What is a forfeiture of shares? Process and effects explained 

When someone holds shares in a company, they take on certain obligations. If they don’t meet those obligations – usually by failing to pay for their shares when called upon – they risk losing them altogether. This is known as a forfeiture of shares.

It’s a formal legal process, not something a company can do on a whim. The rules must be written into the company’s articles of association, and the company must follow those rules carefully to avoid a legal challenge.

This article explains what share forfeiture means in practice, the situations that can trigger it, and the steps a company needs to take. We also cover what happens to forfeited shares and the consequences for everyone involved.

What does forfeiture of shares mean?

Forfeiture of shares is the process by which a company reclaims shares from a shareholder who has failed to fulfil the conditions attached to those shares.

The shareholder loses ownership of the shares, along with any rights that came with them – including voting rights, dividend entitlements, and the right to attend general meetings.

It’s worth distinguishing forfeiture from two related concepts:

• A share transfer is a voluntary transaction between parties
• A surrender of shares is when the shareholder voluntarily returns their shares to the company – often to avoid the formal forfeiture process

Forfeiture, by contrast, is initiated by the company against the shareholder.

The Companies Act 2006 doesn’t set out a standalone forfeiture procedure. Instead, section 659 recognises forfeiture as a valid exception to the general rule that a company can’t acquire its own shares – provided it’s carried out under the articles of association for failure to pay any sum payable in respect of those shares.

• What are my shareholder rights?
• How to change your company’s articles of association
• Understanding nil-paid shares in a limited company

When and why forfeiture of shares occurs

Shareholders can lose their shares for a number of reasons, but not all of them fall within the statutory definition of forfeiture under the Companies Act. It helps to understand the distinction.

Non-payment on nil-paid or partly-paid shares

The most frequent trigger for forfeiture is non-payment. When a company issues nil-paid shares or partly-paid shares, the shareholder agrees to pay the outstanding amount at a later date.

If the company makes a call on those shares and the shareholder doesn’t pay by the deadline, the forfeiture process may begin. The company must first follow the procedure in its articles, such as sending a notice of intended forfeiture – often called a forfeiture notice – giving the shareholder a final deadline to pay

This typically comes about in one of two ways:

• The company issues a call notice demanding payment on nil-paid shares, and the shareholder doesn’t pay by the specified date
• The company issues a call notice for the remaining balance on partly-paid shares, and the shareholder fails to pay

These are the scenarios expressly recognised by the Companies Act 2006. Section 659 permits forfeiture where a shareholder fails to pay sums due in respect of their shares, provided the articles contain the relevant provisions.

Other contractual consequences that may result in loss of shares

A shareholder may also be required to transfer or sell their shares in other situations. These cases are usually dealt with under specific provisions in the articles of association or a shareholders’ agreement, such as:

• Transfer restrictions – for example, where a shareholder transfers shares in breach of pre-emption rights, lock-in provisions, or other transfer rules
• Leaver provisions – where an employee or founder who leaves the business must transfer their shares, often under “good leaver/bad leaver” rules attached to a share plan
• Compulsory transfer provisions – where specified events trigger a required sale or transfer of shares
• Default provisions – where a breach of the articles or shareholders’ agreement gives other shareholders or the company contractual remedies, which may include a forced transfer

Whether these provisions are enforceable depends on how they are drafted and how they interact with the company’s articles, any shareholders’ agreement, and company law.

If you’re dealing with anything other than a straightforward non-payment of calls on nil-paid or partly-paid shares, take legal advice before treating it as a forfeiture.

Forfeiture provisions in the articles of association

A company can only forfeit shares if its articles of association include provisions that specifically allow for it. Without those provisions, there’s no legal basis to proceed.

Private companies and model articles

The model articles for private companies limited by shares don’t include forfeiture provisions.

Article 21 of the private companies limited by shares model articles states that all shares must be fully paid up, so non-payment simply can’t arise in the first place.

If a private company using the model articles wants the ability to issue nil-paid or partly-paid shares and enforce forfeiture, it needs to amend its articles to include the relevant provisions.

Public companies

For PCS, the model articles do include detailed forfeiture rules covering calls on shares, notices of intended forfeiture, and the disposal of forfeited shares.

These are set out in The Companies (Model Articles) Regulations 2008, Schedule 3, Chapter 5, Articles 52 to 62.

Drafting forfeiture provisions for private companies

Since neither the Companies Act 2006 nor common law provides a forfeiture framework for private companies, those that want to include these provisions have two main options:

• Replicate the PLC model articles on forfeiture, adopting the statutory wording with any necessary adjustments for a private company context
• Draft bespoke provisions to create the rules according to the company’s specific circumstances, share classes, and shareholder arrangements

Either way, the articles should clearly set out the circumstances that can lead to forfeiture, the notice requirements, the process directors must follow, and what happens to forfeited shares afterwards.

The share forfeiture process for UK companies

The exact steps depend on what the company’s articles of association say. However, for a PLC, or where a private company has adopted provisions based on the PLC model articles, the process typically follows these steps.

1. Issue a call notice

The directors send a call notice to the shareholder, requiring payment of a specified amount on their nil-paid or partly-paid shares by a stated deadline. This is a formal demand – not an informal reminder.

2. Issue a notice of intended forfeiture

If the shareholder doesn’t pay by the call payment date, the directors may issue a notice of intended forfeiture. This gives the shareholder a final opportunity to settle the amount owed.

The notice must:

• Be sent to the registered holder of the shares, or to anyone entitled to them by reason of death, bankruptcy, or otherwise
• Require payment of the outstanding call amount plus any accrued interest by a date that’s at least 14 days after the notice
• Specify how payment should be made
• State clearly that failure to comply will result in the shares being forfeited

3. Charge interest on the unpaid amount

Until the call is paid, the shareholder owes interest from the call payment date.

The rate is usually set out in the articles. Where no rate is specified, the PLC model articles default to 5% per year.

4. Directors resolve to forfeit the shares

If the shareholder still hasn’t paid by the deadline in the forfeiture notice, the directors can pass a board resolution confirming that the shares are forfeited.

The forfeiture typically includes any dividends or other amounts payable on those shares that hadn’t been distributed before the forfeiture.

Share forfeiture in practice: An example

Suppose you’re a director of a private limited company that wants to issue 500 partly-paid shares to a shareholder at £1 each, with 50p paid on allotment and the remaining 50p payable on call.

Checking the articles

Before issuing the shares, the company checks its articles of association. The standard model articles for private companies don’t include forfeiture provisions and require shares to be fully paid, so the company first passes a special resolution to amend its articles to permit partly-paid shares, calls on shares, and forfeiture for non-payment. The company then files the resolution and amended articles with Companies House.

Issuing the partly-paid shares

Once the new articles are in place, the company issues the 500 partly-paid shares.

Months later, the company issues a call notice requiring the shareholder to pay the outstanding 50p per share (£250 in total) within 28 days, which is longer than the minimum notice period set out in the articles.

The deadline passes

The deadline passes with no payment. The directors then send a notice of intended forfeiture, giving the shareholder a further 14 days to pay the £250 plus any interest due. The notice states clearly that if payment is not made, the shares will be forfeited.

Forfeiture initiated

The shareholder still doesn’t pay. The directors pass a board resolution confirming the forfeiture, notify the shareholder, update the register of members and, where share certificates have been issued, require their return for cancellation.

Dealing with the shares

On forfeiture, the shares are deemed to have been acquired by the company and may be sold, re-allotted, cancelled, or otherwise dealt with in accordance with the articles.

The former shareholder loses the 500 shares, any voting rights attached to them, and the £250 already paid on allotment. They usually remain liable for the unpaid £250 plus interest, subject to the articles and any waiver or release the directors are permitted to grant.

What should a company do after shareholder forfeiture?

Once shares have been forfeited, the company has several administrative and legal obligations to deal with.

Notify the former shareholder

The directors must inform the shareholder that forfeiture has taken place. This should be a formal written notification.

Update the register of members

The company’s register of members must be amended to reflect that the person no longer holds those shares. If the forfeiture removes all their shareholdings, they cease to be a member of the company entirely.

Retrieve and cancel share certificates

Where share certificates have been issued, the company should require their return and cancel them.

Review PSC information at Companies House

If the forfeiture changes someone’s voting percentage or level of influence, check whether the company’s PSC details filed at Companies House need updating.

Decide what to do with the forfeited shares

Once shares are forfeited, they become the company’s property. The directors can then:

• Cancel the shares – this reduces the company’s issued share capital, and the company must notify Companies House and provide a statement of capital. For a public company cancelling forfeited shares under section 662 of the Companies Act 2006, this is done using form SH07.
• Sell or otherwise dispose of the shares – the directors can sell or transfer forfeited shares to existing or new shareholders, or deal with them in any other way permitted by the articles.
• Hold the shares – a private company can hold forfeited shares indefinitely, but a public company must cancel or dispose of them within three years under section 662. If a PLC’s share capital falls below the authorised minimum, it must re-register as a private company.

Can forfeiture be reversed?

If the articles allow it, directors can usually cancel a forfeiture before the shares are disposed of or cancelled – typically on the condition that all outstanding calls and interest are paid in full, along with any other terms the directors consider appropriate.

However, once the shares have been sold or cancelled, the forfeiture can’t be undone.

Consequences of share forfeiture for shareholders

Losing shares through forfeiture has significant implications for the individual concerned:

• They lose some or all of their stake in the company. This includes any voting or dividend rights attached to the forfeited shares.
• It results in diluting their ownership percentage or removal as a company member.
• Depending on how many shares they lose, dilution will reduce the impact on their voting power at general meetings.
• The shareholder will lose any sum they’ve already paid towards those shares.
• They will also lose any future dividend payments and potential gains on share value.
• They may still be liable for any unpaid amounts due on those shares, and any interest, depending on what the articles allow, even after the shares have been forfeited.

Effects on the company when shares are forfeited

Forfeiture doesn’t just affect the shareholder. It creates practical consequences for the company too.

• Administrative burden – the company needs to update registers, cancel certificates, and potentially file forms with Companies House
• Potential impact on share capital – if forfeited shares are cancelled rather than reissued, the company’s issued capital decreases, which may affect its financial profile
• Reissuing at a discount – the company may need to sell forfeited shares at less than their original price to attract new buyers
• Tension between members – the decision to forfeit can strain relationships between the company and its remaining shareholders, particularly if the forfeiture is seen as heavy-handed
• Payment of proceeds on sale – if the company sells the forfeited shares, the former shareholder may be entitled to the proceeds minus any amounts owed and any commission, depending on what the articles say

How forfeiture differs from surrender and lien

These three concepts sometimes get confused, but they work quite differently.

Forfeiture

Forfeiture is initiated by the company. It’s an involuntary loss of shares imposed on a shareholder who has breached the terms of their shareholding. The company must follow the formal procedures set out in its articles.

Surrender

Surrender is initiated by the shareholder. They voluntarily return their shares to the company – often where forfeiture would otherwise follow. It can be a quicker, less adversarial alternative, but the company’s articles still need to permit it.

Lien

A lien gives the company the right to retain a shareholder’s shares as security for debts owed. It doesn’t transfer ownership or cancel the shares – it simply restricts what the shareholder can do with them until the debt is settled. The model articles for PLCs allow a lien on partly paid shares for any amounts due.

Forfeiture vs surrender vs lien: A comparison table

Tips for staying compliant

Share forfeiture carries legal and financial consequences for both the company and the affected shareholder. Here are some practical steps to help you manage the process properly:

• Check the articles first – make sure forfeiture provisions exist and that they cover the situation you’re dealing with. If they don’t, you’ll need to amend the articles before proceeding
• Follow the procedure exactly – any deviation from the process in the articles could make the forfeiture vulnerable to challenge
• Keep detailed records – retain copies of every notice, resolution, and piece of correspondence related to the forfeiture
• Act in good faith – forfeiture must be exercised in the interests of the company, not as a weapon against an individual shareholder
• Take legal advice for complex situations – particularly where the shares are fully paid, where the forfeiture relates to debts other than amounts payable on the shares, or where there’s any risk of a dispute

Get the right share structure for your company

A well-drafted set of articles of association gives your company the tools it needs to address situations like forfeiture if they arise.

Whether you’re issuing shares to co-founders, employees, or investors, having clear provisions in place from the start can save significant time, expense, and legal complexity down the line.

If you’re unsure whether your articles cover forfeiture or need updating, it’s worth reviewing them sooner rather than later – especially before issuing nil-paid or partly-paid shares.

1st Formations can help you set up your company with the right structure, keep your filings up to date, and provide support as your business develops. Explore our company formation packages to get started.