Surrender of Shares, Re-issue and Cancellation
Chapter Thirteen
Syllabus topic 3, "Methods including ... surrender and reissue / cancellation ..."
Pages 30 to 31 of 85
In one line
Surrender is a shareholder voluntarily giving shares back to the company, and it is lawful only where the same result could have been reached by a forfeiture or by a reduction of capital properly sanctioned.
The problem with surrender
There is no section of the Companies Act 2013 that authorises surrender of shares. Sections 61 and 66 authorise alteration and reduction; ss.68 to 70 authorise buy-back; there is nothing else.
That matters because a company acquiring its own shares reduces its capital, and capital may be reduced only as the Act allows. A surrender that has the effect of returning capital to a member, outside s.66 and without the Tribunal, is a reduction of capital by the back door and is not permitted.
So surrender survives in two narrow situations.
Where it saves the trouble of a forfeiture. If a member has failed to pay a call and the company could forfeit the shares, the member may instead surrender them. The company gains nothing it did not already have the right to take, so nothing is evaded.
Where it forms part of a scheme of reconstruction sanctioned under s.66. Here the surrender is not the operative act; the reduction is, and the Tribunal has confirmed it.
Outside those, a surrender is bad.
Surrender in a reconstruction, and why it is used
A scheme may ask shareholders to surrender a proportion of their shares so that the shares surrendered can be cancelled, or re-issued to somebody whose help the company needs, usually a creditor or a debenture-holder who is accepting shares in place of cash.
The attraction is that it lets the company change who owns it at the same time as changing how much capital it has, which a simple reduction of the paid-up value does not do.
The entries
Surrender is recorded in two stages, and the second depends on what is done with the shares.
Stage 1, on surrender. The shares come out of the members' hands into the company's.
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| Equity Share Capital A/c ... Dr | 1,00,000 | |
| To Shares Surrendered A/c | 1,00,000 | |
| (Being 10,000 equity shares of Rs 10 each fully paid surrendered by members under the scheme of reconstruction) | ||
| Total | 1,00,000 | 1,00,000 |
Shares Surrendered Account is a temporary account. It holds the surrendered capital until the scheme says what becomes of it.
Stage 2(a), where the surrendered shares are re-issued. Suppose 6,000 of them are issued to debenture-holders in part satisfaction of their claim.
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| Shares Surrendered A/c ... Dr | 60,000 | |
| To Equity Share Capital A/c | 60,000 | |
| (Being 6,000 surrendered shares of Rs 10 each re-issued to debenture-holders under the scheme) | ||
| Total | 60,000 | 60,000 |
Surrender of Shares, Re-issue and Cancellation
The debenture liability is reduced by a separate entry, debiting Debentures and crediting Shares Surrendered, depending on how the scheme expresses the bargain.
Stage 2(b), where the balance is cancelled. The 4,000 shares nobody takes are cancelled, and the capital they represent is a sacrifice by the members who gave them up.
| Particulars | Dr Rs | Cr Rs |
|---|---|---|
| Shares Surrendered A/c ... Dr | 40,000 | |
| To Capital Reduction A/c | 40,000 | |
| (Being 4,000 surrendered shares of Rs 10 each cancelled, the capital thereon being credited to Capital Reduction Account) | ||
| Total | 40,000 | 40,000 |
The Shares Surrendered Account must close. It received Rs 1,00,000 and has given out Rs 60,000 and Rs 40,000. Nothing is left in it. If a balance remains, an instruction in the scheme has not been carried out.
Surrender, forfeiture and cancellation compared
| Surrender | Forfeiture | Cancellation of unissued shares | |
|---|---|---|---|
| Who acts | The shareholder, voluntarily | The company, against the shareholder | The company |
| Why | Under a scheme, or in place of forfeiture | Non-payment of a call | The shares were never taken |
| Are the shares issued? | Yes | Yes | No |
| Statutory basis | None; valid only where it does the work of a lawful act | The articles, following the model in Table F | s.61(1)(e) |
| Effect on paid-up capital | Falls | Falls | None |
| Entry | Yes, through Shares Surrendered | Yes, through Forfeited Shares | None |
In short
- The Act has no section on surrender; it is a device, not a power.
- It is lawful only where the company could have forfeited the shares anyway, or as part of a reduction sanctioned under s.66.
- A surrender that returns capital outside s.66 is a reduction by the back door and is bad.
- Recorded through a temporary Shares Surrendered Account, which must close to nil.
- Re-issued shares go back to Share Capital; cancelled shares go to Capital Reduction.
- It is not forfeiture, and it is not the cancellation of unissued shares under s.61(1)(e).
Answer in one sentence
What is surrender of shares? The voluntary return by a shareholder of his shares to the company, which the Companies Act 2013 nowhere authorises as such and which is therefore lawful only where the company could lawfully have forfeited the shares, or where it forms part of a scheme of reduction of capital confirmed by the Tribunal under s.66.
How is a surrender recorded? By debiting Share Capital and crediting a temporary Shares Surrendered Account, which is then closed by crediting Share Capital with any shares re-issued and crediting Capital Reduction Account with the capital on any shares cancelled.
The rest of this subject
These notes are cut from the University's printed syllabus. Open the syllabus itself, or the past papers, for the same subject.