4 Important Effects of Forfeiture of Shares in a Company

(ii) Liability:

If the articles of the company permit, the company can sue the member whose shares have been forfeited for unpaid calls even after forfeiture. In such a case the ex-shareholder will be liable as an ordinary debtor and not as a contributory. Suit for the recovery of the calls must be filed within three years of the date of forfeiture.

The company in such a case cannot recover more than the difference between the amount due on shares on the date of the forfeiture of shares and the amount received from the subsequent allottee (in case the forfeited shares have been re-issued).

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(iii) List ‘B’ Contributory:

Where the company goes into liquidation within one year of the forfeiture of shares, the ex-shareholder can be put on “List B” of the contributories.

(iv) Disposal of Forfeited Shares:

Forfeited shares become the property of the company only for disposal and these may be resold at a discount, but the amount of discount cannot exceed the actual amount forfeited on those shares. Forfeited shares, however, shall never become the assets of the company. The purchaser of forfeited shares will acquire good title to the shares reissued to him.

He is neither bound to see the application of the purchase money, nor shall his title to the shares be affected by any irregularity or invalidity in the proceedings in reference to the forfeiture and sale of the shares. The company may also cancel the forfeited shares.

Forfeiture once made is conclusive and irrevocable and severe all connections between the company and its shareholder. An illegal forfeiture cannot be validated by lapse of time or acquiescence.

In the case of wrong forfeiture of shares, the shareholder can bring action for setting aside of such forfeiture. If, however, it is not possible on account of resale of forfeited shares, he can sue the company for damages.

Reissue of Forfeited Shares:

Forfeited shares can be either cancelled by the company or re-issued. These can be re-issued at any price — premium, par value or discount. But the amount of discount on the re-issue of forfeited shares cannot exceed the amount forfeited on these shares.

The board of directors is required to pass a resolution of the board for reissuing these shares. The purchaser of forfeited shares will acquire good title to the shares reissued to him. Re-issue of forfeited shares is not an allotment of fresh shares but resale of old shares, and therefore, the company is not required to file any return of allotment with the Registrar regarding these shares.