FORFEITURE OF SHARES

Forfeiture of shares is a process where the company forfeits the shares of a member or shareholder who fails to pay
the call on shares or instalments of the issue price of his shares within a certain period of time after they fall due. In
other words, when the shareholder fails to pay the full amount of share which he agreed to pay in instalments the
company can cancel his shares. When the shares are issued by the company, generally the shareholders are not
asked to pay the whole amount of share at once. It happens in instalments. The company makes these calls on
shares when it requires further capital. The amount called must be not more than one-fourth of the face value of
share. The dates of two consecutive calls must differ by at least a month. A minimum of fourteen days’ notice must
be given to members. The notice has to mention the time, place and amount of the call on shares.
Generally, the company will give 14 days’ notice to the shareholder and after 14 days if the shareholder is not
willing to pay the money due to the company will forfeit the shares of that shareholder.
After the shares are forfeited, they may be either disposed of or they may be reissued to some other person. The
only condition in reissuing the forfeited shares is that the price which will be fixed by the company for reissue of
the forfeited share (i.e., the price of the reissued share + amount paid by the former owner of the share) should not
be less than the face value of the share. This is done to ensure that the shares are not allotted at a discount.
If the previous shareholder (whose shares has been forfeited) requests the company to cancel the forfeiture, the
board of directors can at any point before the reissue or disposal of such shares can cancel the forfeiture of shares
in terms as the board thinks fit. For this, the board of directors has to pass a resolution to cancel the forfeiture.
Procedure for the forfeiture of shares:
1. Forfeiture of shares must be in accordance with the provisions contained in the articles of the company to be
treated as valid forfeiture. The power of forfeiture of shares must be exercised bona fide and in the interest of the
company. Thus, where the articles of the company authorize the directors to forfeit the shares of a shareholder,
who commences an action against the company or the directors, by making a payment of the full amount of his
shares, was held that such a clause was invalid as it was against the rights of a shareholder.
2. A proper notice under the authority of board must be served on the defaulting shareholder. The notice should
mention that the shareholder has to pay the amount on a day specified which would not be earlier than fourteen
days from the date of notice served. This is provided under Regulation 29 of Table F. the notice should also
mention that in the event of non-payment, the shares will be liable to be forfeited. The objective of sending the
notice is to give the defaulting shareholder an opportunity to pay the call money, interest and any other expenses
and hence notice should disclose enough information with particulars to the shareholder.
3. If the defaulting shareholder does not pay the amount within the specified period mentioned in the notice properly
served to him, the directors of the company may pass a resolution forfeiting the shares under regulation 30 of
Table F. in the absence of such resolution the forfeiture shall be invalid unless the notice of forfeiture incorporates
the resolution of forfeiture as well. For example, the notice may state that in the event of default the shares shall be
deemed to have been forfeited.
Effects of Forfeiture:
Cessation of Membership; Cessation of Liability (the liability of unpaid calls remains even after the forfeiture of
shares.); the liability of a former shareholder remains as a liability of a past member to pay calls if liquidation of
the company takes place within one year of the forfeiture; Forfeited shares becomes companies property.
TRANSFER OF SHARES:
Section 56 of Companies Act, Rule 11 of Companies (Share and Debentures) Rules 2014.
Procedure For Share Transfer In Private Company
1. CHECK AOA: First step is to scrutinize AOA for the restrictions if provided therein such as rights of pre-emption
etc.
2. NOTICE TO DIRECTOR: A notice in writing shall be provided by the shareholder willing to transfer their shares
to the Director of the company.
3. DETERMINATION OF PRICE: A review of AOA is required to determine the price at which shareholders can
transfer shares to the current shareholders of the company.
4. NOTICE TO OTHER SHAREHOLDERS: The shareholder who is willing to transfer his shares must then give
notice to the other shareholders in the company, and if they are not interested, the shares can be transferred to the
outsiders. Moreover, the notice should mention the last date to purchase the shares and the price.
How To Transfer Shares Of A Private Limited Company
INTIMATION TO COMPANY: Transferor should give notice to the company for his intention to transfer shares.
Here comes the duty of a company where the company will notify the existing shareholders about the price, time
limit within which they can purchase the shares, availability of shares, etc.
TRANSFER DEED: To transfer shares the share deed is required, it is a document which needs to be duly
executed both by the transferor and transferee.
Transfer deed is in Form SH-4 which should have been:
 Duly stamped; dated; Having Father’s name, address, occupation, etc.; Number of shares transferred; Certificate
number of share transferred; Consideration i.e. value of shares transferred; Executed by both the parties i.e.
transferor and transferee.
SHARE CERTIFICATE/LETTER OF ALLOTMENT: Letter of allotment must be submitted to the company
along with transfer deed.
PASSING OF RESOLUTION: Board shall register the transfer of shares after receiving and considering the deed
by passing a resolution.
Legal Provisions For Share Transfer
1. STAMP DUTY ON TRANSFER DEED: Stamp duty is 25 paisa for every Rs.100 or part thereof of the value of
shares.
2. Period FOR DEPOSIT TRANSFER DEED: The transfer deed i.e. Form SH4 shall be submitted to the company
within 60 (sixty) days of its execution by or on behalf of transferor or transferee.
3. TIME FOR ISSUANCE OF CERTIFICATE: As per Section 56(4), the company shall provide a certificate for
transfer of shares within one-month application for registration of transfer of shares.

DEBENTURES
A firm can borrow money from the general public by issuing certificates for a specified period of time and at a
fixed rate of interest if it needs money for expansion and growth without raising its share capital. This is referred to
as a debenture. In simple words, a debenture is a written document that bears the company’s common seal and
acknowledges a debt. It includes a contract for the payment of interest at a given rate due often either half-yearly
or annually on fixed dates, as well as for the repayment of principal after a pre-determined period of time, at
intervals, or at the company’s discretion.
Section 2(30) “debenture” is any security issued by a company, including bonds, debenture inventory, and other
securities, irrespective of it constituting a charge on the assets of the company.

CLASSIFICATION OF COMPANY SECURITY

Equities-Equities refer to the money invested in an organization by purchasing shares in the stock market.
1. Equity Shares: Equity shares are part ownership where the shareholders are fractional owners and initiate the
maximum entrepreneurial liability related to a trading concern. Equity shareholders reserve the right to vote.
However, holders of this instrument rank bottom on the scale of preference in the event of company liquidation
because they are considered owners of the enterprise.
2. Preference Shares: Preference shares are issued by corporate bodies, and on the scale of preference, the investors
rank second when the company goes under. These shares are often treated as debt instruments as they do not confer
voting rights to the holders. They also have a dividend payment structured like a coupon or interest paid for bond
issues.
Debt Securities-Debt securities are financial assets entitling the owners to a stream of interest payments. Borrowers
must repay the principal borrowed and are classified into bonds and debentures.
1. Bonds: Bonds are fixed-income instruments primarily issued by the state and center governments, municipalities,
and organisations for financing infrastructural development and other projects. It is referred to as a loaning capital
market instrument, and the bond issuer is the borrower. Typically, bonds carry a fixed lock-in period, and on the
maturity date, bond issuers must repay the principal amount to the bondholders.
2. Debentures: Debentures are unsecured investment options and not backed by any collateral. The lending is based
on mutual trust. Investors act as potential creditors of the issuing company or institution.
Derivatives-Derivatives are capital market financial instruments. Their values are determined by underlying assets
like stocks, currency, stock indexes and bonds. The most common types of derivative instruments are:
 Forward: It is a contract between two parties in which the exchange occurs at the end of the contract at a specific
price.
 Future: It is a derivative transaction involving the exchange of derivatives on a determined future date at a
predetermined price.
 Options: It is an agreement between two parties. Here, the buyer has to right to buy or sell a specific number of
derivatives at an exact price for a particular period.
 Interest Rate Swap: An agreement between two parties involving swapping interest rates. Both parties must agree
to pay each other interest rates on their loans in different options, currencies, and swaps.
Exchange-Traded Funds-Exchange-traded funds are a pool of financial resources from many investors. These are
utilized to purchase different capital market instruments like debt securities (derivatives and bonds), shares, etc.
Most ETFs are registered with the SEBI (Securities and Exchange Board of India). Therefore, it is an appealing
option for investors with limited knowledge of the stock market.
In the stock market, ETFs with features of mutual funds and shares are traded as shares produced through blocks.
They are listed on stock exchanges, and investors can purchase and sell them according to their requirements
during the equity trading.
Foreign Exchange Instruments-Foreign exchange instruments are represented on the foreign market. It primarily
consists of derivatives and currency agreements.
They can be broken into three categories – outright forwards, spot, and currency swaps.

ROLE OF COURT TO PROTECT INTEREST OF CRDITORS AND SHREHOLDERS

The protection of a company’s creditors and shareholders’ interests is largely dependent on the law. The
relationship between creditors, shareholders, and the corporation is governed by a set of rules and regulations
provided by the legal framework. This guarantees the fair and transparent operation of the business and the
protection of the rights of all parties concerned.
CLASS ACTION SUITS
In India, the need for a class action suit first came on the scene with the emergence of one of the biggest
accounting frauds known as the ‘Satyam Scam’. Back in 2009, Satyam Computers Services Ltd. became the talk of
the news for misrepresenting its financial accounts and subjecting its board members, stakeholders, and investors,
amongst others, to deception. Around three lakhs in number, they were unable to claim redressal for the losses
endured because of the then absence of the provision of class action suit under the Companies Act, 1956. A class
action suit, also known as the representative action, refers to a lawsuit filed by a group of individuals affected by
the same or similar injury. It lets people come together and approach the court of law to acquire a joint remedy
against the unlawful activities carried out by some entity that has caused them common financial or legal trouble.
People generally file class-action suits against retailers, manufacturers, corporate companies, or government
organizations. Illegalities committed by any of these impact everyone at large, and it is impossible to deal with
them individually. Moreover, it would also not be feasible for the courts to decide upon several identical matters
one by one.
TYPES OF CLASS ACTION SUITS-
Consumer class action-Sellers often sell a product that tends to violate the respective regulations. The sale may be
affected by misleading marketing activities, or the sellers may refuse the consumers to bargain upon the payment.
Every country around the world has its own law to protect consumers from such unethical practices. Under those
laws, they can file a consumer class-action suit against the seller.
Securities class action-In cases where companies induce the potential investors to procure their securities by
misrepresentation of facts or fraud, the aggrieved may sue the company by filing a securities class action to obtain
reimbursement for the losses so suffered.
Employment class action- There may occur situations where a company indulges in illegal or unethical activities,
because of which it suffers from penal consequences. It also sometimes causes its employees to bear the brunt of
such doings. If these incidents happen, the aggrieved employees may file an employment class action suit to avoid
detrimental impact upon themselves.
Section 245 of the Companies Act, 2013 specifically covers the concept of class action suit. It contains ten sub-
sections that lay down the procedure and requirements for initiating such lawsuits. Before proceeding any further,
it is to be noted that the National Company Law Tribunal (NCLT) deals with grievances common to a large
number of members of companies. The NCLT is governed by the National Company Law Tribunal Rules, 2016.
Introduction of these rules was primarily driven by the fact that it would help to lessen the burden of high courts in
dealing with cases relating to company law.
Against whom class action suit can be filed- The company; Directors of the company; Auditors or the auditing firm
of the company, along with the partners involved in misleading financial statements, if any; Expert or the advisor
of the company
Reliefs that can be obtained- Section-245(1) states that if any of the members or depositors believe that the conduct
of the company’s transactions has dangerous implications for them or the company’s interests, they may apply for
a class action suit before the NCLT:-
 To prevent the company from committing such acts that run contrary to its articles or memorandum.
 To prevent the company from violating the provisions of its articles or memorandum.
 To declare a change to those provisions as invalid because it took place through concealment of the
facts from the members or depositors.
 To prevent the company’s directors from acting on such a change.
 To prevent the company from committing acts that are against the provisions of the company in
force for the time being.
 To prevent the company from taking any action against the decision of its members.
 To appeal for compensation from or against:-
 The company or its directors for any corrupt activity on their part.
 Auditor or the company’s auditing firm for misrepresenting financial statements.
 Any expert or advisor misleading the members or depositors.
 To appeal for any such remedy as the tribunal thinks fit.
Binding effect of the order and penalty for non-compliance- As per Section-245(6), any order passed by the
tribunal regarding the class action suit would be obligatory for all the members of the company involved to follow.
Section-245(7) provides that if the company fails to obey the order passed by the tribunal, it would have to pay
Rs.5,00,000 as a penalty, which the tribunal can also extend to Rs.25,00,000. Further, an officer of the company
not following such an order shall be subject to punishment of up to three years in prison. Also, he will have to pay
a penalty of Rs.25,000, which is extendable by Rs.1,00,000.
Penalty for baseless application- Section-245(8) states that if the tribunal finds that an application for the class
action suit is frivolous or vexatious, it may dismiss the same and pass an order directing the applicant to pay such
an amount as it thinks fit to the opposite party. However, this amount shall not exceed Rs.1,00,000. Section-245(9)
asserts that this whole procedure shall not apply to any company that does business in the banking sector. Lastly, as
per Section-245(10), an individual applying under Section-245(1) must comply with all the requirements
mentioned above.
DERIVATIVE ACTION
Derivative Action An interesting area of law is the law governing derivative action mechanism which enables the
shareholders of a company to bring an action on behalf of the company against a third party before a regular civil
court. Again, there is no specific statutory provision for derivative action in the Indian companies law. However,
the doctrine of derivative action is recognised by the Indian courts. If a shareholder alleges that a wrong has been
done to the company by persons in control thereof, he may bring a derivative action where he derives the authority
from his corporate right to sue on behalf of the company. The premise on which the court entertains this
extraordinary form of action is upon the complaining shareholder’s assertion that the company cannot sue as the
persons in control would not bring an action on its behalf or for its benefit. Derivative action is defined as an action
by one or more shareholders of a company where the cause of action is vested in the company and relief is
accordingly sought on its behalf. Since the company has a distinct legal personality with its own rights and
liabilities which are different from those personal rights of individual shareholders, this action is brought by a
shareholder not to enforce his or her own personal rights but, rather, the rights and liabilities of the company on its
behalf and for the benefit of the company; which the company cannot itself do, as it is controlled by the 'wrong-
doers'. In order to be classified as a derivative action, the following aspects must be satisfied: It must be brought in
a representative form, even though it is the company, rather than the other shareholders, whom the person initiating
the legal action / proceedings seeks to represent. Thus, by implication, all the other shareholders are bound by the
result of the action. Although the action is brought on behalf of the company, the company appears as a defendant,
so that the action takes the form of a representative action by the initiating shareholder on behalf of himself and all
the other shareholders (other than the alleged 'wrong-doers'), against the alleged 'wrong-doers' (who are, in fact, in
control of the company) and the company. It can be bought in the following circumstance- ultra vires, fraud on
minority, Oppression and mismanagement.