Lesson 28: Forfeiture of Shares
Extracted strictly from NIOS Senior Secondary Accountancy Module 5. Covers legal definitions, 14-day statutory notice procedure, accounting for forfeiture at par, pro-rata allotment calculations, premium treatment (received vs unpaid), and discount write-back rules.
1 Meaning, Consequences & Legal Procedure of Forfeiture
Section 28.1Core Concept & Legal Definition
When a shareholder fails to pay the due amount of allotment or any call money on shares, the Board of Directors may decide to cancel his/her membership of the company. Depriving a defaulting shareholder of membership and retaining the money already paid by him/her is called Forfeiture of Shares.
The defaulting shareholder loses all rights and membership status in the company, and forfeits all past amounts paid (e.g. application/allotment money).
The issued share capital of the company is reduced by the nominal face value of the forfeited shares.
Statutory Notice Procedure (Articles of Association)
- Authority: Power to forfeit is granted to the Board of Directors under the company's Articles of Association.
- Minimum Notice Period: The Board must serve at least 14 days' written notice to the defaulting member.
- Notice Contents: Calls upon the shareholder to pay the outstanding amount (with or without interest) before a specified date, warning that non-payment will result in share forfeiture.
- Resolution & Cancellation: If unpaid after 14 days, the Board passes a formal resolution of forfeiture, communicates the decision, and requests the surrender of allotment letters/share certificates.
2 Forfeiture of Shares Issued at Par & Pro-Rata Allotment
Section 28.2Standard Journal Entry (Shares Issued at Par)
When shares issued at par are forfeited, Share Capital Account is debited with the total called-up amount (whether received or not), Share Forfeited Account is credited with the amount actually paid, and Unpaid Calls Accounts are credited.
Share Capital A/c ... Dr. (No. of shares × Called-up per share)
To Share Forfeited A/c (No. of shares × Amount actually paid per share)
To Unpaid Calls / Allotment / Call A/c (No. of shares × Unpaid amount per share)
Pro-Rata Allotment & Unpaid Allotment Calculation Steps
When shares are over-subscribed and allotted on a pro-rata basis, excess application money is adjusted towards allotment. If a pro-rata allottee defaults on allotment, the unpaid allotment amount is determined as follows:
Shares Applied = (Total Shares Applied / Total Shares Allotted) × Defaulter's Allotted Shares
Excess App Money = (Applied Shares - Allotted Shares) × Application Rate
Gross Due = Allotted Shares × Allotment Rate
Net Unpaid Allotment = Gross Due - Excess App Money Adjusted
3 Forfeiture of Shares Issued at Premium & Discount
Section 28.3Shares Issued at Premium: Two Legal Situations
| Situation | Securities Premium Treatment | Journal Entry Structure |
|---|---|---|
| Case 1: Premium Already Received | Securities Premium A/c is NOT affected or debited (remains untouched as per law). |
Share Capital A/c ... Dr. To Share Forfeited A/c To Unpaid Calls A/c |
| Case 2: Premium Due but NOT Received | Securities Premium A/c MUST be debited (cancelled) for the unpaid premium amount. |
Share Capital A/c ... Dr. Securities Premium A/c ... Dr. To Share Forfeited A/c To Unpaid Allotment/Calls A/c |
Shares Issued at Discount (Write-Back Rule)
Discount on issue of shares is a capital loss. When shares issued at a discount are forfeited for non-payment, the discount allowed on such forfeited shares is credited back / cancelled by crediting Discount on Issue of Shares A/c.
Share Capital A/c ... Dr. (Nominal called-up amount)
To Share Forfeited A/c (Amount actually received)
To Discount on Issue of Shares A/c (Discount write-back amount)
To Unpaid Calls A/c (Defaulted call money)