Brief notes on Lien of shares, surrender of shares & forfeiture of shares

The terms Lien of shares, Surrender of shares & Forfeiture of shares are explained in detail as follows :

Lien of shares :

A lien is the right to retain possession of a thing until a claim is satisfied. In the case of a company lien on a share means that the member would not be permitted to transfer his shares unless he pays his debt to the company. The articles generally provide that the company shall have a first lien on the shares of each member for his debts and liabilities to the company. The right of lien is not inherent but must be clearly provided for in the articles. The articles may give the right of lien over share either for unpaid calls or for any other debt due by the member of the company. The company may have lien on fully paid-up shares. The lien also extends to the dividends payable on the shares.

The death of a shareholder does not destroy the lien. The right of lien can be exercised even through the claim has become barred by law of limitation. Where the liability of the shareholder towards the company is disputed by him, it does not deprive the company of its right of lien on the shares. But a company will not be able to exercise its right of lien where the shareholder has mortgaged his shares before he has incurred any liability to the company and the company has notice of it. Similarly, a company will loose its lien if registers a transfer of shares subject to the lien.

Surrender of shares :

The companies act does not provide for surrender of shares. Shares are said to be surrendered when they are voluntarily given up. The articles of a company may authorize the directors to accept surrender of shares. Surrender of shares is valid where it is done to relive the company from going through the formality of forfeiture of shares and the shareholder is willing to surrender the shares. A surrender and a forfeiture have practically the same effect, the only difference being that the former is done with the assent of the shareholder while the latter is done at the instance of the company.

A surrender of shares will be void if it amounts to a purchase of shares by the company or if it is accepted for the purpose of relieving a member of his liabilities. Every surrender of shares whether fully paid-up or not, involves a reduction of capital which is unlawful except when sanctioned by the court. But, fully paid shares can be surrendered without leave of the court provided the surrender does be surrendered without leave of the court provided the surrender does not involve the reduction of capital i.e., in exchange for other shares of the same nominal value.

A person ceases to be a member of the company on a valid surrender of shares. But he shall be liable as a contributory as a past member of the company if it is wound up within twelve months of his surrendering his shares. Shares which have been validly surrendered can be reissued in the same way as forfeited shares.

Forfeiture of shares :

A company has no inherent power to forfeit shares. The power to forfeit shares must be contained in the articles. Where a share holder fail to pay the amount due on any call, the directors may, if so authorized by the articles, forfeit his shares. Shares can only be forfeited for non-payment of calls. An attempt to forfeit shares for other reasons is illegal. Thus where the shares are declared forfeited for the purpose of reliving a friend from liability, the forfeiture may be set aside.

The right to forfeit shares must be pursued with the greatest exactness. Forfeiture being in the nature of a penal proceeding, the provisions of the articles must be strictly followed. It must be exercised by properly appointed directors at their meeting with requisite quorum. A small or insignificant irregularity will make the forfeiture void.

Before the shares are forfeited the shareholder :

i) Must be served with a notice requiring him to pay the money due on the call together with interest;

ii) The notice shall specify a date, not being earlier than the expiry of 14 days from the date of service of notice, on or before which the payment is to be made and must also state that in the event of non-payment within that date will make the shares liable for forfeiture;

iii) There must be a proper resolution of the board;

iv) The power of forfeiture must be exercised bonafide and for the benefit of the company.

Forfeited shares become the property of the company. To that extent it involves a reduction of the capital of the company. The company may sell the forfeited shares for any price they fetch, i.e., the shares may be re-issued at a discount.

A person, whose shares have been forfeited, ceases to be a member of the company. But he shall remain liable to pay to the company all moneys which at the date of forfeiture were payable by him to the company in respect of the shares. The liability of such a person shall cease as and when the company receives payment in full in respect of the shares.

The company shall specify the total number of shares forfeited in every annual return submitted to the registrar under section 159.