ARTICLE
18 April 2024

Critically Analyse About Forfeiture Of Shares Under Indian Company

Ka
Khurana and Khurana

Contributor

K&K is among leading IP and Commercial Law Practices in India with rankings and recommendations from Legal500, IAM, Chambers & Partners, AsiaIP, Acquisition-INTL, Corp-INTL, and Managing IP. K&K represents numerous entities through its 9 offices across India and over 160 professionals for varied IP, Corporate, Commercial, and Media/Entertainment Matters.
We are aware that the corporations do not require shareholders to pay the whole share price in a single payment. It calls them when the money is needed.
India Corporate/Commercial Law
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INTRODUCTION

We are aware that the corporations do not require shareholders to pay the whole share price in a single payment. It calls them when the money is needed. If a shareholder fails to pay a lawful call within the given period, the organization has two options:

  1. The company may file a lawsuit to recover the funds, or
  2. The firm may forfeit the stock.

The first option entails a lengthy procedure. As a result, the company usually decides to forfeit such shares. Forfeiture refers to taking back of shares from the shareholders which led them to removal of them as shareholder. Shares can be forfeited only if the company's AOA contain a clause to that effect that is given in article 28 to 34 of table F of Schedule I of act of 2013 and if not included can by special resolution of the board. This is due to the non-payment of unpaid share capital even after company calls for capital. This article is analysis where the concept of forfeiture of shares is discussed and need and the provisions available has been discussed along with the contemporary issues and legal issues to this forfeiture and the objection led to this as being misused by the companies. The companies nowadays are moving directly for the forfeiture of shares instead of coming up with some new ideas to save the capital and members of that corporation. Where the first choice of suing the shareholder is barged and the extreme measure is taken being inconsiderate who the member is and the profits that member has brought in to the company. Many a time this also happens due to the politics and social issues between the members of the company so instead of forfeiting the shares the company should tell the shareholder prior while issuance of such shares itself that they have to be paid up within the particular time period instead of keeping it unknown to the shareholder when the company will call for money; this will not only allow the shareholders to prepare but also give them longer time to arrange and the issue of knowledge and rigid and strict adherence can also be levied. Also, the company instead of forfeiture can inform the shareholder that his shareholder is amount to forfeit and so in absence of the payment the dividend and benefits that one receives will be transferred for paying off of the unpaid amount this way the unnecessary complications can also be avoided. Also, the company can deduct the unpaid amount from the amount that member receives from the company. Also, the company laws must make it better for the re-allotted transferee as the voting rights play a major role in corporate world, they should get voting rights and also there should be specific law instead of the ambiguous legal precedent.

In the volatile world of corporate finance, share forfeiture is a tactic that imposes discipline in terms of the financial obligations associated with share ownership. In India, this method is governed by the Companies Act of 2013. Shareholders, firms, and potential investors must all be aware of the complexities and consequences of share forfeiture. The Companies Act, 1956 does not contain any provision in respect of forfeiture of shares in the company. However, articles of associations of almost all the company contain detailed provisions regulating forfeiture of shares. These provisions are based on the regulation 28 to 34 in Table F of Schedule I to the Companies Act, 2013 or recast based on the regulations. So, it is necessary to amend article to insert forfeiture clause and make a delegated laws instead of discretionary mechanism. There may be forfeiture of shares, if the articles provide therefor, for reasons other than those mentioned in the articles. But the power is in the nature of a trust and must be exercised bona fide for the benefit of the company. Where, however, the exercise of the powers is contrary to the policy of law, any forfeiture in the exercise of such power will be invalid.1

Criteria & Conditions for Forfeiture of shares.

The forfeiture of shares in valid manner is for the bona fide interest of company. It is supposed to be carried out as the last option and only and only for the interest of company that is considered to be valid otherwise if any forfeiture is done will be considered collusive forfeiture made by directors to enable their own favored to escape from their liability. This is abuse of power that board got and also a fraud done by board towards their own shareholder.2 This should be used as compromising their shareholder due to the default of payment.

The shareholder whose shares are being forfeited his rights to take legal actions against such forfeiture is in question also the informal agreement of board just by passing a resolution is it such need that they expel one of the shareholders the one who's shares are being forfeited the voting rights of that person in such resolution considered; going on for forfeiture is necessary when it is discretionary when there are different methods of call money. Sometime some forfeitures are also in the greed of other directors and indirect benefit from forfeiture which would also be understandable and such benefits could also lead to conflicts of duty and interest. "An unlawful forfeiture is a wrong to the affected shareholders and not to the company. On the facts of this case, he was the only shareholder falling in the category of non-payment forfeiture and, therefore, he alone was the whole body of shareholders affected by the forfeiture. Further on the facts of the case, the court found that forfeiture was not the only course available to the directors. Although the decision of the directors of the three subsidiaries to forfeit the claimant's shares for non-payment of the call and to transfer the forfeited shares to the group holding company were not made for any improper purpose they were nevertheless flawed because the directors had proceeded on the mistaken basis that the only course available to them was forfeiture of the shares."3

The decision of forfeiture made by directors on result of non-payment of unpaid capital even after notice can be considered as valid as the time period given, notices has been served yet the non-payment gives valid ground for no alternative course of action and the board exercising valid discretion. The case where the shareholder is informed that non-payment might lead to forfeiture and board agreeing to it and serving notice with such warning and giving reasonable time frame to pay up the unpaid amount should be considered. Even the willingness of the shareholder to pay should also be the criterion while making such decision where if the shareholder is not in position to pay the called amount but is willing to pay lesser or some other amount instead also reduces the risk on which the forfeiture is based that is risk of default and doctrine of remission could be considered as long as its not very exceptional case. The decision made by the board to be constituted with evidences and reasonable account that such decision is made. The decision of directors can be voidable where in circumstances where they pass a resolution where the benefit was affecting the directors and benefitting them which was known to all the directors and the shareholders such decision should not be considered in benefit of the company.

The directors are empowered of forfeiting power by the AOA and when it is not included then they themselves give powers by passing special resolution after the decision of forfeiture is made out after reasonable and valid grounds of non-payment of unpaid capital a proper notice is to be served which should include the reason and the time period to pay the amount and the consequence to be forfeiture and even after few notices if the shareholders default such amount then the actual procedure of forfeiture should be followed.4 Yet if the call for forfeiture is not duly made and valid or even if the notice sent art inaccurate or doubtful on the reasons and requirements of the payment of the unpaid amount or due date to be wrong will be invalid.5 The notice plays a very pivotal role as the knowledge and affixing the ways of payments can be justified the notice will also include informal notice if the directors are able to prove that the notice was made. Forfeiture of shares does not vest the property in the shares in the company, and it is not an asset of the company and, therefore, there is no reduction of capital because of forfeiture.

In Abdul Karim Babu Khan V. Sirpur Paper Mills Ltd. the court held that the matters related to notice, time and place of payments are directory while the intimation related information i.e., call money, interest and expenses are mandatory and can also be waived off. As questioned earlier where the shareholders having interest in reserving shares but are not able to pay the unpaid amount in such cases the shareholders can seek to rescind his contract with the company and move to company law tribunals to restrain a forfeiture to secure their rights. Shares may be forfeited specifically if the power is given to the board by company's AOA. Whereas the share of a group of shareholders cannot be forfeited with the condition that the group is leading loses because of the unpaid amount. As forfeiture of share being an extensive penalty for the shareholder and individual forfeiture is considered to be valid in the provision whereas forfeiture of group is not provided. "The company may have some grudge against a particular shareholder if he has caused some loss to the company, but forfeiture of shares of all the shareholders without finding out or determining the individual liability and without giving separate notice to all of them, would certainly be illegal and improper. There is nothing on the record to show as to which individual shareholder was responsible for causing the loss, or whether the loss had occurred as a result of mismanagement or was it a loss in the ordinary course of business."6 The power of forfeiture has to be followed strictly adhering rules and regulations and is strictly treated by the courts which the board tries to enforce the strict adherence of procedure where a slight irregularity can fatal its validity. Here it has to be very clear that the bona fide interest is of company and not of the board of directors where they must be inconsiderate to the profits that they might receive after forfeiture and should make decision for company interest considering the benefit that the shareholder might bring in to the company otherwise it would be collusive or fraudulent forfeiture. In cases where the forfeiture is not wholly void the AOA might be providing the remedies in cases of irregularity of such forfeiture and shall dispose of by damages only. The once registered in name of a person the company has no power to forfeit the shares on the ground of failure of consideration where the remedy will be to obtain appropriate relief by suit.7

The notice has to be sent to the shareholders address where the shareholder will receive the information regarding same; though in present time mails are sent to the shareholder in such cases previously the letter was supposed to be sent to the residential address. The principle behind notice is principle of natural justice i.e., Audi alteram palterum where the shareholder should be given an opportunity for payment for call of money, interest and expenses with the sufficient information in regards of the due money to be disclosed. A valid notice is a condition precedent to the forfeiture where even slightest defect will invalidate the forfeiture as this is the purview of property rights as well.8 In the conditions where the shareholder has become insolvent where forfeiture becomes valid as per circumstances yet the notice has to be served.

The interest has to be the rate that is provided in the AOA which is generally 18% due on allotment and calls. The contentions regarding such interest claimed in final notice can be considered as arbitrary and unfair which are held to be ill-conceived and illegality of such forfeiture can be examined on the basis of provisions laid down in AOA.

Legal Pronouncements

The right that a shareholder has before his share is being forfeited if they fail, they can still challenge such forfeiture in the law tribunals as right to challenge is still not abandoned as long as it is within the limitation period specified. It was extensively discussed in Sha Mulchand & Co. Ltd. v. Jawahar Mills Ltd the supreme court laid down that:

A shareholder is disentitled from challenging the forfeiture of his share if he himself has abandoned this right, which includes more than mere waiver, acquiescence or laches that is akin to estoppel which is presumed by the acts and conduct of the shareholder. Also, the facts on record cannot sustain the plea of waiver of such cases and question the validity of such plea. Once the forfeiture is finally forfeited further notices are not necessary. It cannot be challenged stating that notice was not given before sale of such forfeited share. Where the contract law comes into the picture where such requirement of notice of case in cases of pledge under Section 176 is not applicable for the cases of forfeiture.

As per Companies act 1956 the sale of shares by company in exercise of its lien under its AOA cannot with justification be equated to private sale. As per the statutory provision also attributes to court sales which is not to be done in secret manner. As the company affairs are to be effectively scrutinized by shareholders and beneficiaries the details related to shareholding should be known by approach to the company or any authority assigned as company affairs are to be regulated under numerous statutory controls. Here the doctrine of substantial representation and absence of prejudice is applicable to court sales which is also applicable to company sales.

The power though vested in directors and they are in fiduciary power nature for company are to exercise it in good faith and benefit of company it must be formally exercised by resolution unless notice of forfeiture is served in shape of resolution.9 In cases where the resolution is ineffective the members are liable as contributory. A reasonable compromise may be made by the defaulting shareholder. It has to be understood that these powers are not conferred for the purpose of expelling a shareholder nor by connivance or for purpose of assisting the shareholder to get rid of the shares allotted and should not be used by the shareholders to get rid of the shares.10

Contemporary Development

The so called right of company to forfeit the shares is majorly with intention to dispose or to proceed for discharging liability of shareholders and has been used immorally for so long time. This forfeiture of share was affected and the balance belonging to the defaulter was not to be appropriated by the company. It was observed that this power to forfeit does not imply to any authority to appropriate the chance remaining after satisfying the liabilities and obligations of the defaulters and as per AOA if the company is allowed to retain the balance after satisfying the debts and liabilities of defaulting shareholders it is not different from buying a share with a value which is illegal where fully paid-up shares are not in the question per se.11

It is required to pay the fair value on forfeiture of shares and if any AOA denies such forfeiture, it is not to be considered as sustainable practice. A fair value has to be paid to the shareholder while forfeiting the share as these are not short-term ideas. Instead, the company can deduct the value amount which is due to the company from the concerned shareholder. The possibility of misuse of this power even with power with directors or with no such power should be granted as misuse will take up any way.12

Its not only the unpaid shares that get forfeited in few instances the fully paid-up shares also get forfeited with reason of defaulting engagement between the members or on expulsion of such member if the AOA provides so. In Farooq Ahmed (K. Md.) v. Fortran Cirkit Electronics P. Ltd. the court stated that "Shares which were issued as fully paid were not allowed to be forfeited under an allegation that the shareholder had not paid his call money. Forfeiture was also purported to be carried out at a time when the company's claim to the call money had become time-barred and the shareholder had pledged the shares as fully paid with a financial institution. There was no proof of a call, and even if there could be, a call notice by itself does not permit forfeiture. There has to be a procedure after the default."

Whereas the partially paid shares are purchased by the transferees in secondary market and failed to pay the outstanding amount. In such cases the company withheld the equity shareholders for the unpaid amount and the transferees were not absolved from their liabilities merely because share is allotted to the owners and in such cases the company is allowed to forfeit the shares.

As per the 33rd regulation of Table F of Schedule I of 2013 Act it has been made clear that the transferee is entitled to be registered as shareholder. So, the only scope of the aggrieved shareholder is to sue the company only for recovery of damages and will not get shares back anyway.

In cases where the compensations are not satisfactory as remedy the courts have went to the extent where the court orders the companies to put back the aggrieved shareholder in register of members again with shares which belongs to him and if the shares are reissued to some other shareholder, then the aggrieved shareholder gets back his shares and the transferee receives some other shares.13

In cases where shares are sold for non-payment of calls of issue or defaulting the amount is liable to fresh call-in respect to the total amount of prior calls and company cannot sell the forfeited shares free from liability. But if the shareholder pays off some amount is recovered by the ex-shareholder in calls of issue the purchaser will be benefitted by the amount recovered so any payment will reduce the liability of ex-shareholder. When the forfeited share gets re-allotted, the credit is supposed to be given for the money already received in respect of them and new allottee will not only be liable for payment of the balance amount on shares but is not entitled to the voting rights so long the calls payable amount remains unpaid these are all possible only if their AOA provides so also stated in section 106 of 2013 act. So, the liability after forfeiture is new liability arising from forfeiture and can be enforced within three years from date of forfeitures. After the forfeiture od shares the ex-shareholder become simple debtor and a suit to recover the balance due from him is to be governed by section 55 or 113 of the Limitation Act 1963 where the time begins from the date of forfeiture. Whereas to recover such balance due after the forfeiture of shares the limitation period is for 3 years. The AOA empowers directors to annul the forfeiture the company cannot reinstate the ex-shareholder from the liabilities without his consent. A person whose shares are forfeited cannot be brought back to his position as shareholder by board by the rescinding the forfeiture and if it is improperly executed forfeiture which is ultra vires the power of directors is revoked by the company. These types of shares are re-issued with lessee sum or value credited to it. But the power to dispose of shares due to non-payment of amount does not enable the directors to reallot such shares as fully paid-up shares at any discount as it may contravene as per section 53 of 2013 act and becomes void.

These shares will be reallotted and given on credit for money as only the balance money can be recovered by the reallotted which makes it as a high-risk issue for the buyers and not beneficiary to the company as well. The major right of a shareholder that is right to vote is not constituted in such purchase of share and the calls are payable by the original holder of shares if AOA allows so. These forfeited shares are treated as unissued and is reduction of capital as sum is already received in respect of shares whereas upon reissue of such share the capital of company becomes intact. It is open to the Board of Directors to reissue the forfeited shares at a lower price. There is no obligation that such shares be allotted at the prevailing market price. Under Article 31 of Table F of Schedule I to the 2013 Act the forfeited shares can be sold or otherwise disposed of on any terms and in any manner as the Board thinks fit.

As per SEBI (ICDR) Regulations, 2009 under Schedule VIII Part A(VI)(D)(2)(m) a disclosure to the effect of such securities offered through issue shall be fully paid and forfeited for non-payment of call within 12 months from the date of allotment should be incorporated as per the details of capital structure in offer document that is prospectus filed with SEBI.

Scope and Limitation of the provisions

The scope of an aggrieved shareholder is just the damages that they can receive from the company after suing them and not the recovery of shares.14 As for the jurisdiction of challenging such forfeiture is a big issue the company judge held the application for declaration of forfeiture of share being illegal was not maintainable.

This is because the Company Law Board has unique jurisdiction to change a company's member registry. The court found that the 1956 Act did not contain any provisions granting the High Courts broad jurisdiction over any company-related problem. Decision-making authority is not limited to the courts under the Act. Other agencies, such as the Central Government and the Company Law Board, have been given authority under the Act. The Act contains no provision for the High Court to hear claims for share forfeiture.

The format of resolution stating shares of this are forfeited as the call money was not paid on or before certain date is valid being in prospective in nature. The effect of forfeiture is right from the date of forfeiture he ceases to be the member of company and loses not only the rights and powers of being member but is also freed from the obligation of membership and duty to pay call money even though after 1 year he has duty to pay up as past member in contributories list for winding up and the liabilities and lessened privileges are given to the reallotted shareholder with no proper benefits. Even though the articles only allowed forfeiture for non-payment of calls, it was decided that forfeiture of shares for failing to comply with legislative regulations applicable to trusts, even if it happened without notice, fell outside the permissible scope of the power and, as a result, lacked legality. Before removing the petitioners' names from the membership list, the directors should have sought advice from the CLB. As a result, an order was issued to have their names restored. When the shares were reissued without any clause compelling the new allottee to pay the remaining calls, it was determined that the non-payment of calls during the forfeiture of partially paid shares did not meet the standards for a lawful forfeiture where the allottees are unaware of their rights and have first have been informed and their liability to pay the outstanding amount is supposed to be in accordance with law.

CONCLUSION

In the above article the forfeiture of shares has been critically analyzed and compare in accordance to the existing law and majorly based on the legal pronouncement by the courts as majority of the legal precedents are differentiating as per the facts and circumstances. The hypothesis that was stated above that the provisions are misused by the companies as to take back its shares and board targeting one of the shareholders is proven as per the given pronouncements and condition that are being explained. Also, the law in itself has huge ambiguity as its not proper discretionary nor it is strict law that has to be followed. The company being so harsh to use such action as penalty is understandable in cases of insolvent person but the criteria of the shareholder willing to pay off the unpaid amount is not categorized also the option of them able to sue the shareholder is not used instead such method is used. Also, the rights of the new allottee are so discriminatory where the vital right is not given to vote and is also liable for few amounts then does not get discount also does not have an option for unpaid shares should be considered by the company. The provisions in itself are very rigid and distinct whereas the interpretations of those provisions are done in accordance to the facts and circumstantial evidences of every company and shareholder where in some cases the shareholder is liable to pay back the unpaid money somewhere he is not. Also, there is a lot of ambiguity which law has to be followed as the provision in itself is not much explanatory the legal precedents have their own principles and laws. As in above stated cases the shareholder does not have any other remedy except for the damages but in other case the transferee who bought back the share is given some other shares and on court order the company has to get back the shareholder in members list. Also, in contemporary times the forfeiture of shares is used by the shareholders for escaping the liabilities whereas the board of directors use it for targeted shareholder.

REFERENCES

Articles:

  1. Rungta, R. S. "Indian Company Law Problems in 1850." The American Journal of Legal History, vol. 6, no. 3, 1962, pp. 298–308. JSTOR, https://doi.org/10.2307/844075. Accessed 30 Oct. 2023.

Books:

  1. A RAMAIYA: The Companies Act 2013, Vol. 1, 18th edition 2014.
  2. PALMER'S COMPANY PRECEDENTS, 25th Edition, Part I.

Websites:

  1. Forfeiture of Shares – Meaning, Process & its Effect Under the Companies Act, 2013 – Complete Guide.
  2. ICSI- Secretarial Standards- SS-9: Forfeiture of Shares.

Table of Cases

Sr. No. Name of the Parties Citation
1. Clarke v. Hart (1858) HLC 633
2. Spackman v. Evans (1868) LR 3 HL 171
3. Hunter v. Senate Support Services Ltd. (2005) 1 BCLC 175 (Ch D)
4. Bhagwandas Garg v. Canara Bank Ltd. (1981) 51 Com Cases 38(AP)
5. Faure Electric Accumulator Co. v. Phillip art (1888) 58 LT 525
6. Abdul Karim Babu Khan v. Sirpur Paper Mills Ltd. (1969) 39 Com Cases 33 at 45 (AP)
7. Dilbhajan Singh v. New Samundri Transport Co. P. Ltd. (1985) 58 Com Cases 247(P&H)
8. Kotah Transport Ltd. v. State of Rajasthan (1967) 37 Com Cases 288
9. Public Passenger Services Ltd. v. M. A. Khader (1966) 36 Com Cases 1(SC).
10. Hope v. International Financial Society (1876) 4 Ch D 327.

11. Sha Mulchand & Co. Ltd. v. Jawahar Mills Ltd. AIR 1953 SC 98
12. Prayan Prasad v. Gaya Bank and Traders Association Ltd. AIR 1931 Pat 44
13. Liquidator of General Property Investment Co. v. Craig (1891) 18 R 389
14. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. AIR 1971 SC 422
15. Linkmen Services P. Ltd. v. Tapas Sinha (2008) 82 CLA 159(Cal)
16. Farooq Ahmed (K. Md.) v. Fortran Cirkit Electronics P. Ltd. (1998) 92 Com Cases 498

17. Promila Bansal v. Wearwell Cycle Co. (India) Ltd. (1978) 48 Com Cases 202.
18. Balwant Gopal v. The Ceramic Industries Ltd., Chanda AIR 1951 Nag 266.


Table of Statutes

The Companies Act 2013
The Companies Act 1956
The Indian Contract Act 1872.
The Limitation Act 1963
SEBI (ICDR) Regulations, 2009

Footnotes

1. Hope v. International Financial Society, (1876) 4 Ch D 327.

2. Spackman v. Evans, (1868) LR 3 HL 171

3. Hunter v. Senate Support Services Ltd., (2005) 1 BCLC 175 (Ch D)

4. Bhagwandas Garg v. Canara Bank Ltd., (1981) 51 Com Cases 38(AP).

5. Faure Electric Accumulator Co. v. Phillip art, (1888) 58 LT 525

6. Dilbhajan Singh v. New Samundri Transport Co. P. Ltd., (1985) 58 Com Cases 247(P&H)

7. Kotah Transport Ltd. v. State of Rajasthan, (1967) 37 Com Cases 288

8. Public Passenger Services Ltd. v. M. A. Khader, (1966) 36 Com Cases 1(SC).

9. Prayan Prasad v. Gaya Bank and Traders Association Ltd., AIR 1931 Pat 44

10.Liquidator of General Property Investment Co. v. Craig, (1891) 18 R 389

11. Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd., AIR 1971 SC 422

12. Linkmen Services P. Ltd. v. Tapas Sinha, (2008) 82 CLA 159(Cal)

13. Promila Bansal v. Wearwell Cycle Co. (India) Ltd., (1978) 48 Com Cases 202.

14. Balwant Gopal v. The Ceramic Industries Ltd., Chanda, AIR 1951 Nag 266.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

ARTICLE
18 April 2024

Critically Analyse About Forfeiture Of Shares Under Indian Company

India Corporate/Commercial Law

Contributor

K&K is among leading IP and Commercial Law Practices in India with rankings and recommendations from Legal500, IAM, Chambers & Partners, AsiaIP, Acquisition-INTL, Corp-INTL, and Managing IP. K&K represents numerous entities through its 9 offices across India and over 160 professionals for varied IP, Corporate, Commercial, and Media/Entertainment Matters.
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