Forfeited Shares

Forfeited shares are the investment options that shareholders chose but then the issuing company cancels the same due to the non-payment of the subscription amount asked for from the former. These shares are sold further by the issuers to recover the amount that remains unpaid to them.

Shares of investors are forfeited due to the breach of conditions in the purchase agreement, like non-payment of call money within the time limit provided by the company. The forfeited shares process becomes active only after the approval of the board of directors.

Forfeited shares are the instruments that are taken back by the issuing companies, if shareholders fail to pay them the call money. To make this process applicable and active, the issuing company must obtain approval from the board of directors. Once they give their consent, the procedure begins and it cancels or forfeits the shares of an individual.

Besides the payment default, the other reasons for such forfeitures can be non-compliance with the purchase requirements like a failure in payment of allotment money, failure in payment of call money, selling or transferring shares during the restricted period, etc.

The companies cancel the shares issued to shareholders in any of the above events and sell the same to other participants through an auction to recover their outstanding dues. This is referred to as the reissue of forfeited shares. These forfeited shares in the balance sheet are reflected under the Reserve and Surplus section of the liabilities side.

There are companies that offer employee stock purchase plans. Under this scheme, the employees pay a portion of their salaries toward discounted shares of the stock of their companies. Here, the stock is prohibited from being sold or transferred until a defined period once initially purchased.

In the above scenario, if the employee leaves the company, they become liable for this forfeiture. On the other hand, if the employee continues working for a long time in the company, they become completely vested in those shares and they may encash them in the future.

Forfeiture of shares is a serious step as the consequences lead to the end of the shareholder’s rights and also the amount paid. Therefore, there are specific requirements for the forfeiture of shares.

• Powered by Articles of Association – Share forfeiture must be under the provisions mentioned in the articles of association.
• Proper Notice – A proper notice is to be served to the defaulting shareholders mentioning the amount to be paid, and the notice should be sent 14 days before the payment date. The purpose of the notice is to allow the shareholders to pay off the call money and any interest thereupon and save the shares from getting forfeited
• Resolution by Board of Directors – If the shareholders fail to pay the monies due even after being served by a valid notice, then the board of directors can forfeit the shares by passing a resolution.

The accounting entries depend on whether the shares were issued at Premium or Par. The entries are stated as below,

1. If the shares were issued at Par

2. If the shares were issued at Premium and the premium amount was received

3. If the shares were issued at Premium and premium amount was not received

When the shares are forfeited, there are two options with the company, i.e., they can dispose of the shares, or the shares can be reissued. These shares can be reissued at par, premium, and discount, and the entries are as follows,

1.If reissue is at Par

2.If reissue is at Premium

3.If reissue is at Discount

It is essential to understand that the shares can be issued only at par and premium, but reissue can also be made at a discount by using the money forfeited from the share forfeiture.

4.Transfer of balance share forfeiture to Capital Reserve

The amount received from the above formula reduced by the Share forfeiture amount used in case of reissue at a discount is transferred to Capital Reserve A/c.

Let us consider the following examples to understand the forfeited shares meaning better and also see how it works:

Company A Ltd has issued 10,000 shares at Rs. 10 per share; the face value is equal to the issue price, i.e., Rs. 10. The allotment money was Rs. 1 per share paid by all the shareholders. The first call money was Rs. 2, which was not paid by Mr. Vikram, who was allotted 1,000 Shares, and a notice was served for payment of call money. After the non-payment of call money, the board resolved to forfeit the share. Therefore the following accounting entries are to be passed for forfeiture,

The forfeited shares were not reissued, so the entire money is transferred to the capital reserve

Forfeiting shares is the option chosen due to multiple causes, but they have a strong effect on the parties involved. Let us have a look at a few of them:

1. Cessation of Membership – The member whose shares are forfeited ceases to be a member of the company, and his name is struck off from the register of members.
2. Cessation of Liability – The liability of the member to pay future calls ceases after the shares are forfeited. However, the person is still liable to pay the unpaid call money to the company, and it can stand in books as an ordinary debtor instead of a contributory.
3. Liability as a Past Member – If the company goes into liquidation within one year of the share forfeiture, then such a person whose shares are forfeited can be considered a List B contributory.

This article has been a guide to what is Forfeited Shares. Here, we explain the concept along with its accounting, example, process, and effects. You can learn more about it from the following articles –

• Bonus Shares Examples
• Ordinary Shares
• Diluted Shares
• Class A Shares Examples