CALL ON SHARES, LIEN ON SHARES, SURRENDER OF SHARES AND FORFEITURE OF SHARES

CALL ON SHARES

A call signifies a demand by a corporation on its shareholders to pay the full or parts of the balance remaining unpaid on each share within a specified time. 

Lord Lindley stated that the word ‘call’ is employed to denote both demands made for money and the sum demanded.

PROCEDURE OF CALL ON SHARES:

  • It is made in pursuance of a resolution of the Board of Directors and provisions of the Articles of the corporation. 
  • It may be made any time during the lifetime of the company or its winding up. 
  • As the call is made, the shareholder must pay the amount of the call.
  • From the time the call is made it becomes a debt on the shareholder due to the company. If the shareholder fails to pay then the company can either enforce the payment of the amount with interest accrued on it or can forfeit the shares. A member who fails to pay loses all his voting rights until the called money is paid by him.
  • The amounts paid by the shareholder on application and allotment of shares are not considered as calls unless the Articles of the company expressly recognize them as calls. But when the subsequent installments are demanded, they are called calls. 

CONDITIONS FOR A VALID CALL ON SHARES:

  • A call must be made by a resolution of the Board of Directors passed at a meeting of the Board. 
  • A call should be made by the company only when there is a bona fide need for funds. 
  • The calls must be made on a uniform basis on all shares falling under the same class by sending a ‘Call Letter’.
  • A call should be made according to the provisions of the Articles of the company. In case of no such provision in the articles then the Regulations specified in Table A of the Companies Act, 2013, shall apply.
  • The call must specify not only the amount of the call but also the time and the place of payment.

 If authorized by the Articles, a corporation may accept earlier the payment of the entire or the part of the sum remaining unpaid of any shares held by him although no part of the sum has been called up. When a call is made to the Joint shareholders, they are jointly and severally liable for paying the call.

                                 LIEN ON SHARES

Lien means a right to retain possession of a property belonging to another until the claim attached to it is settled. A company has first and paramount rights of lien on every share which are not fully paid shares for amounts payable on the shares or for any amount which is due on a shareholder or his estate to the company. However, the right of the company to have a lien on shares must be provided by the Articles of the company. 

The company’s right of lien on share extends to all dividends payable, bonuses declared on such shares, and the assets receivable by the shareholders in case of winding up of the company. A right of lien is on all shares that are registered in the name of a Member for all debts, liabilities, or engagements to or with the corporation by him. The company’s lien on shares exists also for debts due by a shareholder to the company in the capacity as a customer of the company.

SALE OF SHARES ON LIEN BY THE COMPANY:

A company has a right to sell the shares on which the company has a lien. The procedure of such sale is as follows-

  • Such sale of a share shall be made only in respect of sum on which a presently payable lien exists. 
  • The company shall give a notice in writing demanding payment of such part of the sum in respect of which the lien exists. 
  • After fourteen days of giving such notice, if the registered shareholder of such shares does not pay, the company shall sell his shares.
  • To give effect to any such sale, the corporation may authorize some person to transfer the shares sold to the purchaser thereof. Just in event of such a transfer, the purchaser shall be registered because the holder of the shares comprised therein. 
  • The proceeds of such sale received by the corporation shall be applied in payment of the part of the sum for which a presently payable lien exists.

LOSS OF LIEN:

 A company loses lien if-:

  • It registers a transfer of shares subject to the lien of the transferee;
  • A member pledges his shares to a third party as security for a loan and the company also has the notice thereof, and then incurs a liability to the company. In such a case, the pledgee has priority over the lien of the company.

A lien on shares is not destroyed by the death of the shareholder. A company can exercise its right of lien on shares not only when the claim has been barred by law of limitation but also when a shareholder disputes his liability towards the company.

SURRENDER OF SHARES

When a shareholder of a company voluntarily abandons his shares in favor of the company, he is said to have surrendered those shares to the company. In other words, after the allotment of shares if a shareholder is not able to pay the further calls he can return his shares to the company for cancellation of such shares.

The Companies Act does not contain any provision for the surrender of shares because if a company accepts such surrender of shares it amounts to the purchase of its shares by the company which is not allowed. However, a company may accept the surrender of shares if it is authorized by the Articles of a company.

A surrender is ultra vires if shares are surrendered for some consideration in the form of payment of money or money’s worth as it amounts to the company purchasing its shares.

Surrender results in the termination of the membership of such shareholder surrendering his shares. Surrender has the same effect as forfeiture. The only difference is that a surrender of shares is done voluntarily at the instance of the shareholder whereas forfeiture of shares is a penal action taken by the company against the shareholder by confiscating his shares.

A mere refusal by the shareholder to take up newly issued shares to which the shareholder is entitled cannot be called the surrender of shares by him.

CONDITIONS FOR VALID SURRENDER OF SHARES:

  • In the case of partly paid-up shares where forfeiture is called for and surrender is accepted by the company to avoid the formalities of forfeiture, the surrender is valid. Here, the shareholder is willing to surrender his shares to the company. The reduction of share capital in such a case is considered valid.
  • In the case of fully paid up shares, where the surrendered shares are exchanged for new shares of the same nominal value. Fully paid-up shares can be surrendered without the sanction of the Court as in such a case there is no reduction of share capital.

If a company winds up within 12 months of a valid surrender of shares, the member who surrendered the shares can be held liable as a list B contributory. Share which has been surrendered validly can be reissued in the same way as forfeited shares are reissued.

                                 FORFEITURE OF SHARES

When a shareholder is called by the company to pay any call on his shares and he fails to pay the same, the company may forfeit his shares.

Forfeiture of shares must be provided in the Articles of the company. The Directors of the company must exercise the power of forfeiture of shares only for the benefit of the company and in good faith. Forfeiture of shares is a penal proceeding against the shareholder for not paying the call and forfeited shares may be reissued or canceled.

PROCEDURE OF FORFEITURE OF SHARES:

  • Where a member fails to pay any call or installment of a call on a day appointed, the company shall serve him notice asking him to make the payment along with the interest accrued on it. The notice must specify the exact amount due to the shareholder to the company.
  • The notice shall specify a date, not before the expiry of fourteen days from the date on which the notice is served. The notice shall state that in the case of non-payment within that date the shares for which the call was made shall be forfeited.
  • If the shareholder fails to pay within the time specified in the notice the Board of Directors of the company by passing a resolution shall forfeit the shares in respect of which the call was made.
  • The company may sell or dispose of the forfeited shares in a manner it deems fit. However, a company may cancel the forfeiture of shares before the sale or disposal of such shares.
  • After receiving consideration for the sale of the share, the company may execute a transfer of the share in favor of the person to whom the share is sold or disposed of. The transferee shall be then registered as the holder of the share.

The Manager or the Secretary, of the company, has to make a verified declaration that on the date given in the declaration the share has been forfeited. Such a declaration is valid proof of the said forfeiture against any person who claims to be entitled to the share.

EFFECT OF FORFEITURE:

The major effect of forfeiture is that the person who was holding the forfeited shares shall no longer remain a member of the company concerning the said forfeited shares. However, his liability to pay to the company the sum of money which was on the date of said forfeiture payable by him to the company regarding those shares shall continue.

 The liability of such person ceases when the Company receives payment in full of all such amount of money in respect of the shares.  

In the event of a corporation going into liquidation more than 1 year after the forfeiture, the member whose shares are forfeited can’t be held contributory.

The company must state the total number of shares forfeited in every annual return submitted to the Registrar. A forfeiture may or may not result in a reduction of capital. The forfeited shares may be reissued by the Board of Directors by passing a resolution in the Board meeting.

CONCLUSION:

From the above discussion, we can conclude that a company may make a call on shares asking the shareholder to pay the balance remaining unpaid on each share within a specified period. If a shareholder fails to make such payment a company may either exercise the right of lien on such unpaid shares or may forfeit his shares. A shareholder can surrender his shares by voluntarily returning them to the company.

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