Forfeiture and reissue of forfeited shares, Auditor's Duties

Forfeiture and reissue of forfeited shares
Auditor's Duties

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.

Reissue of the forfeited shares: 

The directors of the company have the power to re-issue the forfeited shares on such terms as it think fit. Thus the forfeited shares can be reissued at par, or at premium or at discount. However, if the forfeited shares are reissued at discount, the amount of discount should not exceed the amount credited to the share forfeiture A/c. If the discount allowed on reissue is less than the forfeited amount there will be the surplus left in the share forfeited A/c. This surplus will be of the nature of capital profits so it will be transferred to the Capital Reserve A/c.

Auditor’s Duties regarding to Forfeiture and Reissue

1. To examine the Articles to verify authorization and compliance of the Provisions of the Articles. The fact that Articles authorized the company to expel a member is not sufficient to enable the company to deprive the expelled members of the shares also.

2. To examine the Director’s Minute Book to see the resolution forfeiting the shares. The auditor must see that the forfeiture has been correctly accounted for and that necessary adjustments have been made in the Register of Members.

3. To inspect the directors’ resolution about the forfeited shares reissued. To trace the receipt of money and to verify that the amount of discount, if any, does not exceed the amount already received thereon from the defaulter shareholders.

4. To vouch the cancellation by reference to the Directors’ Minute Book and the Register of Members, in case the forfeiture is cancelled by the directors.

5. To see that any premium received on the original issue of the forfeited shares is not transferred to ‘Forfeited Shares Account’ but remains in the ‘Share Premium Account’.

6. To examine that in case some excess money has been realized, it should be transferred to the Capital Reserve Account as it represents capital profit and not divisible profits.