This blog is a complete practical guide on the Forfeiture of Shares, its meaning and step wise process under the Companies Act 2013, its causes, implications, and processes, and to provide a comprehensive guide to all stakeholders. In the dynamic world of corporate finance, share forfeiture is a mechanism that enforces discipline in terms of financial obligations associated with share ownership. This process is governed in India under the Companies Act, 2013. Understanding the nuances and implications of share forfeiture is crucial for shareholders, companies, and prospective investors alike.
Understanding Share Forfeiture
Legal Framework
Causes for Share Forfeiture
- Non-payment of Calls: The most common cause of share forfeiture is the non-payment of calls. A ‘call’ is a demand made by the company for the payment of the amount due on the shares. If a shareholder fails to pay this amount within the specified period, the company may choose to forfeit their shares.
- Violation of Company Rules: Share forfeiture can also occur when a shareholder breaches the rules laid down in the articles of association of the company. These rules might pertain to a wide range of situations, from financial responsibilities to conduct within the company. If these rules are violated, it gives the company grounds to enforce share forfeiture.
- Other Causes: There can be other scenarios where a company may exercise its right to forfeit shares. These might be unique to the company’s articles of association or the shareholder agreement. For example, the company may reserve the right to forfeit shares if a shareholder is involved in activities that harm the company’s reputation or interests.
Procedure of Share Forfeiture
Step-1: Issue Notice to defaulting shareholder:
Step-2: Pass Board Resolution
Step-3: Declaration and Updation of Registers
Step -4: Sale of Forfeited Shares
Implications of Share Forfeiture
- For the Shareholder: Share forfeiture can have several significant implications for the shareholder.
- Loss of Rights: The most immediate impact is the loss of shareholder rights. Once shares are forfeited, the shareholder loses all their rights and benefits related to those shares, including the right to receive dividends and attend shareholder meetings.
- Loss of Voting Power: With the forfeiture of shares, the shareholder also loses their voting power in the company proportional to the forfeited shares. This can affect their influence over company decisions.
- Potential Financial Loss: The shareholder can also suffer a financial loss. Although they are relieved from any future liability towards the unpaid amount, they lose the money they have already paid for the shares. Plus, they lose out on potential future returns from those shares.
- For the Company: The implications of share forfeiture for the company can be both financial and reputational.
- Financial Implications: On the financial side, the company may recover the unpaid amount by reselling the forfeited shares. However, it could face potential losses if the shares are sold at a price lower than what was originally due.
- Reputational Implications: Repeated instances of share forfeiture might raise questions about the company’s financial stability and management quality. This could impact the company’s reputation among existing and potential investors and may affect future fundraising efforts.
Legal Redress and Remedies
- Internal Redressal: The first step for shareholders is usually to approach the company’s board of directors and contest the forfeiture. They can present their case, provide any evidence they might have, and ask the board to reconsider its decision. For instance, if a shareholder has proof that they had paid the call money within the due period, they can submit this evidence to the board. If the board is satisfied, they may reverse the forfeiture.
- Approaching the NCLT: If the internal redressal does not yield a satisfactory result, shareholders can approach the National Company Law Tribunal (NCLT), which was established under the Companies Act, 2013. For example, if a shareholder believes the notice for payment was not duly served or the board of directors did not pass the forfeiture resolution in good faith, they can file a petition with the NCLT, citing these reasons. The NCLT, after considering all the facts and circumstances, can either uphold the forfeiture or reverse it.
- Civil Courts: In some cases, shareholders may also approach civil courts if they believe their rights have been infringed. It’s essential to note that this is usually considered a last resort, as it often involves a lengthy process.
- Arbitration: If the shareholder agreement or the company’s articles of association contain an arbitration clause, the shareholder can choose to go for arbitration as well.
Recent Case Laws
- Bhagwandas Goverdhandas Kedia vs. Girdharilal Parshottamdas & Co (1966) 1 SCR 656: In this case, the Supreme Court of India ruled that the forfeiture of shares is not a matter to be taken lightly, and the process must adhere strictly to the requirements and conditions laid down in the company’s articles of association. The decision underlined the critical principle that the power of forfeiture is a drastic one and must be exercised in good faith and for the benefit of the company.
- M/s. Siel Foods & Fertilizer Industries vs. B.S. Atwal (1991). In this case, the Delhi High Court held that a notice of forfeiture served to a wrong address, as a result of the shareholder’s failure to notify the company of a change in address, is considered duly served. This case reinforced the importance of shareholders’ responsibility in maintaining up-to-date contact information with the company.
- In more recent years, there have been a number of cases that have further clarified the law on share forfeiture. For example, in the case of Hindustan Construction Co. Ltd. vs. S.J. Jain (2011) 144 Comp Cas 178 (NCLT), the National Company Law Tribunal (NCLT) held that the power of forfeiture can be exercised only after the shareholder has been given a reasonable opportunity to pay the amount due. The NCLT also held that the company must not be motivated by mala fide or ulterior considerations in exercising its power of forfeiture.
- These are just a few examples of recent cases that have helped to shape the law on share forfeiture. As the law continues to evolve, it will be important to stay up-to-date on the latest developments. Here are some other leading judgments on share forfeiture:
- Indian Bank vs. A.C. George (1989) 62 Comp Cas 353 (Mad)
- Union Bank of India vs. D.V. Patil (1994) 78 Comp Cas 116 (Bom)
- ITC Ltd. vs. A.K. Aggarwal (2003) 123 Comp Cas 328 (Del)
In conclusion, share forfeiture is a complex legal issue with a long history. The law on share forfeiture has been evolving over time, and recent cases have provided valuable insights into how the law is being applied in real scenarios. It is important for companies to understand the law on share forfeiture and to follow the correct procedures when forfeiting shares. Failure to do so could result in legal challenges.
In today’s corporate landscape, share forfeiture is becoming increasingly relevant. As companies face financial challenges, they may be more likely to forfeit shares. This is why it is important for companies to have a clear understanding of the law on share forfeiture and to be prepared to take action if necessary.