What Is Forfeiture of Shares- Meaning, Rules, and Examples
The concept of what is forfeiture of shares is important for students who study accounting, business, and company law. It explains what happens when a shareholder fails to pay the required amount on shares issued by a company. Related topics, such as easy trip planners bonus shares, also help readers understand how companies issue and manage shares.
Forfeiture usually occurs when a shareholder does not pay allotment money or call money by the required date. The company may cancel those shares after following the correct procedure under its governing documents and applicable law. The process also affects the company’s accounting records and share capital.
What Is Forfeiture of Shares?
Forfeiture of shares means the cancellation of shares by a company because a shareholder fails to meet certain payment obligations. Understanding what is forfeiture of shares is important for students learning accounting and company law. In most basic accounting examples, the company takes this step when the shareholder does not pay the amount due on shares despite receiving the required notice.
When a company forfeits shares, the defaulting shareholder loses ownership rights associated with those shares. The company may retain the amount already paid, subject to applicable law and its governing documents. Learning the meaning of forfeiture of shares also helps readers understand how a company may reissue forfeited shares to another investor when the applicable rules allow it.
Why Do Companies Forfeit Shares?
Companies may forfeit shares when shareholders fail to pay money that becomes due under the terms of the share issue. Understanding what is forfeiture of shares helps explain how companies enforce payment requirements and maintain accurate financial records. The most common reason is the non-payment of call money. A company may ask shareholders to pay the remaining value of their shares in stages rather than collecting the entire amount at once.
Another reason may be the failure to pay allotment money. Allotment money is the amount a shareholder must pay when the company formally allocates shares to them. If the shareholder does not pay the amount due, the company may begin the forfeiture process when its rules permit it. These reasons for forfeiture of shares show why shareholders must meet their payment obligations within the required time.
Main Reasons for Forfeiture of Shares
| Reason | Explanation |
|---|---|
| Non-payment of call money | The shareholder fails to pay an amount requested by the company. |
| Non-payment of allotment money | The shareholder does not pay the amount due when shares are allotted. |
| Failure to meet payment terms | The shareholder does not meet a valid payment obligation under the share issue. |
| Continued payment default | The shareholder fails to pay even after receiving the required notice. |
How Does the Forfeiture of Shares Process Work?
The forfeiture process usually begins when a shareholder fails to pay an amount due on their shares. Understanding what is forfeiture of shares helps explain why the company checks its records to confirm the unpaid amount and determines whether its governing documents allow forfeiture. The company then follows the required notice procedure. The notice generally states the amount due, the deadline for payment, and the consequences of failing to pay. The exact requirements depend on the relevant law and company documents.
If the shareholder does not pay within the permitted period, the company may take the formal action required to approve forfeiture. Once the company completes the valid procedure, it updates its share register and accounting records. This process of forfeiture of shares ensures that the company handles the cancellation according to its governing documents and applicable law.
Accounting Treatment of Forfeiture of Shares
| Account | Debit | Credit |
|---|---|---|
| Share Capital Account | Called-up amount | — |
| Share Forfeiture Account | — | Amount already paid |
| Share Allotment or Calls Account | — | Unpaid amount |
Example of Forfeiture of Shares With Journal Entry
Suppose ABC Limited issues 100 shares with a face value of Rs. 10 each. The company calls up the full value of Rs. 10 per share, but Ali pays only Rs. 7 per share and fails to pay the remaining Rs. 3. This example explains what is forfeiture of shares in accounting and shows how a company handles unpaid share capital. The company follows the required procedure and forfeits all 100 shares. The accounting team can calculate the amounts using the following table to understand the accounting treatment of forfeiture of shares.
| Particulars | Calculation | Amount |
|---|---|---|
| Total called-up capital | 100 × Rs. 10 | Rs. 1,000 |
| Amount already paid | 100 × Rs. 7 | Rs. 700 |
| Unpaid call money | 100 × Rs. 3 | Rs. 300 |
The company records the following journal entry.
| Account | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Share Capital Account | 1,000 | — |
| Share Forfeiture Account | — | 700 |
| Calls in Arrears Account | — | 300 |
| Total | 1,000 | 1,000 |
Reissue of Forfeited Shares
After forfeiture, a company may reissue the shares to a new investor when the applicable law and company rules permit it. Understanding what is forfeiture of shares also helps explain how reissue allows the company to offer the shares again instead of leaving them unused. For example, ABC Limited reissues the same 100 shares at Rs. 9 per share. The company receives Rs. 900, while the face value of the shares remains Rs. 1,000. This example demonstrates the reissue of forfeited shares and shows how a company records the new payment and adjusts the difference under the applicable accounting rules.
The company records the reissue as follows.
| Account | Debit (Rs.) | Credit (Rs.) |
|---|---|---|
| Bank Account | 900 | — |
| Share Forfeiture Account | 100 | — |
| Share Capital Account | — | 1,000 |
| Total | 1,000 | 1,000 |
Difference Between Forfeiture and Reissue of Shares
| Basis | Forfeiture of Shares | Reissue of Shares |
|---|---|---|
| Meaning | Cancellation of shares after a permitted default | Offering forfeited shares to a new holder |
| Main reason | Failure to meet an obligation, usually payment | Making the cancelled shares available again |
| Shareholder | The defaulting shareholder loses ownership | A new shareholder receives the shares |
| Accounting | Removes called-up capital and records paid and unpaid amounts | Records the new payment and share capital |
| Capital reserve | Usually not created immediately from the forfeiture alone | A remaining eligible balance may transfer to Capital Reserve |
Advantages and Effects of Forfeiture of Shares
Forfeiture gives a company a way to respond to payment defaults when its governing rules allow it. It can help the company enforce payment terms and keep its shareholder records accurate. However, forfeiture also has serious effects on the shareholder. The person loses ownership of the affected shares and may lose the money already paid, depending on the applicable rules. The company must also complete the correct legal procedure to avoid disputes.
Forfeiture does not automatically mean that the company has earned new cash. The company records the money previously received, cancels the relevant share capital, and removes the unpaid amount from the applicable accounts. The actual financial effect depends on the circumstances and any later reissue.
Important Rules for Forfeiture of Shares
Companies must follow their articles of association and the relevant company law before cancelling shares. The rules may require a formal notice, a payment period, a warning about forfeiture, and approval by the authorised directors or body. The exact requirements differ by country and company type. Therefore, students should follow the rules taught in their accounting syllabus, while businesses should check the law that applies to their jurisdiction.
When shares were issued at a premium, the accounting team must also check whether the premium was already received. If the company received the premium, the accounting treatment generally differs from a case in which the premium remains unpaid.
Conclusion
Understanding what is forfeiture of shares helps students learn how companies manage unpaid share capital and maintain accurate accounts. The process usually follows a shareholder’s failure to pay allotment money or call money, but the company must comply with the required legal procedure.
The key accounting points are simple: debit Share Capital with the called-up amount, credit Share Forfeiture with the amount already paid, and credit the relevant unpaid account with the amount due. If the company later reissues the shares, it records the new issue separately and transfers any eligible remaining forfeiture balance to Capital Reserve. In short, forfeiture of shares means cancelling shares because of a permitted default, while reissue allows the company to offer those shares to another investor.
