What it means
When a company issues shares partly paid, the buyer pays some of the price up front and promises the rest when the company asks for it. Each request is a call, and the company's articles usually say what happens if a call goes unpaid after due notice.
The standard remedy is forfeiture: the board passes a resolution, the shares are cancelled from the holder's name and the money already paid is retained. Forfeiture also appears in employee share schemes, where unvested shares or awards are forfeited if someone leaves before the vesting date or fails a performance condition.
The mechanics differ from a call default, but the principle is the same, in that the holder loses an entitlement they had not yet fully earned or paid for. For the company, forfeiture is a collection tool rather than a profit opportunity.
It restores certainty over the share register and lets the board reissue the shares to a buyer who will pay, but it does not create distributable profit, because the retained money is a capital receipt rather than trading income. The accounting follows a set pattern.
The amount already paid is credited to a forfeited shares account; when the shares are reissued at less than the original price, the shortfall is charged against that account, and any balance left over is moved to a capital reserve. The nuance worth remembering is that forfeiture is a serious step, hedged with procedural protections.
Notice periods, minimum warning letters and board approval are usually required, and a forfeiture carried out without following the articles can be challenged and reversed.
In practice
Real-world examples.
Example
A property investment company issues shares partly paid to fund a development in stages. Two subscribers fail to meet the second call, so after formal notice their shares are forfeited and reoffered to existing holders at a modest discount.
Example
A senior manager at a logistics group holds restricted shares that vest over four years. She resigns after eighteen months, and the unvested portion is forfeited under the scheme rules and returned to the plan trust for future awards.
Example
A small mutual insurer discovers that a deceased member's partly paid shares have gone unpaid for two call cycles. Rather than pursue the estate for a small sum, the board forfeits the shares and cancels them, tidying the register at minimal cost.
Formula
Calculation
Amount forfeited = Amount already paid per share x Number of shares. On reissue: Discount allowed = (Original issue price - Reissue price) x Number of shares, and Transfer to capital reserve = Amount forfeited - Discount allowed.
An investor subscribes for 10,000 shares at an issue price of $5.00 each, a total of $50,000. She pays $2.00 per share on application and allotment, which is 10,000 x 2.00 = $20,000, then fails to pay the final call of $3.00 per share, which is 10,000 x 3.00 = $30,000.
After notice, the board forfeits the shares. The company keeps the $20,000 already paid and credits it to a forfeited shares account, and the $30,000 the investor never paid is simply never received.
The company later reissues the same 10,000 shares to a new buyer as fully paid for $3.50 each, raising 10,000 x 3.50 = $35,000 in cash. The discount allowed is (5.00 - 3.50) x 10,000 = $15,000, charged against the forfeited shares account.
That leaves 20,000 - 15,000 = $5,000, which is transferred to capital reserve. The company has received 20,000 + 35,000 = $55,000 in total against an original issue price of $50,000 for those shares.Case study
Seen in the real world.
Northgate Harbour Developments is an illustrative, fictional company used here to show how forfeiture works in practice. It raised money for a marina project by issuing shares partly paid, taking 40% up front and calling the balance in two instalments as construction progressed.
When the second call went out, holders of 60,000 shares did not pay. The board sent the reminder notices required by its articles, waited the full period and then formally forfeited those shares, retaining the amounts already paid in a forfeited shares account.
Six months later, with the marina half built and interest recovering, Northgate reissued the shares to a regional investor at a small discount to the original price. The shortfall was absorbed by the forfeited amounts, a modest balance moved to capital reserve, and the project stayed funded. In this fictional case, the lesson was procedural: the forfeiture held up only because the board followed its own articles to the letter.
Watch out
Common mistakes.
- Believing the company profits from forfeiture, when the retained money is a capital receipt that cannot be treated as distributable trading profit.
- Forfeiting shares without following the notice periods and board procedures in the articles, which gives the former holder grounds to challenge the decision.
- Assuming the defaulting holder's liability disappears entirely, when many articles allow the company to pursue the unpaid call as a debt even after forfeiture.
Questions
People also ask.
Can forfeited shares be given back?
Sometimes, because many articles let the board annul a forfeiture on reasonable terms before the shares are reissued, usually once the arrears and costs are paid.
What happens to the shares afterwards?
The company holds them pending reissue or cancellation, and while held they carry no votes and no dividend entitlement.
Does forfeiture apply to fully paid shares?
Not in the call sense, since there is nothing left to pay, though scheme shares can still be forfeited under employee plan rules if vesting conditions are not met.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related