Forfeiture of Shares: Meaning, Entry and Examples

Forfeiture of Shares: Meaning, Entry and Examples

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Chanchal
Chanchal Aggarwal
Senior Executive Content
Updated on Mar 27, 2024 17:31 IST

Forfeiture of shares occurs when a shareholder fails to pay the call money by the due date, leading to the company reclaiming the shares. This process results in the shareholder losing all rights and benefits associated with the forfeited shares.

Forfeiture of Shares

Have you ever considered the risks of not keeping up with your share payments? Forfeiture of shares is a significant risk, where a company takes back shares for unpaid dues. It's a stark reminder of the importance of financial commitments in share investing. 

However, it's crucial to note that a company can only forfeit shares if its Articles of Association explicitly allow such action. This provision ensures the process is legally grounded, protecting the company and its investors.

Table of Content

What is Forfeiture of Shares?

Forfeiture of shares occurs when a shareholder loses their rights and ownership of the shares due to non-payment or other breaches of the terms of ownership. This typically happens when a shareholder fails to pay for the shares as required, and the company has the right to cancel the shares and retain any previous payments made by the shareholder. The forfeited shares can then be reissued or cancelled by the company.

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Example of Forfeiture of Shares

Imagine ABC Corp offers shares at Rs 200 each. Mrs. B buys 500 shares, paying half upfront. She's supposed to pay the rest in two parts. After paying the first part, she fails to pay the second. ABC Corp, as outlined in its Articles of Association, takes back Mrs. B's shares. This means Mrs. B loses her 500 shares and the Rs. 50,000 she had paid, affecting her investment and decreasing ABC Corp's total subscribed capital.    

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Forfeiture of Shares Entry

Journal entry forfeiture of shares at Premium:

Consider a company that issues 100 shares at Rs. 120 each (Face value Rs. 100, Premium Rs. 20). The shareholder pays Rs. 70 (Rs. 50 face value + Rs. 20 premium) but defaults on the final call of Rs. 50. Upon forfeiture:

Account Titles and Explanation

Debit (Rs.)

Credit (Rs.)

Share Capital Account (100 shares @ Rs. 100)                 Dr. 

10,000

 

Securities Premium Account (100 shares @ Rs. 20)       Dr. 

2,000

 

                                          To, Shares Forfeiture Account

(Amount received on forfeited shares)

 

7,000

                                          To, Final Call Account

(Outstanding final call on forfeited shares)

 

5,000

Narration: Being 100 shares forfeited for non-payment of the final call, involving a face value of Rs. 100 per share and a premium of Rs. 20 per share, with Rs. 50 per share remaining unpaid.

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Journal entry forfeiture of shares at Par:

Total Shares Forfeited: 100 shares

Par Value per Share: Rs. 100

Amount Called Up per Share (before forfeiture): Rs. 100

Application Money Paid: Rs. 40

Allotment Money Paid: Rs. 30

First Call Money Paid: Rs. 20

Final Call Money (Defaulted): Rs. 10 

Account Titles and Explanation

Debit (Rs.)

Credit (Rs.)

Share Capital Account (100 shares @ Rs. 100)

10,000

 

                  To, Shares Forfeiture Account

(Amount received on forfeited shares)

 

9,000

                  To,  Final Call Account

(Outstanding final call on forfeited shares)

 

1,000

Narration: Being 100 shares forfeited for non-payment of the final call, with a par value of Rs. 100 per share, and Rs. 10 per share remaining unpaid.

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Journal entry forfeiture of shares at discount:

Total Shares Forfeited: 100 shares

Face Value per Share: Rs. 100

Issue Price per Share (Discounted Price): Rs. 90 (i.e., issued at a 10% discount)

Amount Called Up per Share (before forfeiture): Rs. 90

Application Money Paid: Rs. 30

Allotment Money Paid: Rs. 30

First Call Money Paid: Rs. 20

Final Call Money (Defaulted): Rs. 10

Account Titles and Explanation

Debit (Rs.)

Credit (Rs.)

Share Capital Account (100 shares @ Rs. 100)

10,000

 

Discount on Issue of Shares

1,000

 

To Shares Forfeiture Account

(Amount received on forfeited shares)

 

8,000

To Final Call Account

(Outstanding final call on forfeited shares)

 

1,000

Narration: Being 100 shares forfeited for non-payment of the final call, issued at a discount of 10%, with Rs. 10 per share remaining unpaid.

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Reasons for Forfeiture of Shares

  1. Non-payment of allotment money or calls on shares: When a shareholder fails to make the required payments for the shares they have been allotted or fails to pay any subsequent calls on the shares as requested by the company, the shares may be subject to forfeiture. This is typically outlined in the terms of the share issuance and the company's articles of association.
  2. Breach of terms of the share agreement: If a shareholder breaches any of the terms or conditions outlined in the share agreement, such as restrictions on transferability or other obligations, the company may have the right to forfeit the shares.
  3. Failure to provide necessary documentation or information: In some cases, shareholders may be required to provide specific documentation or information to the company, and failure to do so within the specified timeframe could result in the forfeiture of shares.
  4. Violation of statutory provisions or company regulations: If a shareholder violates legal or regulatory provisions related to share ownership or breaches company regulations, the company may exercise its right to forfeit the shares.
  5. Any other specified reasons: The company's articles of association or shareholder agreement may outline additional specific reasons for which shares may be forfeited, providing clarity and transparency regarding the circumstances under which forfeiture may occur.

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Process of Forfeiture

  • Forfeiture is the act of losing property or rights due to a breach of contract or failure to meet legal obligations.
  • It can occur in various contexts, such as real estate, finance, and legal proceedings.
  • Forfeiture typically involves a formal legal process and may require court intervention.
  • The specific process of forfeiture can vary depending on the nature of the agreement or the jurisdiction in which it takes place.
  • Common examples of forfeiture include the loss of a security deposit for violating a lease agreement or the seizure of assets due to criminal activity.

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Effects of Forfeiture of Shares

The forfeiture of shares can have several effects, including:

1. Loss of Ownership: When shares are forfeited, the shareholder loses ownership rights and any associated benefits, such as voting rights and dividend payments.

2. Liability for Unpaid Amounts: Depending on the terms of the original share agreement, shareholders who have their shares forfeited may still be liable for any unpaid amounts on the shares.

3. Company's Authority to Reissue: The company has the authority to reissue the forfeited shares to new shareholders or existing shareholders, providing the company with additional capital.

4. Impact on Share Capital: Forfeiture of shares can impact the company's share capital and may require adjustments in the company's financial statements to reflect the changes in ownership structure.

5. Legal Process: The forfeiture of shares typically involves following specific legal procedures outlined in the company's articles of association and relevant laws and regulations.

Reissue of Forfeiture of Shares

When a shareholder forfeits shares, the company can reissue them to new or existing shareholders. This re-issuance provides the compare-issuance opportunity to raise additional capital and may involve following specific procedures outlined in the company's articles of association and relevant laws and regulations.

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About the Author
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Chanchal Aggarwal
Senior Executive Content

Chanchal is a creative and enthusiastic content creator who enjoys writing research-driven, audience-specific and engaging content. Her curiosity for learning and exploring makes her a suitable writer for a variety ... Read Full Bio