Page 33 - Ebook Financial Accounting 3

2.4 The nature of forfeiture of shares and reissuance of forfeited shares

a) Forfeiture of shares

A forfeited share is an equity share investment which is cancelled by the issuing
company. A share is forfeited when the shareholder fails to pay the subscription money called

upon by the issuing company. When shares are allotted to an applicant, he and the company enter
into a contract automatically. Then such an applicant is bound to pay the allotment money and all

the various call monies till the shares are fully paid up. But if the shareholder fails to pay any of

the calls (one or more) on the authorization of the board of Directors, the said shares can be
forfeited. Forfeiture essentially means cancellation.

Before such forfeiture is done a notice must be given to the shareholder. The notice must
provide the shareholder with a minimum of 14 days to make the payment due, or his shares will

be forfeited. Even after such notice if the shareholder does not pay, then the shares will be
cancelled.

When the said shares are forfeited the shareholder ceases to be a member of the company.
He loses all his rights and interests that a shareholder might enjoy. And once his name is removed

from the register of shareholders, he also losses all the money he has already paid towards the
share capital. Such money will not be refunded.

b) Reissue of the Forfeited Shares

The directors of the company have the power to re-issue the forfeited shares on such

terms as it thinks fit. However, if the forfeited shares are reissued at discount, the amount of
discount should not exceed the amount credited to the share forfeiture A/c. If the discount

allowed on reissue is less than the forfeited amount there will be the surplus left in the share

forfeited A/c. This surplus will be of the nature of capital profits so it will be transferred to the
Capital Reserve A/c.

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