Forfeiture and Reissue of Shares

Forfeiture Of Shares

Forfeiture of shares means the cancellation of membership of a shareholder and taking back his shares by the company for non-payment of calls or other amounts due on the shares.

It is a drastic step taken by the company as per the provisions in its Articles of Association (AoA). Forfeiture can only occur if the articles provide for it. The procedure laid down in the AoA must be strictly followed, which usually involves giving the shareholder a notice requiring payment of the unpaid amount within a specified period (not less than 14 days), failing which the shares will be forfeited.

The amount already paid by the defaulting shareholder on the forfeited shares (application money, allotment money, or any calls paid) is generally retained by the company and is credited to a 'Forfeited Shares Account'. This amount cannot be refunded to the defaulting shareholder.

Once shares are forfeited, the defaulting shareholder ceases to be a member of the company, and his name is removed from the Register of Members. The forfeited shares can then be reissued by the company.

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Accounting Treatment for Forfeiture of Shares (Original Issue at Par)

When shares are forfeited, the following adjustments are made:

• Share Capital Account is debited with the amount called up on the forfeited shares. The Share Capital account represents the nominal value called up on the shares. Since these shares are being cancelled from the shareholder's name, the called-up amount is reduced from the Share Capital.
• Calls in Arrears Account (or individual call accounts like Share Allotment A/c, Share First Call A/c, etc.) is credited with the total unpaid amount on the forfeited shares. This cancels the amount previously shown as due from the defaulting shareholder.
• Forfeited Shares Account is credited with the amount already paid by the defaulting shareholder on the forfeited shares. This account represents the amount forfeited and retained by the company, which is a capital receipt.

General Journal Entry for Forfeiture (Shares issued at Par)

$ \begin{array}{|l|l|l|} \hline \textbf{Date} & \textbf{Particulars} & \textbf{Amount (₹)} \\ \hline & \text{Share Capital A/c Dr.} & \text{Called-up amount on forfeited shares} \\ & \hspace{10mm} \text{To Calls in Arrears A/c} & \text{Unpaid amount on forfeited shares} \\ & \hspace{10mm} \text{To Forfeited Shares A/c} & \text{Amount paid on forfeited shares} \\ & \text{(Being forfeiture of ..... shares for non-payment of call money)} & \\ \hline \end{array} $

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Accounting Treatment for Forfeiture of Shares (Original Issue at Premium)

When shares issued at a premium are forfeited, the treatment of the Securities Premium amount depends on whether the premium was received by the company or not.

• If Premium was Received: If the defaulting shareholder had paid the premium amount (usually due on allotment), the Securities Premium Account is not debited at the time of forfeiture. The premium, once received, cannot be cancelled or reversed, as per Section 52 of the Companies Act, 2013.
• If Premium was Not Received: If the defaulting shareholder failed to pay the premium amount (e.g., did not pay allotment money which included premium), then the Securities Premium Account is debited at the time of forfeiture with the amount of premium not received. This is because the premium was previously credited to the Securities Premium Account when the allotment money was made 'due', but it was never received.

Journal Entry for Forfeiture (Shares issued at Premium)

Let's assume shares of ₹10 were issued at a premium of ₹2 (Issue price ₹12), payable as: ₹3 on application, ₹5 on allotment (₹3 Capital + ₹2 Premium), ₹2 on first call, ₹2 on final call. Mr. Sharma held 200 shares.

Scenario 1: Mr. Sharma paid Application and Allotment, failed First Call. Shares forfeited. (Premium Received)

Amount paid: ₹3 (App) + ₹5 (Allot, including ₹2 premium) = ₹8 per share.

Amount unpaid: ₹2 (First Call) + ₹2 (Final Call) = ₹4 per share. (Note: Final call was not yet made when shares were forfeited after First Call failure, so amount called up is ₹3+₹5+₹2 = ₹10 per share).

Amount called up on 200 shares = $200 \times ₹10 = ₹2,000$

Amount unpaid (Calls in Arrears) = $200 \times ₹2 = ₹400$ (First Call only)

Amount paid and forfeited = $200 \times ₹8 = ₹1,600$ (This includes the ₹2 premium received).

The premium of $200 \times ₹2 = ₹400$ was received with allotment and remains in Securities Premium A/c. It is not debited on forfeiture.

$ \begin{array}{|l|l|r|} \hline \textbf{Date} & \textbf{Particulars} & \textbf{Amount (₹)} \\ \hline & \text{Share Capital A/c Dr.} & 2,000 \\ & \hspace{10mm} \text{To Calls in Arrears A/c} & 400 \\ & \hspace{10mm} \text{To Forfeited Shares A/c} & 1,600 \\ & \text{(Being forfeiture of 200 shares for non-payment of first call. Premium already received)} & \\ \hline \end{array} $

Scenario 2: Mr. Sharma paid Application, failed Allotment (including Premium) and subsequent calls. Shares forfeited after Allotment failure. (Premium Not Received)

Amount paid: ₹3 (Application) = ₹3 per share.

Amount unpaid: ₹5 (Allotment, including ₹2 premium) = ₹5 per share. (Subsequent calls were not yet made).

Amount called up on Share Capital portion = ₹3 (App) + ₹3 (Allotment Capital part) = ₹6 per share. (Note: Share Capital account is only credited with the nominal value called up). Total called up on Share Capital = $200 \times ₹6 = ₹1,200$.

Amount of Premium not received = $200 \times ₹2 = ₹400$. This was credited to Securities Premium when allotment was made due, but not received.

Total unpaid (Calls in Arrears) = $200 \times ₹5 = ₹1,000$ (Allotment money)

Amount paid and forfeited = $200 \times ₹3 = ₹600$ (Application money)

$ \begin{array}{|l|l|r|} \hline \textbf{Date} & \textbf{Particulars} & \textbf{Amount (₹)} \\ \hline & \text{Share Capital A/c Dr.} & 1,200 \\ & \text{Securities Premium A/c Dr.} & 400 \\ & \hspace{10mm} \text{To Calls in Arrears A/c} & 1,000 \\ & \hspace{10mm} \text{To Forfeited Shares A/c} & 600 \\ & \text{(Being forfeiture of 200 shares for non-payment of allotment money including premium)} & \\ \hline \end{array} $

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Reissue Of Forfeited Shares

Forfeited shares can be reissued by the company to new shareholders. The Board of Directors has the power to reissue forfeited shares on such terms as they think fit, provided it is permitted by the Articles of Association.

Forfeited shares can be reissued at:

• Par: Issue price equals the face value of the share.
• Premium: Issue price is more than the face value.
• Discount: Issue price is less than the face value. However, the amount of discount allowed on reissue cannot exceed the amount originally forfeited on those shares (i.e., the balance in the Forfeited Shares Account related to those shares). This is because the forfeited amount is available to the company to cover the loss on reissue. The discount on reissue is debited to the Forfeited Shares Account.

Upon reissue, the status of the shares is restored, and the new shareholder becomes a member of the company. The shares are usually reissued as fully paid-up, even if the amount received on reissue is less than the face value, by utilising the forfeited amount.

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Accounting Treatment for Reissue of Forfeited Shares

When forfeited shares are reissued, the following journal entries are passed:

On Reissue of Forfeited Shares (Cash Received)

Debit the Bank account with the amount received on reissue.

Credit the Share Capital Account with the amount treated as paid-up on the reissued shares (usually the full face value).

If reissued at premium, credit Securities Premium Account with the premium amount.

If reissued at a discount, debit Forfeited Shares Account with the amount of discount allowed.

General Journal Entry for Reissue

$ \begin{array}{|l|l|l|} \hline \textbf{Date} & \textbf{Particulars} & \textbf{Amount (₹)} \\ \hline & \text{Bank A/c Dr.} & \text{Amount Received on Reissue} \\ & \text{Forfeited Shares A/c Dr.} & \text{Discount Allowed on Reissue (if any)} \\ & \hspace{10mm} \text{To Share Capital A/c} & \text{Amount treated as Paid-up} \\ & \hspace{10mm} \text{To Securities Premium A/c} & \text{Premium on Reissue (if any)} \\ & \text{(Being reissue of ..... forfeited shares as fully paid-up)} & \\ \hline \end{array} $

Important Note on Discount: Maximum permissible discount on reissue per share = Amount originally forfeited per share on the same share.

Total discount on reissue = Number of shares reissued $\times$ Discount per share.

Total debit to Forfeited Shares A/c on reissue $\le$ Total credit to Forfeited Shares A/c at the time of forfeiture of the shares being reissued.

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On Transfer of Balance in Forfeited Shares Account

After reissuing the forfeited shares, there might be a balance remaining in the Forfeited Shares Account. This balance represents the surplus amount out of the sum originally forfeited, which was not utilised as discount on reissue.

This surplus is a capital gain for the company and must be transferred to the Capital Reserve Account.

Amount to be transferred to Capital Reserve = (Total amount credited to Forfeited Shares A/c on shares being reissued) - (Total amount debited to Forfeited Shares A/c on reissue of those shares).

Journal Entry for Transfer to Capital Reserve

$ \begin{array}{|l|l|l|} \hline \textbf{Date} & \textbf{Particulars} & \textbf{Amount (₹)} \\ \hline & \text{Forfeited Shares A/c Dr.} & \text{Balance transferred} \\ & \hspace{10mm} \text{To Capital Reserve A/c} & \text{Balance transferred} \\ & \text{(Being profit on reissue of forfeited shares transferred to Capital Reserve)} & \\ \hline \end{array} $

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