Ever heard the term “forfeiture of shares” and wondered, “What Do U Mean By Forfeiture Of Shares?” In simple terms, it’s when a company takes back shares from a shareholder, usually because they haven’t paid the full amount they owe on those shares. Think of it like this: you start buying a car, but stop making payments – the dealership repossesses it. Forfeiture of shares is a similar concept in the world of stocks.
Decoding the Concept of Share Forfeiture
Forfeiture of shares occurs when a shareholder fails to pay the calls (installments) due on their shares within the stipulated time frame. Companies issue shares to raise capital, and shareholders are expected to pay the promised amount in stages, known as calls. If a shareholder defaults on these calls, the company has the right to forfeit their shares. This process is crucial for maintaining the financial health of the company and ensuring fairness among all shareholders. Here’s a breakdown:
- Non-payment of call money triggers the process.
- The company must send a notice to the defaulting shareholder, giving them a final opportunity to pay.
- If the payment isn’t made within the notice period, the shares are forfeited.
The articles of association of a company outline the specific procedures and conditions for forfeiture. These articles essentially serve as the rulebook for how the company operates and includes the fine print on what happens when a shareholder doesn’t meet their payment obligations. They dictate the notice period, the method of forfeiture, and the accounting treatment of the forfeited shares. For instance, here’s a simplified example of how call money might be structured:
| Call | Amount per Share |
|---|---|
| Application | $2 |
| Allotment | $3 |
| First Call | $2.5 |
| Second and Final Call | $2.5 |
Following forfeiture, the company can reissue these shares, often at a discount, to recover the unpaid amount. This process helps the company recoup some of its losses and ensures that the share capital is fully paid up. Reissuing forfeited shares is subject to certain regulations, aiming to protect the interests of both the company and potential investors. The amount received from the reissue is used to cover the initial unpaid amount and any expenses incurred during the forfeiture process.
To gain a deeper understanding of the legal and procedural aspects surrounding forfeiture of shares, consulting the relevant sections of the Companies Act and the specific articles of association of the company in question is highly recommended. This will provide you with a comprehensive view of the rights, responsibilities, and potential consequences associated with share ownership.