Detailed Study Notes for Unit III

Unit-III: Shares, Stock, Allotment, Forfeiture, Transfer & Transmission

1. Shares and Stock

A. Meaning and Definition of a Share (Section 2(84))

• Definition: A share means a share in the share capital of a company, including stock (except where a distinction between stock and share is expressed or implied).
• Nature of Property: A share is movable property transferable in the manner provided by the articles of the company (Section 44). It represents a bundle of rights and liabilities, including the right to receive dividends, vote at meetings, and share in surplus assets upon winding up.
• Distinction Between Shares and Stock:
  • Shares are individual, distinct units of capital with nominal face values and are usually numbered. Stock is simply a consolidated pool or bunch of fully paid-up shares put together into a single fractional mass for convenience of transfer.
  • Shares can be partly paid or fully paid, whereas stock must always be fully paid-up.

2. Statutory Restrictions and Procedures on Allotment of Shares

A. Allotment of Shares (Sections 39 and 40)

• Meaning: Allotment is the appropriation or acceptance of a definite number of shares to an applicant in response to a share application, creating a binding binding contract between the company and the investor.
• Minimum Subscription (Section 39): A company cannot allot shares to the public unless the minimum amount stated in the prospectus has been subscribed and application money (at least 5% of the nominal value) has been received. If minimum subscription is not received within 30 days of the issue of the prospectus, application money must be refunded within 15 days.
• Listing Permission (Section 40): Every company making a public offer must make an application to one or more recognized stock exchanges for permission to deal in securities.

3. Calls, Forfeiture, and Surrender of Shares

A. Calls on Shares

• Meaning: When shares are not fully paid upon application and allotment, the company makes formal demands (calls) on shareholders to pay the remaining unpaid balance of the share value, subject to conditions and timelines specified in the Articles of Association.

B. Forfeiture of Shares

• Meaning: Forfeiture is the cancellation of shares due to default by a shareholder in paying validly made calls on shares.
• Procedural Requirements: Forfeiture must be strictly authorized by the Articles of Association, preceded by a proper statutory notice giving reasonable time for payment, and executed via a formal board resolution.
• Effect of Forfeiture: The defaulting member ceases to be a member, but remains liable to pay all unpaid calls, while the company regains forfeited shares and can reissue them at a discount (not exceeding the amount already paid up).

C. Surrender of Shares

• Voluntary handing back of shares by a shareholder to the company. It amounts to a reduction of capital and is valid only if done under circumstances where forfeiture is justified.

4. Transfer and Transmission of Shares (Section 56)

A. Transfer of Shares

• Meaning: The voluntary and intentional conveyance or transfer of property in shares from one living person (transferor) to another (transferee).
• Procedure (Form SH-4): A transfer of physical shares requires a duly stamped and executed instrument of transfer in Form SH-4, signed by both transferor and transferee, specifying names, addresses, and occupations.
• Time Limit for Delivery: The executed instrument of transfer must be delivered to the company within 60 days from the date of execution.

B. Transmission of Shares

• Meaning: The transfer of ownership of shares taking place by operation of law due to death, insolvency, bankruptcy, or lunacy of a shareholder, rather than by voluntary contract or transfer deed.
• No Form SH-4 Required: Transmission is effected upon producing valid legal documents (such as probate, succession certificate, or letters of administration) to the company, exempting it from standard transfer deed requirements.

5. Certification, Issue, and Rectification of Share Certificates

A. Share Certificate (Section 46)

• Definition: A share certificate issued under the common seal (if any) or signed by directors specifies the shares held by any member and serves as prima facie evidence of title to the shares.
• Time Limits for Delivery (Section 56(4)): Every company must deliver share certificates within:
  1. 2 months from incorporation for subscribers to the memorandum.
  2. 2 months from the date of allotment for shares allotted.
  3. 1 month from the date of receipt of the instrument of transfer or transmission.

B. Rectification of Register of Members (Section 59)

• If the name of any person is fraudulently or without sufficient cause entered in or omitted from the Register of Members, the aggrieved party or any member can apply to the National Company Law Tribunal (NCLT) for rectification of the register.

6. In-Depth Landmark Case Studies

Case Study 1: Forfeiture of Shares and Strict Compliance with Procedural Rules

• Case Title: In re Cawnpore Cotton Mills Co.
• Citation & Court: (1893) ILR 16 All 302 (Allahabad High Court)
• Related Legal Principles: Forfeiture of shares, strict compliance with Articles of Association, and fiduciary duty.
• The Story & Real-Line Background: Directors of a company forfeited shares of a member for non-payment of calls. However, the directors failed to follow the exact procedure, timing, and notice requirements prescribed in the company’s Articles of Association.
• Legal Issues Involved: Whether a share forfeiture executed in violation of internal procedural rules in the Articles of Association is valid.
• Final Judgement & Ratio Decidendi:
  • Ruling: The court held that the power of forfeiture is of a penal nature and must be executed with absolute, strict compliance with the procedure laid down in the articles. Any slight irregularity or deviation renders the forfeiture null and void.
  • Ratio: Forfeiture of shares involves expropriation of property rights; hence, strict adherence to statutory and article-prescribed procedure is mandatory.

Case Study 2: Estoppel Arising from Share Certificates Issued by Companies

• Case Title: Compart Syndicate v. British America Corporation (and classic Burkinshaw v. Nicolls principle)
• Citation & Court: [1901] 1 Ch. 279 (Court of Appeal)
• Related Legal Principles: Estoppel, share certificates as prima facie evidence, and bona fide purchasers.
• The Story & Real-Line Background: A company issued a share certificate erroneously stating that shares were fully paid up, although no money had been paid. Relying on this certificate, a third party purchased the shares in good faith. The company later sought to demand unpaid calls from the new purchaser.
• Legal Issues Involved: Whether a company is estopped from denying the truth of statements made in its official share certificate against a bona fide purchaser.
• Final Judgement & Ratio Decidendi:
  • Ruling: The court held that a company is estopped from denying the validity or fully-paid status of shares stated in a share certificate issued under its authority, when acted upon by a bona fide purchaser for value.
  • Ratio: Share certificates carry a legal representation of title; companies are bound by statements certified therein when relied upon by innocent third parties.

Quick Reference Guide: Unit-III Company Law

Unit Number	Topic / Concept Name	Core Statutory Provision	Core Description / Subject Matter
Unit-III	Definition of Share	Section 2(84), Act of 2013	Movable property representing interest in company capital with rights and liabilities.
Unit-III	Minimum Subscription	Section 39, Act of 2013	Mandatory collection of minimum subscription (at least 5% application money) before allotment.
Unit-III	Share Transfer (Form SH-4)	Section 56(1)	Voluntary conveyance of shares via stamped instrument delivered within 60 days.
Unit-III	Certificate Delivery Timeline	Section 56(4)	Mandatory issuance of share certificates within 1 month of transfer or 2 months of allotment.