Company’s ability to forfeit member’s shares for non-payment limited to amounts payable on those shares
30 January 2025The High Court has held that a company was not permitted to issue a call, and subsequently to forfeit, fully paid shares held by one of its shareholders on the basis that the shareholder had not paid amounts he owed the company that were entirely separate from his shareholding.
What happened?
Key Choice Financial Planning Ltd v Evoy [2025] EWHC 4 (Ch) concerned a company established by two individuals (D and E). Both individuals were appointed directors and took shares in the company. E paid the full amount for his shares, meaning they were considered “fully paid” under company law.
The company adopted the Model Articles for Private Companies. However, it modified those articles to allow it to issue partly paid shares, to make calls on shares (whether partly or fully paid) in respect of any amounts owing to the company (and not merely amounts unpaid on the shares), and to forfeit the shares if those amounts were not paid.
For more information on paying up shares, see box “What are partly paid and fully paid shares?” below. For more information on forfeiting shares, see box “What is forfeiture of shares?” below.
What are partly paid and fully paid shares?
Under UK law, all shares issued by a UK company must have a “nominal value” (sometimes referred to in other jurisdictions as a par value).
The nominal value is the minimal amount a person must pay when subscribing for the shares. A company cannot agree to allot and issue new shares to someone for less than their nominal value.
A person can agree to pay more than the nominal value to subscribe for shares. The amount the subscriber agrees to pay above the nominal value is known as the premium.
Although a company cannot allot shares for less than their nominal value, it can agree to allot shares on the basis that the subscriber will pay some, or even all, of the nominal and premium at a later time. In other words, it can allow the subscriber to defer some or all of the nominal and any premium.
If the subscriber pays the entire nominal value and premium when the shares are allotted, the shares are considered fully paid. If the subscriber pays some, but not all, of the nominal and premium, the shares are partly paid. If the subscriber defers the entire nominal and premium, paying nothing on allotment, the shares are sometimes referred to as nil paid (which is, for all intents and purposes, a type of partly paid share).
The subscriber can pay the nominal or premium up in instalments or a lump sum at a later time, depending on what they and the company agree. So, it is possible for partly paid shares to become fully paid shares, and for nil paid shares to become partly paid or fully paid shares, in the future.
Unpaid amounts attach to the relevant shares and travel with them. So, if a person subscribes for partly paid shares and then transfers them to someone else, the recipient will become liable to pay up the balance on the shares.
A company cannot allot shares partly paid unless its articles of association allow it to do so. The Model Articles for Private Companies (which apply to private companies to the extent they are not disapplied or modified) do not allow companies to allot partly paid shares.
If a private company wishes to be able to allot partly paid shares, it must modify its articles to permit this. One way to achieve this is to borrow wording from the Model Articles for Public Companies, which do permit the allotment of partly paid shares.
In due course, E left the company in 2019 but retained his shares. He subsequently brought an unsuccessful petition to wind the company up and was ordered to pay the company the costs of the proceedings. After two years, E had still not paid the amount ordered and interest had accrued.
In September 2021, the company served a “call notice” on E requiring him to pay up the amount he owed. In October 2021, when E had still not paid, it served a notice of intended forfeiture on him. In November 2021, with E still not having paid, the company served a notice on E stating that he had forfeited his shares in the company and was no longer a shareholder.
In relation to calls and forfeiture, the company’s articles contained the following provisions. We have placed the important text in bold.
“23 The company has a lien … over every share, whether or not fully paid, which is registered in the name of any person indebted or under any liability to the company, whether he is the sole registered holder of the share or one of several joint holders, for all monies payable by him (either alone or jointly with any other person) to the company, whether payable immediately or at some [time] in the future …
…
25.1 … the directors may send a notice … to a shareholder requiring the shareholder to pay the company a specified sum of money (call) which is payable by that member to the Company at the date when the directors decide to send the call notice.
…
28.1 If a person is liable to pay a call and fails to do so by the call payment date:
28.1.1 the directors may issue a notice of intended forfeiture to that person …
…
30 If a notice of intended forfeiture is not complied with before the date by which payment of the call is required …, the directors may decide that any share in respect of which it was given is forfeited …”
It is important to note that article 23 above was adopted and adapted from article 52 of the Model Articles for Public Companies, which applies the company’s lien to partly paid shares in relation to any part of the nominal value or premium that has not been paid. In other words, the wording was intentionally changed to give the company a lien over fully paid shares for any and all debts.
In addition, article 25.1 was adopted and adapted from those same Model Articles to replace the words “payable in respect of shares which that member holds” with the words “payable by that member”, again in an attempt to make the call provisions as wide as possible.
E contested the forfeiture. He claimed that, notwithstanding the wide and general wording in article 23, the power to forfeit shares was limited to circumstances where the shareholder had not paid up the entire amount owing on their shares.
At first instance, the District Court agreed. The company appealed to the High Court.
What is forfeiture of shares?
When a company’s articles allow it to allot partly paid shares (see box “What are partly paid and fully paid shares?” above), they will also state that the company has a “lien” over any partly paid shares until they are fully paid.
A lien is a form of security over an asset (collateral). In the context of shares in a UK company, perhaps its principal purpose is to allow the company to block transfers of the shares and, ultimately, to forfeit the shares.
Often, the lien is limited to amounts remaining to be paid up on the shares (i.e. the balance of the nominal value and any premium).
However, in some cases, the articles may attempt to extend the lien to amounts the shareholder owes to the company that are not related to the shares. This might include, for example, the balance of any loans the company has made to the shareholder, or (as in this case) any damages or other amounts payable following a court judgment.
When shares are partly paid, the company will generally have the ability to issue a “call” on the shares. This is a notice requiring the shareholder to pay up any remaining amounts it owes to the company. If the shareholder does not comply with the call, the company can forfeit the shares. On forfeiture, the shareholder ceases to hold shares in the company.
It is not clear whether a company can force the forfeiture of fully paid shares, or whether a company can make a call and impose forfeiture on any shares to force payment of debts that are not related to the shares.
Previous case law suggests that it may be possible to impose a lien over fully paid shares (e.g. to secure amounts owed on other, partly paid shares). However, both case law and statute suggest that it is not possible to activate forfeiture for debts that do not relate to the shares, whether those shares are partly paid or fully paid. This would necessarily mean that it is never possible to activate forfeiture over fully paid shares, as there would be no debts remaining that relate to the shares.
However, notwithstanding this, it is still quite common to see articles of association that attempt to permit this.
The concepts of “lien” and “forfeiture” are distinct and achieve different purposes. However, in some cases (as in this one), depending on how the company’s articles are constructed, the wording of one provision can have an influence on the meaning of the other.
What did the court say?
The High Court held that the company could not force forfeiture of E’s shares.
The judge reached this decision through a process of contractual interpretation. He held that, although the words in the company’s articles referred to all monies payable by E, these words were limited to all amounts remaining to be paid on the shares in question.
The judge gave various reasons for this conclusion, including those set out below.
- The wide language of articles 23 and 25.1 had to be read alongside the more specific language in other articles. In particular, several articles relating to calls and forfeiture used the words “in respect of whose shares the call is made”. These words tied the provisions to sums outstanding on shares.
- This was consistent with the Companies Act 2006, which (as an exception to the rule against a company acquiring its own shares) permit forfeiture of a company’s shares “for failure to pay any sum payable in respect of the shares”.
- The call provisions also stated that liabilities would continue even after a transfer of the shares in question. It did not make sense that a transferee of shares would become liable for a transferor’s debts that did not relate to those shares.
- The word “call”, to a reasonable person, referred to payment of amounts due on shares. If that were not the case, then a joint holder of shares could become liable (and forfeit their shares) if the other joint holder failed to pay a debt unconnected with the shares. That could not be the case.
- The wording for the company’s lien and forfeiture provisions had been adapted from the public company Model Articles. But this did not mean they could be interpreted by looking at those Model Articles. It was not reasonable to expect someone looking at a modified version of the private company Model Articles to compare them with the public company Model Articles.
- Indeed, the company’s articles contained forfeiture provisions because it had modified the private company Model Articles to allow it to allot partly paid shares. This suggests that those provisions were linked to partly paid shares and amounts unpaid on them (and not debts more generally).
As a result, the company was unable to treat E’s shares as forfeited.
What does this mean for me?
There has always been some doubt over whether forfeiture provisions can be used in relation to fully paid shares or in relation to debts that do not relate to shares in the company.
Principal among these concerns is that a forfeiture of fully paid shares is prohibited by the general rule in the Companies Act 2006 that a company cannot acquire its own shares except where the Act allows it to. The Act allows forfeiture in relation to partly paid shares for failure to pay any sum on those shares. But it says nothing about forfeiture of fully paid shares or debts that do not relate to shares.
Although this case principally concerned the interpretation of a company’s articles, it casts further doubt on this area.
Indeed, the judge himself referred a statement in the respected company law commentary Gore-Browne on Companies to the effect that forfeiture for non-payment of debts other than “calls” might never be allowed, whatever a company’s articles say. The parties declined to put forward arguments on this point, so the court was unable to consider it, but the fact that the judge raised this point of his own initiative provides a good indication of the court’s likely thinking on this.
It is worth noting that, although the court decided that the company’s call and forfeiture provisions applied only to amounts owing on the shares, it did not necessarily reach the same conclusion on the company’s lien.
This leaves open the question of whether a company can rely on its lien to block transfers of its own shares where the transferor owes it debts that are unconnected to the shares in question. This would certainly seem less objectionable, as it does not involve the company acquiring its own shares.
We will wait to see whether the judgment prompts any change in practice. However, it would not be surprising to see some articles continue to attempt to extend lien, call and forfeiture provisions to all shares in respect of all debts. These provisions have become quite common in some scenarios, although, notwithstanding their enforceability, may be resisted for commercial reasons – including by third party lenders taking security over relevant shares, and therefore wishing to preserve their potential route to enforcement of that security and the value of the shares more generally.
The key point in practice is that, if a company is considering utilising its call and forfeiture provisions, it should seek legal advice first to ensure that it is entitled and permitted to do so.
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