeiture is to ensure that all shareholders meet their financial commitments and to maintain discipline within the company’s capital structure.
What is Forfeiture of Shares?
The forfeiture of shares meaning can be explained as the company’s right to take back shares from a shareholder who defaults on payment obligations.
When shares are forfeited, the shareholder loses all associated benefits, such as voting rights and dividends.
This step protects the company’s interests and ensures that its financial resources are not impacted by non-paying shareholders.
However, forfeiture is considered a serious measure and is carried out only after proper legal procedures are followed.
Legal Framework: Forfeiture of Shares in Company Law
The process of forfeiture of shares in company law is governed by a company’s Articles of Association.
Before forfeiting shares, the company must issue a written notice to the shareholder, clearly mentioning the amount due and a final date for payment.
If the shareholder still fails to comply, the board of directors can pass a resolution to forfeit the shares.
Any error in this process can make the forfeiture legally invalid, so following due procedure is essential.
Here is a simple forfeiture of shares example for better understanding:
Suppose a company issues 1,000 shares of ₹10 each, payable ₹5 on allotment and ₹5 on the final call. If a shareholder fails to pay the final call amount, the company may issue a notice and later forfeit those shares after the deadline passes. The shareholder then loses both the shares and the rights attached to them.
