In an environment when the corporate governance norms are being tightened the world over. The duties of a director in a company, being in the nature of fiduciary duties like duty of good faith, loyalty andcare though not laid down in any law, are determined on the basis of judicial decisions so that the responsibility, on part of the directors, increases i.e. directors will act in an honest manner and will follow the procedure with strict compliance, towards the shareholders and the company.
This article briefly examines the procedure for forfeiture of shares vis-à-vis the duties of the directors. In reality, the dominant shareholding pattern continues to control the Indian corporate sector. However, nowadays duties of directors are of extreme importance, as they are personally accountable for corporate misdeeds by misusing their duties. In that sense now there is a subtle shift towards the scrutiny of directors.
The term ‘forfeiture’ means, “Depriving a person of his property as a penalty for some act or omission or can also be termed as default of payment”. In the event of default of payment of a valid call within the stipulated time, the company can enforce payment of such moneys by legal process i.e. to sue him for recovery of the amount of the call after waiting for a reasonable period, which involves more costs than the dues.
If the articles of a company regulating calls on shares and forfeiture for default to pay the calls are not strictly complied with, the acts of the directors will not be binding upon the members since the Regulations are in the nature of penal provisions. Regulations 29 to 35 are related to forfeiture of shares and it is provided under Schedule 1, Table A of the Companies Act, 1956, which are as follows:
If a valid forfeiture exists, then the special powers have been vested with the directors to forfeit the shares. A proper notice and actual exercise of the power to forfeit should be followed as per the procedure given in the articles of the company.
In the case of Bhagirath S & W Co. v. Balaji Bhavani Powar (AIR 1930 Bom. 267), it was held that when a valid call and default have been made to affect a proper forfeiture and if the forfeiture is not strictly in compliance with the procedure envisaged in the articles, it is ultra vires.
The Supreme Court clearly held in the case of Sha Mulchand & Co. Ltd. v. Jawahar Mills Ltd ( AIR 1953 SC 98) that:
A person disentitled from challenging the forfeiture of shares than he must have abandoned his right to challenge the forfeiture. The factum of Abandonment must be incurred from the conduct of the shareholders. Facts on record, cannot sustain a plea of waiver, acquiescence or laches, the same facts cannot sustain an abandonment of right.
No further notice of forfeiture is necessary when the shares have been forfeited.
Before the shares of a member are forfeited, a proper notice must have been served. The object of the notice is to give the shareholder an opportunity to pay the amount of the call money, interest and expenses.
A proper notice is a condition precedent to the forfeiture, and even the slightest defect in the notice will invalidate the forfeiture. [Public Passenger Services Ltd. v. M.A. Khader [1966] 1 Comp. LJ; Bhagwandas Garg v. Canara Bank Ltd. [1981] 51 Comp. Case.38 (AP)]
If the defaulting shareholder does not pay the amount within time specified by the notice, then the directors may pass a resolution forfeiting the shares. However, in the absence of such resolution, the forfeiture shall be invalid unless the notice of forfeiture incorporates the resolution of forfeiture as well.
A forfeited share may be re-issued in consideration of a lesser sum than the sum credited as paid on them; the board can reissue forfeited share as an unpaid share. The Board of Directors are not permitted to rescind the forfeiture without the consent of the former shareholder. (Exchange Trust Ltd., Larkworthy’s case (1903) 1Ch, 711)
A person whose shares are forfeited ceases to be member in respect of the forfeitedshares. Liability still remains for unpaid calls, even after the forfeiture of shares.
The director, manager or secretary should duly verify the declaration in writing that the shares have been duly forfeited and declaration shall be the conclusive evidence.
The provisions of these regulations as to forfeiture shall apply in the case of non-payment of any sum which, by the terms of issue of a share, becomes payable at a fixed time, whether on account of the nominal value of the share or by way of premium, as if the same had been payable by virtue of a call duly made and notified.
The word ‘surrender’ means to hand over, relinquish possession of, especially on compulsion or demand to give into another’s power of control. The phrase ‘surrender of shares’ means the surrender to the company on part of the registered shareholder of the shares already issued. However, the power to surrender shares does not include power to renounce newly issued shares. [Ezkiel v. Carew & Co. Ltd.(1938) 8 Comp Cas 161 (Cal)]. When shareholder of a company voluntarily gives up his share in favour of the company, he is said to have surrendered them to the company. The Companies Act does not contain any provision related to surrender of shares and Table A gives no power to accept surrender.
If a company accepts the surrender of shares, it possibly amounts to a purchase by the company of its own shares and the same is prohibited by Section 77 of the Companies Act, 1956. The ultimate effect of surrender and forfeiture of shares is the termination of the membership of a shareholder. Nevertheless, surrender of shares is voluntary whereas forfeiture of shares is at the instance of the company. Shares can be surrendered only when forfeiture is justified; a company can accept surrender of partly paid-up shares only.
The duties of the directors towards shareholders, creditors and the economy have changed because of the various codes of corporate governance, which are being recognised and implemented by the companies from time to time. It required the directors to honestly discharge their fiduciary responsibilities and duties towards the company’s shareholders as well as creditors.
As per the present law, a director is not liable for misfeasance, if he can demonstrate that he “acted reasonably as well as honestly and with due diligence.” While the due-diligence and reasonableness requirements inject objectivity into the rule, it remains overly subjective by allowing directors to escape liability by demonstrating subjective honesty.
According to Section 210 (5) of the Indian Companies Act, which provides a fine for directors of up to 10,000 rupees and six months imprisonment or with both; but there is no accountability in real sense because liability is incurred only if the director has wilfully defaulted or committed the offence and does not address negligence or failure to take the duty of care. Thus, the same section also provides for an easy exit route to avoid the penalty or imprisonment. Thus, directors are able to avoid liability even after committing a corporate offence.
To conclude, it can be said that, at present, shareholders, creditors and the public demand greater accountability and transparency and due to this reason, directors have been under increased scrutiny. It is when directors undertake their responsibility they become subject to legal and fiduciary responsibility. And it prohibits them from serving their own interests at the expense of the corporation, and requires them to use good business judgment. This means that directors are required to be competent, diligent and to act in good faith when they make business decisions. The director’s fiduciary duty of care, loyalty and good faith is owed to the company and its shareholders, and sometimes its creditors, tax authorities and employees.
Moreover, these fiduciary duties act as an addition to the statutory duties, since these duties can be in many cases be easily avoided by the directors, as it has been explained above. The fiduciary duties of directors are fewer and of less relevance and there is certainly a requirement of amendments in Indian laws in which the liability of the directors towards the shareholders, creditors and to the general economy is enhanced according to the present corporate scenario.
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