Introduction:
There are three main types of business organization:
1. sole proprietorship
2. partnership
3. company
Each form of business organization is required capital to carry on its business smoothly. On sole proprietorship the whole capital is contributed by sole proprietor in partnership the capital is invested by the partners and in case of company capital is invested by the public.
Meaning of share and share capital:
A share is one unit into which the total share capital is divided. Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares. The amount collected by the company from the public towards its capital, collectively is known as share capital and individually is known as share. A share is not a sum of money but is an interest measured by a sum of money and this interest also contains bundle of rights and obligations contained in the contract i.e. Article of Association. Investment in the shares of any company is a basis of ownership in the company and the person who invest in the shares of any company, is known as the shareholder, member and the owner of that company.
Definition:
According to the section 2(46) of the Company’s Act 1956, share means a part in the share capital of the company and it also includes stock except where a distinction between stock and share capital is made expressed or implied. But in India a share is also regarded as “goods”. Section 82 of the Companies Act, 1956, provides that shares or other interest of any member in a company shall be movable property.
An amendment of Section 82 introduced by the Companies (Amendment) Act, 1999 says that while before this amendment Section 82 confined itself to the "shares or other interest of any member", the statement should now be read as "shares, debentures or any other interest of any member." And Sale of Goods Act defines goods as including every kind of moveable property. Hence shares in a company in India are goods and not mere chose-in-action.
The analysis of the "share" in terms of goods has been carried further to some of its natural implications by the Supreme Court in LIC v Escorts Ltd. [1] if shares are goods, rules relating to passing of ownership in goods would apply. Section 19 of the Sale of Goods Act says that property in the goods sold passes when it is intended to pass. "Shares" are specific goods and Section 20 of the Act says that ownership in specific goods passes when the contract is made. Thus a purchaser of shares becomes the owner of the property in the shares when he contracts to buy them. The inevitable implication of these provisions is that the company cannot deprive him of his ownership by refusing to register him as a shareholder unless there is a genuine reason to do so. But even so shares are not "goods" in the ordinary sense of the word.[2]
Shares are a peculiar kind of movable property which cannot pass from hand to hand like bales of cotton. The property in these shares belonged to the registered shareholders and could not be transferred to another except according to the articles of the company.[3]
A person who holds such a share is known as the shareholder. Each shareholder, therefore, holds a portion of the capital of the company. "A share means a share in the capital of the company. It is a tangible property."[4] "But shareholders are not, in the eyes of law, part owners of the undertaking. The undertaking is something different from the totality of the shareholdings."[5] All the assets of the company are vested in the corporate body and not in the individuals composing it. Hence a share does not constitute the holder a part owner of the company's capital. But shareholders are the owners of certain rights and interests and subject to some liabilities. A shareholder acquires an interest not in a mere chattel, but in the company itself, an interest of a permanent nature. "A share is the interest of a shareholder in the company measured by a sum of money for the purpose of liability and dividends, in the first place, and of interest, in the second, and also consisting of a series of contract as contained in the articles of association."[6] "A share is not a sum of money but an interest measured by a sum of money and made up of various rights and liabilities. A share is an existing bundle of rights."[7] "It is well established that shares are simply bundles of intangible rights against the company which had issued them. Share certificates are not valuable property in themselves-they are just evidence of the true property, which are the proportionate interests of the shareholders in the ownership of the company. One pari passu share is exactly the same as any other. This was recognized in Solloway vMcLaughlin.[8]Therefore, each share certificate with the depository evidences the same bundle of rights and each bundle of rights can satisfy the client's proprietary interest as any other.[9]
Types of shares:
As per the provision of section 85 of the Companies Act, 1956, the share capital of a company consists of two classes of shares, namely:
ü Preference Shares
ü Equity Shares
Preference Shares:
According to Sec 85(1), of the Companies Act, 1956, a preference share is one, which carries the following two preferential rights:
I. The payment of dividend at fixed rate before paying dividend to equity shareholders.
II. The return of capital at the time of winding up of the company, before the payment to the equity shareholder.
Both the rights must exist to make any share a preference share and should be clearly mentioned in the Articles of Association.
Preference shareholders do not have any voting rights, but in the following conditions they can enjoy the voting rights:
v In case of cumulative preference shares, if dividend is outstanding for more than two years.
v In case of non-cumulative preference shares, if dividend is outstanding for more than three years.
v On any resolution of winding up.
v On any resolution of capital reduction
FORFEITURE OF SHARES
If a member, having been called upon to pay, defaults, the company may, of course, bring an action against him. But articles of association often provide that in such a case the company may proceed to forfeit his shares. Shares cannot be forfeited unless there is a clear power to that effect in the articles. Thus in Madhwa Rarnchandra Kamath v Canara Bkg Corpn Ltd[10] the articles of a company only authorized it to expel a member. That was held to be not sufficient to enable the company to deprive the expelled member of his shares.
Forfeited shares become the property of the company. To this extent forfeiture involves a reduction of the company's capital. The shares can, however, be re-issued, even at a discount, but that is not the same thing as an allotment.[11]
"The right to forfeit shares must be pursued with the greatest exactness: it must be exercised by the proper parties, that is, by directors properly appointed, and by the requisite number of them and in the proper manner and for the proper cause. The right must be exercised bona fide for the purpose for which it is conferred. The power of expulsion is a trust the execution of which will be narrowly scanned by the courts. [12]The proper procedure to be observed in carrying out forfeiture is as follows:
1. In accordance with articles
Forfeiture to be valid must proceed on the grounds specified in the company's articles. It seems to be a principle of English law that shares can be forfeited only for a non-payment of calls. for example, Viswanath Prasad Jallan Vs. Holylalld Cilletone Ltd, AIR 193{All 739: ] 939 AU 950, where it was held that where certain subscribers had undertaken to purchase a certain number of shares but there was no term in the articles of association by which they were to pay the amount on a particular date, nor was any date fixed by the board of directors, their shares were not liable to forfeiture. Similarly in Panlla Lal Vs. Jagatjit D&A Industries, A1R 1952, It was held that where a call for payment is made on the transferee of shares before his name is registered as a member, the call would be invalid and consequently the forfeiture of shares for non-payment of the call money would also be invalid.
A call which does not fix the time for payment cannot support a valid forfeiture. Forfeiture on any other ground would be an illegal reduction of capital. But the Supreme Court has now held in Naresh Chandra Sanyal Vs Calcutta Stock Exchange Assn Ltd.[13] that "there is no provision in the Companies Act restricting the exercise of the right to nonpayment of calls only.
A stock broker, holding one fully paid share in the Exchange, carried on business on its premises. He had agreed to buy certain shares from a company, but failed to carry out his commitment. The shares were then resold by the company with the authority of the Exchange. The broker was required to pay the difference between the contract and resale prices. On his failure to do so his share was forfeited.
The Supreme Court held the forfeiture to be valid.[14] The Court said:
company may by its articles lawfully provide for grounds of forfeiture other than non-payment of a call, subject to the qualification that the articles relating to forfeiture do not offend against the general law of the land and in particular the Companies Act, and public policy; that the forfeiture contemplated does not entail or effect a reduction in capital or involve or amount to purchase by the company of its own shares, nor does it amount to trafficking in its own shares. The learned judge then stated that the forfeiture of shares did not result in reduction of capital. The company was under an obligation to dispose of the forfeited share, and could not retain the same. Further, the reissue of a forfeited share was not an allotment, but only a sale, for otherwise the forfeiture, even for non-payment of call, would be invalid as involving an illegal reduction of capital.
Where the buses of a transport company were divided into two gro).Ips of shareholders, each group operating them separately, and one of them causing losses, that would not justify forfeiture of their shares[15]
2. Notice precedent to forfeiture
A notice under the authority of the Board of directors must be served on the defaulting shareholder. The notice should require him to pay the amount on a day specified which should not be earlier than fourteen days from the date of service. The notice should clearly warn him that in the event of non-payment before the time fixed, the shares would be liable to be forfeited.[16]The notice must also specify the exact amount due from the shareholder. Where, for example, the notice of forfeiture claimed interest from the date of the call instead of the date fixed for its payment, it was held to be a bad notice and the forfeiture invalid.[17]"This seems to be somewhat technical. But in the matter of forfeiture of shares, technicalities must be strictly observed. [18] “A very little inaccuracy is as fatal as the greatest." It has been held by BACHA W A T J in a decision of the Supreme Court[19] that a notice which does not specify the amount claimed by the company as call money, interest and expenses, is defective. "The defect in the notice, though slight, invalidates it and is fatal to the forfeiture." In a case before the Delhi High Court,[20] shares were forfeited on the basis of a registered A D notice which came back as unserved, it was held that the forfeiture was bad, for it was the duty of the company to know whether the address of the member had changed. The fact that forfeited shares had been reaIlotted to others was held to be no defense and the member was entitled to have her name put back in the register for the same shares which she held before forfeiture. Even .Iaches or delay on the part of the shareholder in protesting against the forfeiture was held to be not sufficient to disentitle her from her remedies.
3. Resolution of forfeiture
The above notice does not by itself operate as forfeiture. The directors have further to pass a resolution declaring the forfeiture. Thus where the final resolution of forfeiture was not passed the court held85 that, "a declared intention to forfeit not carried into effect is no forfeiture at all''. But the notice threatening forfeiture may incorporate the resolution of forfeiture as well. It may state that in the event of default the shares shall be deemed to have been forfeited. In such a case no further resolution is necessary.
4. Good faith
Lastly, "the object of a power of forfeiture is that the company shall be enabled, for its own benefit, and adversely to the shareholder, to forfeit his shares if he fails to pay his calls. The power cannot be used at the request of the shareholder to relieve him of shares. The power must be exercised in good faith' in the interest of the company."
5. Right and liability after forfeiture
The liability of a member whose shares have been forfeited depends upon the provisions of the articles. The articles may provided that the member should be liable to pay all calls owing upon the shares at the time of the forfeiture. In such 'a case the members will remain liable as a debtor of the company, but not as a contributory, even if the winding up follows more than one year after the forfeiture. He, however, remains a contributory as a past member for one year from the date of forfeiture.
His right is that when his shares are resold he can collect from the company the surplus of the sale proceeds after deducting the amount due. Thus the Supreme Court in Naresh Chandra Sanyal vs Calcutta Stock Exchange Assn Ltd[21] declared that the articles of the Exchange which allowed it to retain such proceeds were invalid for two reasons: first, it would amount to penalty against the spirit of Section 74 of the Indian Contract Act; secondly, It would also be equivalent to a purchase by the company of its own shares in contravention of Section 77. The case is different from others, for forfeiture is generally carried out for non-payment of calls. Whereas, here, a fully paid share was forfeited. The grounds on which the court ordered refund of surplus may not apply to the case of forfeiture for non-payment.
A person to whom forfeited shares have been reissued is governed by the terms of reissue. When the reissue is without any stipulation as to the outstanding calls, the new allottee cannot be held liable for the previous calls and interest on the overdue amount and his shares cannot be forfeited on that ground.
REISSUE
A forfeited share may be reissued or otherwise disposed of on such terms and in such a manner as the Board may think fit.
Reissue of forfeited shares is a sale of shares and it does not amount to an allotment. The company should duly record the particulars of the members who acquire those shares as if it were a transfer of shares.
The directors would fix a price for the forfeited share that should not be lower than the amount of the call(s) due and unpaid on the share at the time of forfeiture. In the case of a company whose shares are listed in a recognized stock exchange, re-issue of forfeited shares shall be as per Guidelines for Preferential Issue of the Securities and Exchange Board of India and the listing agreement.
Surrender of shares
Every surrender of shares, like forfeiture, amounts to reduction of capital. But, while forfeiture is recognized by the Act, surrender is not. There is no reference in the Act to surrender of shares; but these have been admitted by the courts, upon the principle, that they have practically the same effect as forfeiture, the main difference being that one is a proceeding in invitum and the other a proceeding taken with the assent of the shareholder who is unable to retain and pay future calls on the shares."92 Hence a company can only accept surrender under conditions and limitations subject to which shares can be forfeited. A valid call and a default must exist and the directors may, instead of going to the length of forfeiture, in good faith accept surrender from the shareholder. Surrender should not be used as a device for relieving a shareholder from his liability.
Following cases are illustrations of bad surrender of shares: Collector of Moradabad v Equity Insurance Co, AIR 1948 Oudh 197. In this case, after the death of a Raja who held several shares in a company, his shares were surrendered to the company and the surrender was accepted by the secretary of the company. It was held that "even if the secretary intended to accept the surrender. There transaction would be ultra virus. Under our law it is not open to a shareholder to surrender the shares held by him or to the company to accept the surrender, unless the act of the company can be brought within the rules relating to forfeiture of shares".
Yet another case is Mangal Sain v Indian Merchants Bank, Amritsar, AIR 1928 Lah 240. The objector having been placed in the list of contributories. In the winding up of a company contended that he had surrendered his shares, and that the directors had under a clear power in the articles of association, accepted the surrender. It was held that a company can .only accept a surrender under conditions and limitations under which shares can be forfeited, which did not exist in the present case.
Conclusion
Therefore I conclude that the forfeiture is withdrawal of shares due to non-payment of any call by the shareholder or for any other ground as may be provided in the Articles. On forfeiture of shares the member loses the amount paid thereon and his interest in the ownership of the shares. Notice should be served by the company on the defaulting member by registered post acknowledgment due.
[1] -(1986) I SCC 264 at 321: (1986) 59 Comp Cas 548
[2] - France v Clark, (1884) 26 Ch D 257.
[3]- Vadilal Sarabhai v Manekji Pestonji Bharucha, AIR 1923 Born at 423.
[4] - SNDP Yogan!, Re, ILR 1969 Ker 516: [1970] 1 Comp LJ 85
[5] - Short v Treasury Commissioners, [1948] I KB 116 at 122: [1947] I All ER 22.
[6] - Borland's Trustee v Steel Bras & Co Ltd, [1901] 1 Ch 279, 288. Adopted by the Supreme Court in Charanjil Lat v VOL, AIR 1951 SC 41 at 55: 1950 SCR 869: (1951) 2] Comp Cas 33
[7] - Pauline, Re, [1935] 1 KB 26 cited with approval by the Supreme Court in CIT v Standard Vacuum Oil Co. [1966] 1 Comp LJ 187 at 192: AIR 1966 SC 1393
[8] - [1937] 4 All ER 328: [1938] AC 247.
[9] CA Pacific Finance LId Re, [2000] 1 BCLC 494; Harvard Securities Ltd. Re, [1997] 2 BCLC 369 CA.
[10] - AIR 1941 Mad 354. Regulations 29 to 35 of Tab]e A provide for the power or forfeiture. If a company's original articles do not contain this power they may be amended so as to include the power.
[11] -70 Calcutta Stock Exchange Assn, Re, AIR 1957 Ca1438. Upon reissue the capital becomes intact.
[12] -), in Kanshi Ram v Kishore Chand, AIR 19]5 Lah 109: 291C 567.
The learned judge added: "It (the power of forfeiture) cannot, for example, be exercised surreptitiously for the purpose or expelling a shareholder, nor, by connivance for the purpose of assisting him in getting rid of his shares.
[13] - (1971) 1 SCC 50: (1971) 41 Comp Cas 51.
[14] - For a criticism of this approach see K. Ponnuswami, Forfeiture of ShareYt [1964] I Comp U 171. For a discussion of the whole of law of forfeiture see Srinivasan, Forfeiture of Shares in Compallies, [1964] 1 Comp U 135.
[15] -77 Dilbhajan Sillgh v New Samundri Transport Co (P) Ltd, (1985) 58 Comp Cas 247 P&H. See also K. Md. Farooq Ad v Portrall Cirkit Electrollics P Ltd, (1997) 25 Corpt LA 209 (CLB), shares, which were fully paid, not allowed to be forfeited for the fact that the NRI holder had not obtained RBI approval. Seven years had passed and the allottee had already become a resident.
[16] -79 Satish Challdra Sanwalka v Tinplate Dealers Assll P Ud. (2001) 107 Comp Cas 98 CLB, a notice WhIch does not specify that the fmlure to pay the call would result in the forfeiture being regarded invalid.
[17] - Johnson v Lyule's Iron Agency, (1877) 5 Ch D 687: 36 LT 528.
[18] - Lord ROMER in Premila Devi v People's Bank of NortheTlllndia, 1LR (1939) 20 Lah I Pc.
[19] - Public Passenger Service LId v Khadar, [1965] 1 Comp U I: AIR 1966 SC 489: (1966) 36 Comp Cas I: [1966]
[20]- Prollula Bansal v Weanvell Cycle Co (India) Ud, (1978) 48 Comp Cas 202 Del.
[21] -(1971) I SCC 50: (1971) 41 Comp Cas 51.
