What consequences arise from share forfeiture?
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What consequences arise from share forfeiture?
Effects of Forfeiture of Shares:
Forfeiture of shares occurs when a shareholder fails to pay the call money due on their shares, leading to the loss of their shares. This action has several effects on the shareholder and the company:
1. Loss of Shareholder Rights: Upon forfeiture, the shareholder loses all rights associated with the forfeited shares, including voting rights, dividend rights, and any other benefits of share ownership.
2. Reissue of Forfeited Shares: The forfeited shares become the property of the company and can be reissued or sold to new shareholders. This helps the company raise additional capital or restructure its shareholding.
3. Liability for Unpaid Calls: The forfeiting shareholder remains liable to the company for any unpaid calls or other amounts due on the forfeited shares. The company can take legal action to recover these amounts.
4. Adjustment of Capital: The forfeiture of shares leads to a reduction in the company's issued share capital, which may require regulatory approval and compliance with relevant laws and regulations.
5. Accounting Treatment: The company must account for the forfeiture of shares in its financial statements. The forfeited shares are removed from the issued share capital, and any amounts received on the forfeiture are credited to the share capital account or retained earnings.
6. Impact on Shareholder Equity: Forfeiture of shares affects the shareholder equity of the company. It reduces the total number of shares outstanding, which can impact key financial ratios and indicators.
7. Legal Proceedings: If the forfeiting shareholder fails to settle the unpaid calls or other amounts due, the company may initiate legal proceedings to recover the debt.
Conclusion:
Forfeiture of shares is a significant action that affects both the shareholder and the company. It results in the loss of shareholder rights, reissue of forfeited shares, liability for unpaid amounts, and adjustments to the company's capital and financial statements. Companies must follow legal procedures and regulatory requirements when forfeiting shares to ensure compliance and protect the rights of shareholders.