Forfeiture of Company Shares: Could It Be Ineffective?
In certain circumstances, a company can exercise the right to forfeit shares, for instance where a shareholder fails to pay the amounts due. However, companies must exercise caution in case it forfeits shares for an improper purpose.
In a recent case1, a company’s articles gave it no power to forfeit shares for an outstanding liability unrelated to amounts owed on specific shares. Its purported forfeiture of shares was therefore ineffective.
As the company’s governing document, the articles of association should set out the scenario/s in which it can forfeit shares. Where a dispute around forfeiture of shares arise, the articles should determine the effectiveness or otherwise of a purported forfeiture.
What happened?
In this case, a financial planning company (the appellant) forfeited the shares of a former director who held 57 fully paid up shares in the company. He also owed a substantial costs liability arising out of earlier litigation, and so the company forfeited his shares. Importantly, the 57 shares were not partly paid and there were no sums due in respect of those shares.
However, the company claimed it had authority to forfeit the shares under its articles of association. It said that on the proper construction of its articles, it was able to forfeit the shares if the respondent owed any debt which was not paid when demanded.
A High Court judge made a declaration that the purported forfeiture of shares was ineffective and the company unsuccessfully appealed.
No authority
The appeal judge agreed with the judge’s “clear” ruling in which he had set out uncontroversial principles of construction. The interpretation of articles required the court to establish
"the natural and ordinary meaning that the relevant provision conveys to a reasonable person with the requisite background knowledge in relation to the other provisions of the articles of association, the overall purpose of [the Article] and the articles of association in general, the circumstances known or assumed by the parties at the time of entering into the articles, together with the application of commercial common sense, but disregarding the subjective evidence of any party's intentions".
The judge highlighted several drafting ambiguities within the company’s articles, yet consistency in construction was required. Call notices cannot be issued in respect of any debt of a shareholder – only if it was a call on the amount owed in respect of that share could it be enforced by forfeiture.
So, any call or call notice within the articles must be limited to sums due in respect of shares and this did not extend to other debts owed. Further, any subsequent exercise of the power of forfeiture must be limited to calls in respect of those shares.
It is important a company’s decisions are made in accordance with the articles of association and general company law. If in doubt, always seek specialist advice from corporate and commercial lawyers.
1Key Choice Financial Planning Ltd v Evoy [2025] EWHC 4 (Ch)
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