Question

What do you understand by forfeiture of shares?

Hint:

The forfeiture of shares is usually a last resort for companies after repeated efforts to collect outstanding dues from shareholders.

Answer 1

Forfeiture of shares refers to the process in which a company cancels or takes back the shares from a shareholder due to non-payment of dues or failure to meet the terms of the share agreement. It is a legal method used by companies when shareholders fail to pay the calls on shares within the stipulated time.

Reasons for Forfeiture: The most common reason for the forfeiture of shares is the non-payment of the call money on shares. When a company issues shares, it may require shareholders to pay the subscription amount in installments or calls. If a shareholder fails to pay the call money within the prescribed time, the company can forfeit their shares.
Procedure for Forfeiture: The company sends a notice to the shareholder requesting the payment of the overdue calls. If the shareholder does not respond or pay within the notice period, the company passes a resolution to forfeit the shares. The forfeited shares are then canceled, and the shareholder loses their rights on those shares.
Impact of Forfeiture: When shares are forfeited, the shareholder loses their rights to dividends, voting rights, and capital appreciation associated with those shares. However, the company can reissue the forfeited shares to new investors.
Accounting Treatment: The company needs to pass entries in the books to record the forfeiture. The amount received on the forfeited shares is transferred to a separate Forfeited Shares Account, which can be used to offset any losses or to issue new shares.
In summary, forfeiture of shares is a mechanism used by companies to deal with unpaid dues from shareholders, which results in the cancellation of their shares.