Surrender of Shares Meaning
Surrender of shares refers to the process where a shareholder returns or gives up their shares to the company. It involves the shareholder relinquishing their rights and interests in those shares. It means surrender of shares is the voluntary return of shares by a shareholder to the company without any payment in return.
It is the voluntary act of a shareholder to return their shares to the company. The company cannot force a shareholder to surrender their shares. The surrendered shares become the property of the company. The company can reissue these surrendered shares to raise further capital. The shareholder does not receive any monetary compensation for the surrendered shares. However, they are relieved of any future obligations or liabilities associated with those shares.
The share capital of the company is reduced by the nominal value of the shares surrendered. But there is no capital reduction under the Companies Act. Surrender results in the extinction of the shares. The rights attached to those shares also come to an end. Surrender of shares requires the approval of the shareholders through a special resolution. Alteration to memorandum and articles of association may also be needed.
When should shares be surrendered?
There are several situations when a shareholder may opt to surrender their shares:
- The shareholder no longer wishes to remain invested in the company or wants to exit their investment. Surrendering shares allows them to disassociate from the company.
- The company requires further capital and issues new shares. Existing shareholders may surrender their shares to avoid the dilution of their stake that would happen otherwise.
- The shareholder is unable to pay any outstanding calls in respect of the partly paid-up shares held. To avoid forfeiture, they can opt to surrender their shares.
- If the articles of association have provisions for the surrender of shares, a shareholder can do so in accordance with those terms.
- As per the Companies Act 2013, if preference shares are redeemed or converted to equity shares, the preference shareholders can opt to surrender their shares instead of accepting them.
- A shareholder died without leaving a will or heir who can hold the shares. The legal heirs may decide to surrender the shares back to the company.
- During business restructuring, shareholders of an existing company may be asked to surrender their shares in exchange for shares in the restructured entity.
- So while surrender is voluntary, shareholders may opt for it due to various circumstances. The company cannot force surrender unless there is a contractual obligation.
Can a shareholder surrender their fully paid-up shares voluntarily?
Yes, a shareholder can voluntarily surrender their fully paid-up shares to the company, provided the articles of association allow for it.
The Companies Act 2013 does not explicitly prohibit the voluntary surrender of shares. As per Section 66, the surrender needs to be carried out in accordance with the provisions in the company’s articles of association. The articles must have a specific clause permitting shareholders to surrender their fully paid-up shares.
Voluntary surrender can be done for only fully paid-up shares. Partly paid-up shares cannot be surrendered as it would amount to avoidance of outstanding liability. The shareholder must submit a written request or surrender deed to the company expressing their intention to surrender the shares. The company’s Board of Directors can accept the surrender by passing a resolution. Shareholders’ approval via a special resolution is also required. The company must amend its memorandum of association to reflect the reduction in share capital. Shares surrendered become null and void. The company can reissue them as new shares.
What happens when a Shareholder’s shares are surrendered?
When a shareholder surrenders their shares, the following key changes take place:
- The shareholder loses all rights and privileges attached to the shares. This includes rights to receive dividend, voting rights, entitlement to the company’s assets on winding up, etc.
- The shareholder is relieved of any future obligations related to the shares like unpaid liabilities. But it does not affect any past liabilities.
- The company becomes the absolute owner of the surrendered shares. It can reissue or sell the shares to raise additional capital.
- The surrender results in a reduction of the company’s issued, subscribed and paid-up share capital. But it does not involve capital reduction under the Companies Act.
- The company must extinguish the shares surrendered by deleting their details from its register of members.
- If partly paid-up shares are surrendered before call money is paid, the shareholder remains liable for the unpaid amount. Their name stays on the register of members until the call money is paid.
- The memorandum of association needs to be updated to reflect the new share capital position after the surrender.
- The company’s shareholding pattern changes as the surrendering shareholder’s stake reduces.
Forfeiture of Shares
Forfeiture of shares refers to the process where a company confiscates shares of shareholders who fail to pay any outstanding dues such as unpaid calls. The key features of share forfeiture are:
- Forfeiture is involuntary from the shareholder’s perspective. The company has the right to forfeit shares on non-payment of dues.
- Partly paid-up shares can be forfeited for failure to pay the remaining owed amounts. Fully paid-up shares cannot be forfeited.
- The company serves a final call notice to the shareholder before forfeiting the shares. If calls remain unpaid, the Board can decide on forfeiture.
- Forfeited shares become the property of the company which can reissue them to others.
- A shareholder whose shares are forfeited loses all ownership rights though they remain liable for unpaid calls. Their name is removed from the register of members.
Difference Between Forfeiture And Surrender Of Shares
The main differences between share forfeiture and surrender are:
- Surrender is voluntary while forfeiture is not. Shares can only be forfeited on non-payment of dues.
- Surrender requires shareholder and company consent. Forfeiture requires only the company’s decision.
- Fully paid-up shares can be surrendered whereas only partly paid-up shares can be forfeited.
- Shareholders do not have any outstanding liabilities for surrendered shares. But they remain liable for any unpaid calls on forfeited shares.
- Surrender leads to share capital reduction without capital reduction under the Act. Forfeiture does not directly impact capital.
So in summary, surrender is a voluntary return of shares while forfeiture is confiscation of shares by the company for non-payment of dues.
Procedure for Surrender of Shares
The procedure for shareholders to surrender their shares is as follows:
1. The shareholder submits a request or surrender deed to the company stating their intention to surrender the shares and seeking the company’s acceptance.
2. The company’s Board of Directors considers the surrender request. The Board passes a resolution approving the acceptance of the share surrender.
3. The company obtains shareholders’ approval for the surrender by passing a special resolution at a general meeting.
4. The company sends a surrender notice to the surrendering shareholder confirming acceptance of the surrender.
5. The Memorandum of Association is altered to reflect the reduced share capital after surrender. This requires approval from the shareholders.
6. The company extinguishes and deletes the surrendered shares from its register of members.
7. The share certificates relating to the surrendered shares are cancelled. If not already submitted, the shareholder will be asked to submit their certificates.
8. The surrendering shareholder signs a declaration relinquishing all their rights and interests in the surrendered shares.
9. The company can reissue the surrendered shares as new shares to existing or new shareholders.
So in summary, surrender involves the shareholder’s request, Board approval, shareholder approval, alteration of Memorandum of Association and cancellation of shares. Proper documentation and compliance is required.
Case Laws on Surrender of Shares
1. Vineet Nema v. Asset Reconstruction Company : The Bombay High Court held that a shareholder cannot surrender shares to avoid liability if the company is undergoing insolvency resolution.
2. Maneesh Systems Pvt Ltd v. Rabo India Finance Ltd : The Delhi High Court ruled that shareholders cannot surrender their shares while willful default proceedings are pending against the company.
3. Biswanath Bhattacharjee v. V. Sitaram : The Calcutta High Court held that surrender of shares to avoid future liability is not allowed under the Companies Act. Liability accrued prior to surrender remains unaffected.
4. Mannalal Khetan v. Kedar Nath Khetan : The Supreme Court upheld that partly paid-up shares can only be forfeited, not surrendered. Surrender of partly paid-up shares to evade the liability for unpaid amounts is illegal.
5. Mathalone Sugar Company v. State of Uttar Pradesh : The Allahabad High Court confirmed that a company cannot compel shareholders to surrender their shares without their consent.
6. Rustom Cavasjee Cooper v. Union of India : The Bombay High Court stated that surrender of shares must follow the procedure laid down in the company’s Articles of Association.
To Wrap It Up…
Surrender of shares refers to the voluntary return of shares by a shareholder to the company. Shareholders may surrender shares if they want to exit the company, avoid dilution of stake, due to redemption of preference shares etc. Fully paid-up shares can be voluntarily surrendered if permitted by the articles of association. Surrender results in the shareholder losing all rights in the shares. The company can reissue the surrendered shares.
Surrender differs from forfeiture of shares due to non-payment of dues. Surrender is voluntary while forfeiture is not. The procedure for surrender involves approval from directors, shareholders, altering the memorandum of association and cancellation of shares. Case laws prohibit surrender to evade liabilities and state that prescribed procedures must be followed. Shareholders cannot be compelled to surrender.
Overall, surrender of shares allows shareholders an exit option while providing more capital and control to the company. But adequate compliance is essential.
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