Key Differences Between Forfeiture and Surrender of Shares (With Table)
The difference between forfeiture and surrender of shares is a frequent topic in commerce exams, company law, and practical accounting. Knowing this distinction is vital for school students (CBSE/ICSE/State boards), competitive exam aspirants, and anyone dealing with share capital in daily business. This concept forms part of the Introduction to Company Accounts and legal company frameworks.
| Basis | Forfeiture of Shares | Surrender of Shares |
|---|---|---|
| Meaning | Shares are cancelled by the company due to non-payment of allotment or call money by shareholder. | Shareholder voluntarily returns shares to company for cancellation. |
| Initiated By | Company (Compulsory action) | Shareholder (Voluntary action) |
| Legality | Specifically allowed by Companies Act and Articles of Association. | Permitted only if Articles of Association allow or for legal reason (e.g., reissue on similar grounds as forfeiture). |
| Accounting Entry | Forfeiture of paid-up amount; transfer to Forfeited Shares Account. | Similar treatment as forfeiture if permitted. |
| Reissue Possible | Yes, forfeited shares can be reissued. | Yes, but only if law permits and under same grounds as forfeiture. |
| Effect on Shareholder | Loses rights and membership; amount already paid is forfeited. | Loses rights and membership; amount paid is not refunded. |
| Legal Provision (Companies Act, 2013) | Section 61 and Articles of Association | No explicit provision; case law and Article-based |
Difference Between Forfeiture and Surrender of Shares
Understanding the difference between forfeiture and surrender of shares ensures clarity in company law and accounting. Forfeiture is when a company compulsorily cancels shares due to non-payment. Surrender is when a shareholder themselves offers up the shares for cancellation, often in similar circumstances. Both affect the company's share capital structure and need proper recording.
Definitions and Relevance in Company Law
Forfeiture of shares means a company cancels a shareholder’s partly paid shares due to non-payment of calls. Surrender of shares occurs when a shareholder willingly hands back their shares, typically due to inability to pay further call money. These concepts are critical in exams and for understanding the treatment of shares in business.
Key Points on Forfeiture and Surrender under Companies Act, 2013
The Companies Act, 2013, and a company’s Articles of Association guide forfeiture and surrender processes. Both typically happen only with partly-paid shares. The company must follow due legal procedure to ensure fairness.
- Forfeiture: Clearly permitted by law and governed by a company’s Articles and Section 61.
- Surrender: Only allowed when Articles permit, and generally in cases where forfeiture could legally be done.
- Surrender is not a substitute for regular share buyback or cancellation for other reasons.
Stepwise Process and Example (Accounting & Legal)
Let’s see how forfeiture and surrender are processed and recorded with a typical example.
Process of Forfeiture of Shares
- Company issues call notice for unpaid allotment or call money.
- If shareholder does not pay, Board passes a resolution for forfeiture.
- Entry is made: Share Capital A/c Dr.
Unpaid Calls A/c (if any) Cr.
Forfeited Shares A/c Cr. - Forfeited shares can be reissued, generally at a price not less than face value minus amount forfeited.
Example: Forfeiture
Suppose X holds 100 shares of ₹10 each, ₹7 paid. X fails to pay the final call of ₹3 per share. Company forfeits the shares. The entry is:
Share Capital A/c Dr. ₹700
To Forfeited Shares A/c ₹700
Process of Surrender of Shares
- Shareholder requests the company to accept surrender of shares, explaining inability to pay future calls.
- If Articles allow, Board considers and accepts surrender only if it could have lawfully forfeited the shares.
- Accounting entry for surrender is similar to forfeiture.
Example: Surrender
If Y, holding 50 shares of ₹10 each, ₹8 paid, voluntarily surrenders as they cannot pay the remaining ₹2, and Articles permit, the company passes an entry like in forfeiture.
Legal Effects and Shareholder Impact
After forfeiture or surrender, the shareholder loses all rights in those shares. Any money already paid is lost. The company can then reissue such shares to others. These concepts aim to protect the company from defaults while ensuring proper procedure.
Related Concepts and Internal Links
Besides forfeiture and surrender, students should understand related terms like Types of Shares, Forfeiture of Shares, and Issue, Forfeiture, and Reissue of Shares. Deepening topic knowledge through these resources at Vedantu supports better conceptual clarity for school and professional courses.
Summary of Difference Between Forfeiture and Surrender of Shares
In summary, forfeiture is the company’s action to cancel shares for non-payment, while surrender is the shareholder’s voluntary return of shares (allowed only in rare, legal cases). Both result in cancellation and possible reissue, affecting shareholder rights and accounting records. Mastery of this concept benefits commerce exams, project work, and daily company law understanding.
FAQs on Difference Between Forfeiture and Surrender of Shares
1. What is the difference between forfeiture and surrender of shares?
Forfeiture of shares occurs when a company cancels a shareholder's shares due to non-payment of dues, while surrender involves a shareholder voluntarily returning their shares to the company. Key differences lie in the initiator (company vs. shareholder), legality (compulsory vs. voluntary), and accounting treatment.
2. What is the difference between forfeiture and surrender of lease?
While both forfeiture and surrender relate to the termination of an agreement, they differ significantly in context. Forfeiture of a lease happens when a tenant breaches the lease agreement, leading to the landlord reclaiming the property. Surrender of a lease, however, is a mutual agreement where both parties agree to end the lease early. The key difference lies in the reason for termination (breach of contract vs. mutual agreement).
3. Are forfeit and surrender the same?
No, forfeiture and surrender are not the same. Forfeiture is a compulsory action taken by a company against a shareholder for non-payment, while surrender is a voluntary action by the shareholder. The legal implications and accounting treatments also differ significantly.
4. What is the difference between forfeiture and forfeited?
Forfeiture is the noun, referring to the act of canceling shares or a lease. Forfeited is the past participle adjective, describing the state of something that has been forfeited (e.g., 'the shares were forfeited').
5. What is the process of forfeiture of shares under the Companies Act, 2013?
The Companies Act, 2013 outlines a specific process for share forfeiture. It generally involves issuing a notice to the shareholder for unpaid calls, followed by a board resolution to forfeit the shares if the dues remain unpaid. The forfeited shares can then be reissued. Specific details are outlined in the Act's relevant sections.
6. Can shares be surrendered at any time?
Generally, shares can't be surrendered at any time. The Articles of Association of a company will typically specify conditions under which share surrender is permitted, such as a buyback program or specific shareholder agreements. There might also be restrictions based on the type of shares (e.g., preference shares).
7. Are forfeit and surrender of shares the same in accounting?
No, the accounting treatment for forfeiture and surrender of shares differs. Forfeiture involves debiting the Share Capital account and crediting the Forfeited Shares Account; surrender usually involves a debit to the Share Capital account and a credit to the Shareholder's account. Specific journal entries would depend on the company's accounting policies.
8. What are the legal effects of forfeiture and surrender?
Forfeiture results in the termination of the shareholder's rights and ownership. Surrender also ends the shareholder's ownership but is usually a voluntary action, potentially avoiding certain penalties. Both have implications under the Companies Act, 2013.
9. Can forfeited or surrendered shares be reissued?
Yes, typically, both forfeited and surrendered shares can be reissued. However, the process and any applicable legal restrictions will depend on the company's Articles of Association and the Companies Act, 2013. Usually, forfeited shares are reissued at a lower price than their original value.
10. What entries are passed for forfeiture and surrender of shares in company accounts?
Forfeiture entries involve debiting Share Capital and crediting the Forfeited Shares Account, potentially involving other accounts like Calls in Arrear and Forfeited Shares Account. Surrender entries typically debit Share Capital and credit the Shareholder's account or a related liability account. Precise entries depend on specific circumstances and accounting standards.
11. How does the balance sheet reflect forfeited and surrendered shares?
Forfeited shares would reduce the amount shown in the Share Capital section of the balance sheet. Any proceeds from the reissue of forfeited shares would be shown as an asset, usually as 'Forfeited Shares Reissued'. Surrendered shares would similarly reduce Share Capital, and the payment to the surrendering shareholder would be considered a liability.
