(Provisions Regarding the Statutory Forfeiture of Shares) The forfeiture of shares should be legal, otherwise it will not be valid by the court. There are following provisions in the Companies Act for statutory forfeiture of shares.
1. Provisions in the Councilor’s Articles of the Company No company can ordinarily forfeit shares unless it is expressly provided for in the Councilor’s Articles with respect to forfeiture of shares.
2. Reasonable justification for forfeiture – There should be a proper justification for forfeiture of shares which cannot be done by the shareholders only after the payment of the call for a certain period of time. The company cannot forfeit the shares for any other reason, even if there is an additional provision in the Articles of Association of the company.
3. Appropriate action to be taken while forfeiture – Forfeiture of shares cannot be considered valid unless proper action has been taken for the same. If a call has not been made by law, then the director cannot proceed for forfeiture of shares for non-payment of such call.
4. Procedure for forfeiture should be proper and valid – The procedure for forfeiture of shares should be proper and valid, otherwise the forfeiture of shares will be considered illegal. The arrangement for forfeiture of shares should be as per the lawful rules mentioned in the Articles of Association of the company.
5. The right of forfeiture of shares by the directors to be exercised in the interest of the company – Only the directors of the company have the right to forfeit the shares. They should exercise this right in the interest of the company. If they do not do so, the forfeiture of shares may be cancelled. For this, the shareholders also get the right to present a suit in the court.