The procedure to be followed for the forfeiture of shares is as follows:
1. In Accordance with the Articles of Association:
Shares can be forfeited only in accordance with the provisions laid down in the articles of association of a company. The ground on which shares can be forfeited has to be explicitly stated in the articles and generally the ground mentioned is non-payment of a call(s). But if the articles provide, the company can forfeit fully paid-up shares on grounds other than the non-payment of a call.
2. Notice Precedent to Forfeiture:
A default in the payment of calls does not ipso facto bring about forfeiture. A notice of demand requiring the member to pay calls within a fixed period of the notice must be given to the holder of shares.
The notice shall also state that in the event of non-payment of calls shares shall be forfeited. The amount to be paid by way of interest or expenses besides the amount due on the call must be stated specifically in the notice; otherwise the forfeiture will be invalid.
3. Resolution of Forfeiture:
The board must also pass a resolution for the forfeiture of shares. “A declared intention to forfeit not carried into effect is no forfeiture at all”.
Forfeiture without a board’s resolution is invalid.
4. Bone fide:
The power to forfeit shares is in the nature of a trust.
Directors must exercise this power bona fide for the benefit of the company. It should not be exercised to expel a member or to get rid of him, nor it should be exercised to relieve a friend from liability.
Certain directors of a company took up shares in the company only to qualify themselves for appointment as directors. They paid nothing on their shares.
When the company was in difficulties, they got their shares forfeited and cancelled. It was held that the forfeiture was invalid, and therefore, the directors were still the shareholders of the company.