Accountancy · Ch 8 — Company Accounts
Forfeiture of Shares
Forfeiture of Shares
If a shareholder fails to pay a call (or the amount due on allotment) even after the company serves a formal notice allowing a further reasonable period, the Board of Directors — where the Articles of Association authorise it — may forfeit the shares. Forfeiture cancels the shareholder's membership in respect of those shares and extinguishes the company's obligation to refund whatever had already been paid on them.
Accounting treatment
On forfeiture, the Share Capital Account is debited with the total amount called-up on the forfeited shares — not necessarily the full face value, if the shares had not yet been fully called. The amount already received on those shares (application money, and any allotment/call instalments actually paid) is credited to a Share Forfeiture Account (also called Forfeited Shares Account); the unpaid instalments are credited to the respective Allotment/Call accounts, closing them off.
When the forfeited shares had been issued at a premium, two situations are possible:
- Premium already received — Securities Premium is not disturbed at all. Once a premium has genuinely been received, it is a real reserve, and forfeiting the share afterwards does not require reversing it. …
Cancellation of a shareholder's membership in respect of partly-paid shares, by the Board of Directors, for non-payment of allotment or cal …
The account credited with the amount already received (and not refundable) on shares that have been forfeited; later adjusted on reissue and any surplus tra …
A formal notice the company must serve on a defaulting shareholder, giving a further reasonable period to pay the overdue amount with interest, before the Board ca …