What is Forfeiture of Shares?
Share Forfeiture: What does it Mean?
Before the corporation may foreclose on a defaulting shareholder, it must provide that person 14 days' notice that he must pay the overdue sum, plus interest. Shares will be cancelled if payment is not received by the due date. However, if the shareholder still does not pay, the business might vote for a resolution to forfeit the shares. In case of a forfeiture, they must cancel the shares, and the Share Capital is reduced accordingly. The business does not give back the money it has taken in. The amount in the share forfeiture account is transferred to Paid-Up Capital in the Notes to Accounts on 'Share Capital' until the forfeited shares are reissued.
In the Event of a Forfeiture of Shares Journal Entry Must be Made
A Share Forfeiture Requires a Corresponding Journal Entry.
Reissuing forfeited shares is a process, and it's important to understand the associated share forfeiture entry. In most cases, firms will issue forfeited shares at a premium, which will be explained further below.
1. When Forfeiture of Shares Issued at Par
The company credits the Forfeited Shares Account
Shares Allotment Amount and Shares Call Account
2. Forfeiture of Shares that were initially issued at Premium
The Securities Premium amount has been received:
Securities Premium amount has not been received:
Forfeiture of Shares Issued at a Premium
During the Forfeiture of Premium Shares, a firm has two primary choices. It is contingent upon the payment of a security premium being cleared. There are two possible outcomes, both of which are detailed here.
1. Upon Payment of the Security Premium
The account used to track the company's share capital is then debited for the whole amount of its share capital and the called-up payment. It's worth noting that this sum is automatically deposited into each applicable account. Forfeiture and reissue of shares have a lower premium than the amount obtained in the allotment process, while First Call Shares have a higher premium than the amount received in the final call process.
2. The Amount of the Security Premium Was Not Received
An extra step is required here since they did not receive the security premium. The First call and Final call accounts, the Share allotment account, any fees associated with the allocation, and the Forfeited Shares account are all debited for the number of shares that have been called up. The premium for the security is also deducted from the share capital account.
How should Share Forfeiture be Handled Financially?
What are the Financial Implications of Forfeiture of Shares?
Although the accounting entries associated with the issue of forfeiture and reissue of shares have been detailed above, the following accounting treatments should be considered. All these corrections, including reversing the entry for forfeited Shares, take effect immediately.
The amount of the call price for the shares that have been surrendered is deducted from the capital account.
This aggregate Forfeiture call amount is deposited to the Forfeiture account associated with the shares subject to the call.
It is crucial to note that they only kick in if the shareholder or owner cannot pay the called-up sum. It is common practice for businesses to require shareholders to provide advance notice before their stock is sold.
Conclusion
If a shareholder does not fulfil the company's purchasing, holding or selling requirements, the company might force the sale of their shares. Many stipulations must be met, including the payment of call money, the transfer of Shares within a limited time and the prohibition of sales. Importantly, if a member's shares are forfeited, they will not be liable for any unpaid balance or profit. Potential causes of Forfeiture include neglecting to pay fees or falling behind on payments.
FAQs on Forfeiture of Shares
1. How does a share forfeiture affect a company?
But, if a shareholder's shares are forfeited because of late payment or nonpayment, that shareholder is no longer a member of the company's ownership group. On the date of Forfeiture, a shareholder's financial obligations remain the same as before the Forfeiture. The first step in the procedure for the Forfeiture of Shares is for the company secretary to compile a list of defaulting shareholders. A second warning is given to defaulters if they still don't pay; their shares are cancelled at the next meeting.
2. In what ways and under what circumstances are publicly traded shares subject to Forfeiture?
Noncompliance with the purchase requirements, such as failure to pay allotment money or call money, can result in the company cancelling or forfeiting a shareholder's shares. This process requires the approval of the board of directors. The failure of the investor to pay the call money within the specified period constitutes a violation of the purchase agreement, which results in the Forfeiture of the investor's shares. Nothing can be done without the approval of the board of directors.
3. What does the term "forfeiture of shares" mean?
A share represents a fractional ownership interest in a firm, corporation, or other entity. A shareholder in a firm has a say in the company's financial success or failure. When a shareholder fails to pay allotment and calls payments to the company, the company may cancel the shareholder's shares. In addition to the shares, the amount of money already paid to the corporation is also lost. Following the shareholder's Forfeiture, the corporation will remove its name from the shareholder registry.
5. What is the procedure to forfeit Shares?
When a person fails to pay the installment or due to the share, he forfeits the share which means he loses the ownership of the Shares. This happens only when the company has a clause to forfeit the Shares in the agreement. Following is the procedure to forfeit Shares:
The secretary of the company or the organization makes a list of the defaulters, who have not paid the due and keeps the list in front of the board of directors for necessary action.
The board of directors checks the details and sends the instructions to the secretary to call the defaulters or send notices
As per the instructions from above, the secretary sends notice to all the defaulters to pay the due within 14 days along with the interest.
If the defaulter still does not pay the money, the secretary sends another notice asking them to pay the due else they would forfeit the Shares.
If the shareholder does not respond to the second notice, the secretary places the entire list in front of the board of directors and they will take necessary action forfeiting the Shares.
