Forfeiture of Shares

Forfeiture of shares signifies cancellation of shares and the company seizes the amount of the shares. The shareholder, who applies for the purchase of shares, makes an offer on the one hand. On the other hand, the company by accepting or allotting shares shows acceptance. Hence, offer and acceptance with the lawful consideration create a valid contract between the shareholder and the company. In this article, we will look at the aspects of forfeited shares.

Notice before Forfeiture

There are instances when a member who is liable to pay any call money on his shares, fails to pay the amount. In such cases, the directors may either by the implementation of Table A or express provision on the articles proceed to forfeit the shares of such a defaulting member. Before the actual forfeiture of the shares, the company may send a notice to the defaulting member asking payment of the call.

The notice must give not less than 14 days time from the date of service of notice for the payment of the amount of the call. The notice must also state the consequences of not fulfilling the requirements of the notice. It generally states that if the shareholder fails to pay the amount within a time which the notice mentions then his shares will be liable for forfeiture.

Non-compliance with Notice

If the shareholder fails to comply with the requirement of this notice, the directors will pass a resolution on behalf of the company starting the forfeiture of the shares.

Accounting Treatment

In the case of Share Forfeiture (Par)

Date	Particulars	L.F.	Amount (Dr.)	Amount (Cr.)
	Share Capital A/c                                                Dr.		XXX
	To  Forfeited Shares Account A/c			XXX
	To Shares Allotment A/c			XXX
	To Shares Call A/c			XXX

If, we maintain Calls-in-Arrears Account we will credit Calls-in-Arrears Account instead of “Shares Allotment Amount” and “Shares Call Account”.

Journal entry for this will be:

Date	Particulars	L.F.	Amount (Dr.)	Amount (Cr.)
	Equity Share Capital A/c                                   Dr.		XXX
	To Forfeited Shares Account A/c			XXX
	To Calls-in-Arrears A/c			XXX

In the case of Share Forfeiture (Premium)

Date	Particulars	L.F.	Amount (Dr.)	Amount (Cr.)
	Share Capital A/c                                     Dr.		XXX
	To Shares Allotment A/c			XXX
	To Forfeited Shares A/c			XXX
	To First Call A/c			XXX

 

Date	Particulars	L.F.	Amount (Dr.)	Amount (Cr.)
	Share Capital A/c                                          Dr.		XXX
	Securities Premium A/c                              Dr.		XXX
	To Shares Allotment A/c			XXX
	To Forfeited Shares A/c			XXX
	To First Call A/c			XXX

Solved Question on Forfeited Shares

Question: Give Journal entry relating to ‘Forfeiture of Shares’ for the following:

Verma Ltd. Issues 20,000 equity shares of Rs.10 each at a premium of Rs.2 per share. The amount is payable as Rs.4 per share on the application, Rs.5 per share as allotment, Rs.3 per share on 1st and final call. The company allows 100 shares to Mr. Saksham. If Saksham fails to pay allotment money and on his subsequent failure to pay the first and final call, the company forfeits his shares.

Solution:

Date	Particulars		Amount (Dr.)	Amount (Cr.)
	Equity Share Capital A/c (100 x ₹ 10)                                    Dr.		1,000
	Securities Premium A/c  (100 x ₹ 2)                                      Dr.		200
	To Shares Allotment A/c (100 x ₹ 5)			500
	To Forfeited Shares A/c (100 x ₹ 4)			400
	To First and final Call A/c (100 x ₹ 3)			300
	(Being 100 shares forfeited for non-payment of allotment and first and final call money)