Company's Articles - power of forfeiture over its debtor's shares in the Company

In England and Wales, a private limited company's articles of association ('AoA') may contain provisions, permitting the company to forfeit the shares that a shareholder has in the company, where the shareholder fails to pay a (certain) debt/liability to the company[1]. But what types of debt/liability, the failure of which to pay, can this power of forfeiture, validly apply to? Can the power of forfeiture apply only to a debt/liability connected to the shares in question, or can it apply to any debt/liability, including those completely unconnected with the shares in question?

This article will explore this area of the law, in light of:

(1) Hopkinson v Mortimer Harley & Co Ltd [1917] 1 Ch. 646 ('Hopkinson'), High Court (Eve J) on 6.3.1917;

(2) Wellington Bowling Club v Sievwright [1925] NZGazLawRp 34; (1925) 26 GLR 227 ('Wellington'), New Zealand Court of Appeal (Sims J; Reed J; Adams J) on 21.4.1925;

(3) Bundaberg Sugar Ltd v Isis Central Sugar Mill Co Ltd [2006] QSC 358 ('Bundaberg'), Supreme Court of Queenland, Australia (Chesterman J) on 5.12.2006.

(4) Key Choice Financial Planning Ltd v Evoy [2025] EWHC 4 (Ch) ('Key Choice'), High Court (Michael Green J) on 6.1.2025.

It is important to note that Bundaberg is not a binding authority in England and Wales. However, it is a decision in another commonwealth jurisdiction, and it is interesting to read what approach it takes to permissible scope to a 'power of forfeiture' in a company's AoA. 

POWER OF FORFEITURE

With forfeiture, a distinction is drawn between, forfeiture of:

(1) part paid up shares (which includes, nil paid up shares), because the shareholder (member) has failed to pay a call or instalment properly due on the shares in question. That is, 'debts due from him as a contributory' [bold added] (Hopkinson, paragraph 5); and

(2) fully paid up shares or part paid up shares, because the shareholder has failed to pay general debts/liabilities, owed to the company. That is 'forfeiture for non-payment of debts due from a member generally' (Hopkinson, paragraph 5);

Here it can quickly be stated, that in respect to part paid up shares, it seems uncontroversial that a company's AoA can contain provisions for the forfeiture of part paid up shares, for non-payment of any call or instalment due on them. In Hopkinson, Eve J said, at paragraph 5 '...a right of forfeiture for non-payment of calls and contributions had long been recognized as the only effective way of preventing co-adventurers from making default in performing their engagements...'[2]

What is controversial, is whether a company's AoA can validly contain provisions, empowering the company to forfeit fully paid up shares (or part paid up shares) in the company, held by a shareholder, for non-payment by that shareholder, of general debts/liabilities, owed to the company, by the shareholder.

Turning to some authorities

Hopkinson

Facts and Argument 

In Hopkinson:

(1) Mortimer, Harley & Co. Limited ('MHC Company') 'had claims' against a Mr Hopkinson; 

(2) Mr Hopkinson owned (100) fully paid up shares in MHC Company (9445 issued shares);

(3) MHC Company's AoA contained, amongst other things, the following 2 provisions (the inclusion in Article 22 of 'other than fully-paid shares' is dealt with below):

(a) Article 22:

'The Company shall have a first and paramount lien upon all the shares, other than fully-paid shares, registered in the name of each member (whether solely or jointly with others) for the debts, liabilities, and engagements of such member, solely or jointly with any other person, to or with the company, whether the period for the payment, fulfilment, or discharge thereof shall have actually arrived or not. And such lien shall extend to all dividends from time to time declared in respect of such shares.'

(b) Article 23:

'The board may, for the purpose of enforcing such lien, sell the shares subject thereto in such manner as they think fit. The board may also, by a resolution to that effect, forfeit the shares subject to such lien. No sale or forfeiture shall be made under this article until the period of the payment, fulfilment, or discharge of such debts, liabilities, or engagements as aforesaid shall have arrived, nor until notice in writing of the intention to sell or forfeit shall have been served on such member, his executors, or administrators, by posting the same to his registered address, and default shall have been made by him, or them, in the payment, fulfilment, or discharge of such debts, liabilities, or engagements for seven days after such notice.' [bold added]

Ancillary AoA provisions, in Articles 24, 25 and 29, read: 

(c) Article 24:

'In the case of a sale the net proceeds shall be applied in or towards satisfaction of the said debts, liabilities, or engagements, and the residue (if any) paid to such member, his executors, administrators, or assigns.'

(d) Article 25:

'In case of a forfeiture, the forfeiture shall include all dividends declared in respect of the forfeited shares and not actually paid before the forfeiture.'

(e) Article 29:

'Any share forfeited under any of the provisions of these presents shall be deemed to be the property of the company, and the board may sell, re-allot, re-issue and otherwise dispose of the same in such manner as they think fit.'

(4) subsequently, a special resolution was passed, removing the words 'other than fully-paid shares' from Article 22. The effect of this alteration, was, it seemed, to:

(a) create in favour of the company, a first lien on fully-paid shares (joining part paid up shares, in that regard) and the dividends thereon, for the debts, liabilities, and engagements of the holder of the shares, and

(b) to render such shares (and dividends) liable to forfeiture.

(5) though there was no immediate threat to exercise Article 22/Article 23 in respect to Mr Hopkinson's shares in MHC Company, Mr Hopkinson took issue with the peril Article 22/Article 23, in its new form, put his shareholding in. In response[3], Mr Hopkinson issued proceedings, seeking a declaration from the Court that, '...the resolution that article 22 should be altered by striking out the words “other than fully-paid shares” was ultra vires and illegal, or, alternatively, that the resolution, so far as it might have the effect of rendering fully-paid shares of the company liable to forfeiture, was ultra vires and illegal.'. Or as Eve J put it, Mr Hopkinson sought '...to have it declared that the fully paid up shares of which he is the holder are not subject to a power of forfeiture...' (paragraph 1)

The proceedings were defended, on the basis that resolution was valid and was duly confirmed. There were 'no grounds for making a declaration to the effect that the power is not in fact exercisable.' (paragraph 1)

Decision 

Eve J considered the position where the company AoA contained a power of forfeiture for non-payment of calls and contributions. In other words, a power to forfeit part paid up shares, where the company had called for the shareholder to pay up the remaining sum, and the shareholder had failed to pay. Eve J recognised that this type of forfeiture power was valid[4]. 

Eve J then considered the position where the company AoA contain a power of forfeiture, over fully paid up shares, for non-payment of debts/liabilities unconnected to the purchase of the shares in question. The question Mr Hopkinson, in effect, raised. As to this, Eve J held that Mr Hopkinson was '...entitled to a declaration that the fully-paid shares of which he is the holder are not subject to the power of forfeiture contained in article 23.' (paragraph 10).

In reaching this conclusion, Eve J:

(1) recorded Mr Hopkinson's criticisms[5] of the apparent power of forfeiture, namely: 

'Is the power exercisable whatever be the relation of the debt in amount to the market value of the shares? Is the exercise of the power intended to reduce or extinguish the debt, and, if so, what method is to be adopted for determining the value of the forfeited shares? If the value exceeds the amount of the debt, is the company to appropriate for itself, or account to the member for, the excess? Finally, if the value of the shares is not to be credited against the debt, how is the company to deal in its capital account with the amount paid up on the shares?' (paragraph 1)

Further, that the apparent power of forfeiture '...is in the nature of a clog on the equity of redemption subsisting in respect of the shares subjected to the lien...' (paragraph 1)[6]

(2) recorded MHC Company arguments in reply[7], dismissing a preliminary point that the claim was premature[8];

(3) arguably gave 3 reasons why the article, in its amended form, was invalid[9]. The third reason is the most prominent. Involving the question: '...whether forfeiture under this power would or would not result in an illegal reduction of capital.' (paragraph 5). On this, in essence[10], Eve J concluded that:

(a) it would be an illegal reduction of capital, and

(b) if any part of the value of the shares was set off against the debt value, then this would be the equivalent of the company purchasing its own shares, without being legalised by Court sanction - an objectionable proposition. 

As to the article in question, in its amended form, Eve J said, at 654:

'...as the article stands, I am of opinion it is invalid in this respect, and that the board cannot forfeit shares for non-payment of the debts and liabilities therein referred to without bringing about an illegal reduction of the company's capital in any event and a purchase by the company of its own shares in some events. It may be that a reduction in capital brought about by the forfeiture of fully-paid shares inflicts no injury on the creditors or contributories, but this consideration cannot legalize a procedure which for other reasons is illegal, and it does not exist if in fact the value of the shares - which may be greatly in excess of the amount paid up on them - has to be brought into account with the defaulting member.'

(c) 'Such being the state of the law, I think this power to forfeit [Mr Hopkinson's] shares on his failure to redeem on a seven days' notice is a clog on the equity and as such invalid and ultra vires.' (paragraph 8)

Overall, 'In my opinion, [Mr Hopkinson] is right in his contentions' (paragraph 10).

In short then, Hopkinson decided that, save for the recognised exception, an company AoA article which purports to grant the company a power to forfeit issued shares, from a shareholder, because the shareholder has failed to pay a debt/liability owed to the company, is invalid. The one exception is, where the debt/liability due to the company, from the shareholder, is money owed to the company, for the shares (i.e. qua contributory; non-payment of calls or instalments).

Bundaberg

In Bundaberg:

(1) Isis Central Sugar Mill Co Ltd ('ICSMC Company') was a company: (a) limited by shares; (b) incorporated 1894; (c) carrying on a business of crushing sugar cane to produce raw sugar for sale (paragraph 1); (d) which owned a mill. The company bought '...sugar cane from growers in the surrounding district. It owns and operates a light rail system which is used to transport cane from the farms to the mill.' (paragraph 1)

(2) the first plaintiff, a public company (Bundaberg Sugar Ltd; 'BSL') purchased 16,435 shares in ICSMC Company (paragraph 8);

(3) ICSMC Company's AoA contained powers of forfeiture in the ICSMC Company's directors, beyond, it seemed, for non-payment of call or instalment due on part paid shares. ICSMC Company's AoA contained:

(a) Under the heading 'Liens and Forfeiture', Article 29, subarticles 29(1) and 29(2):

'(1) If any member fails to pay any call or instalment on or before the day appointed for payment of the same, the Directors may at any time thereafter during such time as the call or instalment remains unpaid give a notice to such member requiring him to pay the same together with any interest that may have accrued and all expenses that may have been incurred by the Company by reason of such non-payment.'

(2) If any member shall cease to be a Supplier or shall be in breach of any agreement pursuant to article 5 hereof, the Directors may at any time give a notice in writing to such member requiring him to dispose of all shares registered in the name of such member or remedy such breach.'

(b) For Article 29(2) then, there were 2 triggers. That is, where a member should:

(i) 'ceased to be a Supplier'; or

(ii) 'be in breach of any agreement pursuant to article 5 hereof'

Taking these in turn:

(c) ICSMC Company's AoA, Article 1 contained the definition of 'Supplier'. Chesterton J in Bundaberg said, at paragraph 17:

'Article " defines ‘Supplier’ to mean a person or corporation who or which is:

‘(a) the registered proprietor, owner or lessee of Assigned Land; and

(b) the holder of either an Assignment or a Peak to the Mill and who ... actually supplies sugar cane to the ... Mill ...; and

(c) who otherwise satisfies the Directors that he supplies or agrees to supply sugar cane to the ... Mill.’

‘Assignment’ and ‘Peak’ were terms taken from the Sugar Cane Prices Act when that legislation regulated the production and sale of sugar cane.'

(d) ICSMC Company's AoA, Article 5 provided:

'Shares in the capital of the Company may only be held by bona fide Suppliers who have entered into such agreement or agreements as the Directors shall from time to time require:-

(a) granting or otherwise assuring to the Company free access to over and through the land owned or occupied by the Supplier for the purpose of transporting sugar cane to the Company’s Mill from Assigned Lands or other lands;

(b) granting or assuring to the Company full and free right to lay use and maintain tramways or railways upon or over such land;

(c) whereby each such Supplier agreed to be bound by the Memorandum and Articles of Association; and

(d) containing such other provisions as the Directors may from time to time in their absolute discretion require.’

(e) Pausing there, it is helpful to note Chesterton J's summary of the position (so far). Chesterton J said, at paragraph 20:

'Article 29 contemplates three circumstances in which the directors may resolve to take action against a member of the company who is in breach of his obligations qua member. They are:

1. Where a member has not paid a call or instalment on the due date.

2. Where the member ceases to be a supplier to the plaintiff as defined in the articles.

3. Where the member is in breach of the agreement described in article 5.

In any of these three cases the directors may give a notice to the defaulting member requiring him to make good the default: by paying the call or instalment; or by selling his shares in the case where he has ceased to be a supplier; or by remedying the breach of the agreement made under article 5.' [bold in italics in original]

(f) Notice served pursuant to Articles 29(1) and 29(2), had to contain: (a) a window of time to remedy the default; (b) a warning  ICSMC Company's AoA, subarticles 30(1), 30(2) and 30(3) read:

'(1) Any notice under article 29(1) shall name a day (not being less than fourteen days from the date of the notice) and a place or places on and at which such call or instalment and such interest and expenses as aforesaid are to be paid.

(2) Any notice under article 29(2) shall name a day not being less than fourteen (14) days from the date of the notice) by which the member to whom the same is addressed shall either dispose of his shares or remedy the breach.

(3) The notice shall also state that, in the event of non-payment at or before the time and at the place appointed, the shares in respect of which the call was made or instalment is payable will be liable to be forfeited.’ [bold added]

(g) ICSMC Company's AoA, article 31(1) had to be read, so Chesterton J held, at paragraphs 27 and 33, as though it read:

‘If the requirements of any such notice as aforesaid are not complied with, any shares in respect of which such notice has been given may at any time thereafter be forfeited by resolution of the directors to that effect but, in the case of non-compliance with a notice given pursuant to article 29(1), before payment of all calls or instalments, interest and expenses due in respect thereof.’ [bold added]

(5) under the heading 'Validity of article 31: the power to forfeit shares', Chesterton J recorded that:

(a) it was BSL's contention that, the apparent right, in ICSMC Company's AoA, conferring '...a right on the directors to forfeit shares in the case of a member ceasing to be a supplier the article is invalid.' (paragraph 35); and,

(b) 'The ground of invalidity advanced is that a power conferred on the directors of a company to forfeit shares for any circumstance other than the failure of the shareholder to pay a call on the shares is beyond power. It is said to infringe the rule that a company limited by shares must maintain, and cannot reduce, its share capital. The principle is well established. It is said that to allow the directors to forfeit the shares would be to effect a reduction of the capital of the company which may occur only in the circumstances admitted by the Corporations Act and/ or with the approval of the Court. The only exception is that there may be a forfeiture where the shareholder has not paid calls due in respect of the shares.' (paragraph 35)

(6) Chesterman J considered Hopkinson (Bundaberg, paragraph 36 onwards). On the objection that a power of forfeiture provision, would involve an illegal reduction of capital, he considered the law underlying this, as identified in the House of Lords decision in Trevor v Whitworth (1887) 12 App Cas 409.

Chesterman J concluded that Hopkinson had not decided what the law was (i.e. valid or invalid article), in the following situation: where the article allowed directors to forfeit: (a) shares which were fully paid; (b) for no consideration (i.e. the shareholder go nothing in return, in the forfeiture process) (Bundaberg, paragraph 45). Chesterman J recognised, that in such a situation:

(a) there would be no return of capital, from the company to a shareholder (since the company would pay nothing to the shareholder, in respect to the forfeiture; the capital in the company would not therefore be depleted); and

(b) there would be no company nominal capital reduction either, because the forfeited shares, could be re-issued (Bundaberg, paragraph 46) (clarified better, below).

After considering Wellington, and some views in the legal text books, Chesterton J analysis what happens to shares, when they are forfeited by the issuing company. Chesterton J considered, at paragraph 55, the following, to be accurate:

'It would be a mistake to regard forfeiture not involving the forgiveness of a debt owed to the company, as necessarily involving a reduction of capital. Such a contention is quite inconsistent with orthodox notions of forfeiture as exemplified by the comments of Lord Watson in Whitworth at 424 (set out above). The point is taken up in Pennington’s Company Law, 6 th Edition at 173-174, where the learned author comments:

"It is questionable whether a forfeiture or surrender of shares does really reduce the company’s capital. At first sight it appears to do so, because the company cannot be treated as having taken a transfer of the shares, and it therefore looks as though the shares are extinguished. But this is not necessarily the result. The cases show that shares are not cancelled by being forfeited or surrendered, but are merely in abeyance until they are re-issued. No dividend is paid in respect of forfeited or surrendered shares, and no votes can be case in respect of them at shareholders’ meetings if the company is a public one or, presumably, if it is a private company, but that does not mean that the shares cease to exist. When forfeited or surrendered shares are re-issued the full rights attached to them revive. The re-issued shares are the same shares that were forfeited or surrendered, and not new shares issued in place of the forfeited or surrendered ones. Consequently, the company may reissue them at whatever price it can obtain, whether more or less than their nominal or paid up value, and they are paid up in the hands of the person who takes them on re-issue to the same extent as they were paid up immediately before they were forfeited or surrendered. The amount received by a company on the re-issue of forfeited or surrendered shares is not paid up capital of the company, except in so far as it is appropriated by agreement to pay calls or instalments of the issue price which is owing but unpaid." '

(Chesterton J said 'I respectfully agree with the analysis found in Pennington.' (Bundaberg, paragraph 56))

After noting the dearth of authority in this area, Chesterton J said, at paragraphs 57 to 60:

'Two reasons are advanced for contending that an article permitting the forfeiture of shares on grounds other than nonpayment of calls is invalid. The first is that as a result of the forfeiture the company owns shares in itself, and the second is that the forfeiture operates as a reduction of capital.

The first ground is, I think, misconceived. Forfeited shares are ‘in abeyance’ until they are reissued, sold or cancelled. No dividend is paid on the forfeited shares and no votes are cast in respect of them. The company is not the proprietor of them; it is not a member in itself and does not hold the shares in itself. The defendant’s articles provide that forfeited shares are held by the directors on trust for the company, which is not a member of itself.

The second point does have some substance. A forfeiture of shares may operate to reduce the company’s capital, but it will not operate to reduce paid up capital when the shares have been fully paid. This point is recognised in the cases. Nevertheless a forfeiture may still serve to reduce the company’s issued capital, at least if the shares are cancelled consequent upon the forfeiture. This may be the point Eve J had in mind when he said that, on a forfeiture, ‘the capital is reduced by the amount paid up on the forfeited shares.’'

This point is now without substance.' 

It was without substance for particulars in Australian Company law (which need not presently concern us).

Later, Chesterton J in Bundaberg said, at paragraphs 64 and 65 (the reference to Corporations Act is a reference to Australia legislation):

'The analysis comes to this. There is no reason in principle why a forfeiture which does not in fact operate to reduce the capital of the company should be invalid. Indeed under the present Corporations Act a forfeiture of fully paid shares cannot reduce a company’s nominal or issued capital. Secondly there is no clear authority for the proposition that the forfeiture of shares except for non-payment of calls or instalments is invalid, whether or not it effects a reduction in capital. There are dicta to that effect but they depend upon Hopkinson which is an unsatisfactory base for them. The ratio of that case is properly recognised by the authors of Gore-Browne on Companies, 44 th ed, at [15.4]: ‘a forfeiture of shares for the non-payment of debts other than calls is invalid ... [if] the articles purport to give a lien on shares for such a debt, the rule forbidding a clog on the equity of redemption will be infringed by an attempted forfeiture.’

If Hopkinson is to be taken as deciding that forfeiture in all events, save the non-payment of calls, is invalid the decision goes beyond its rationale which is the preservation of the company’s capital.'

On the facts in Bundaberg, Chesterton J said, at paragraphs 66 to 69:

Article 32(1) of the defendant’s articles deems a forfeited share to be held on trust by the directors on behalf of the defendant and further provides that the forfeited shares may be sold, realloted or otherwise disposed of by the directors in such a manner as they think fit. If the shares are re-allotted the re-allotment may occur with or without any money paid on the re-allotment being credited as monies paid up by the former shareholder. If the forfeited shares are sold the net proceeds of sale are to be applied in satisfaction of any monies due in respect of the shares, or for their sale. Any surplus goes to the former shareholder.

By article 35 a member whose shares have been forfeited remains liable to pay all calls, interest and expenses owing in respect of the shares at the time of the forfeiture.

It is apparent from these provisions that a forfeiture does not operate to reduce the defendant’s capital. The shares are not cancelled but are held on trust, or in abeyance, pending sale or re-allotment. There is no return of subscribed capital because the former shareholder remains liable to pay outstanding calls and does not become entitled to receive any monies previously paid in respect of the shares.

In these circumstances there is no reason in principle why the articles permitting forfeiture should be held invalid. There is no compelling persuasive authority which requires that course. Accordingly I refuse the [BCL's] invitation to strike down the articles.'

Key Choice

In Key Choice:

(1) Mr Evoy owed £162,420 to Key Choice Financial Planning Ltd ('KCFP Company'), on a default costs certificate; 

(2) Mr Evoy held 57 fully paid up shares in KCFP Company ('Those shares were not partly paid; nor was there any sum due in respect of those shares.' (paragraph 3);

(3) the sole director, at the material time, was a Mr Karl Dickenson ('KD');

(4) the default costs certificate arose out of Mr Evoy bringing an unsuccessful contributory's winding up petition against KD (and KCFP Company). The petition being dismissed and Mr Evoy being ordered to pay KCFP Company's costs on an indemnity basis (paragraph 12) 

(5) Mr Evoy failed to pay (paragraph 13), which lead to '...steps being taken by [KCFP Company] to forfeit [Mr Evoy's] shares for non-payment of a large costs liability owed to [KCFP Company].' (paragraph 2). After the purported forfeiture (paragraph 14), KCFP Company informed Mr Evoy that 'the forfeiture did not affect [Mr Evoy's] liability to pay the outstanding costs debt.' (paragraph 14) (though where, post forfeiture, the share is sold, the net proceeds of sale of that share, will be paid as surplus, to the (former) shareholder (article 32; paragraph 26));

(6) At first instance, a DJ declared that 'the purported forfeiture by [KD] acting on behalf of [KCFP Company] of [Mr Evoy's] shareholding of 57 fully paid ordinary shares in [KCFP Company] was ineffective.' (paragraph 1)

(7) KCFP Company appealed that declaration, and the appeal came before Michael Green J, who summed up the issue before him as: '...the lawfulness of [KCFP Company's] purported forfeiture of [Mr Evoy's] shares in [KCFP Company].' (paragraph 3)

(8) KCFP Company claimed that '...on the proper construction of the Articles of Association of [KCFP Limited], in particular Article 25.1, that it was able to forfeit the shares if any debt owed to [KCFP Company] by [Mr Evoy] had not been paid when demanded.' (paragraph 3)

(9) The Judge then dealt with a point which is important to understanding what Michael Green J in Key Choice, did not deal with. The Judge said that:

(a) he had raised with counsel, in advance of the appeal hearing, a passage from Gore-Browne on Companies, wherein, the learned authors, at [26-14], state that "a forfeiture of shares for non-payment of debts other than calls is invalid, whatever the articles may say…" (the 'Gore-Browne Issue') (Gore-Browne based this on Hopkinson, while making some reference to Bundaberg)

(b) both counsel had said the Gore-Browne Issue should not form part of the appeal. It had not formed part of the issues before the DJ, Mr Evoy had not lodged a Respondent's Notice (seeking to support the DJ's decision (to make the declaration), on additional grounds - i.e. that, as a matter of law, a company cannot have a power of forfeiture for debts/liabilities other than those connected with the a call/instalments for shares to be forfeited), and Mr Evoy 'did not wish to argue it' on the appeal (paragraph 7). 

(c) consequently,'...while I think that it does raise interesting issues about the validity of such a forfeiture right that [KCFP Company] is contending for, I must bow to the parties' wishes and confine myself to the grounds of appeal that are properly before me.' (paragraph 8);

Pausing there. As a result of the above, the question of whether, as a matter of principle, there can be a valid power to forfeiture in a company's AoA's, to forfeit the shares in the company, held by a shareholder, for debts/liabilities, other than for unpaid capital in respect of its shares (by calls or instalments), owed by that shareholder, to the company, was not in issue in Key Choice. Mr Evoy neglected to run the validity point at first instance, and then, when, in effect, encouraged to do so, as a ground for fortifying the DJ's decision, Mr Evoy elected not to do so. The result is that the judgment of Michael Green J does not deal with the validity point (the Gore-Browne Issue). A missed opportunity, readers might think. Seemingly, Key Choice proceeds on the unchallenged foundation that a company's AoA can include a power to forfeiture for any kind of shareholder debt/liability, whether the debt/liability is connected to the shares, or not.

The issue in Key Choice was (just) whether, on the true construction of KCFP Company's own particular AoA, KCFP Company's AoA gave KCFP Company the power to forfeit for an unconnected to the shares, debt (i.e. to forfeit, for not payment of the default costs certificate costs liability - a liability unconnected to the shares themselves (that is - unconnected to paying for the shares)). In other words, 'whether [KCFP Company's] power to forfeit [Mr Evoy's] shares is limited to calls in respect of those shares or whether it extends to any sums of money owed by the [Mr Evoy] to [KCFP Company].' (paragraph 31). 

Looking then, at KCFP Company's AoA, they:

(a) '...adopted the Model Articles for Private Companies Limited by Shares, save for certain specific modifications or exclusions – see Article 1.6' (paragraph 17), which '...were substantially modified.' (paragraph 10). Template power of forfeiture clause(s) did not come with the Model Articles for Private Companies Limited by Shares - '[t]hose Model Articles do not include any provisions for forfeiture.' (paragraph 17). Instead, the drafter of KCFP Company's AoA used The Model Articles for Public Companies, as a template - a basis for the KCFP Company's AoA forfeiture (and lien) provisions (paragraph 37);

(b) suffered from problems of ambiguity (paragraph 37) and inconsistency (paragraph 39), introduced when the drafter imported in, the forfeiture provisions; 'there are problems with what the drafter has done, leading, in my view, to there being ambiguity in the meaning of Article 25.1 and perhaps more importantly in relation to the power of forfeiture.' (paragraph 37)

As part of the process of discerning the true construction of KCFP Company's AoA, both the DJ at first instance, and then, Michael Green J, on appeal: 

(i) applied the principles of construction for company AoA's, identified in DnaNudge Limited v Ventura Capital GP Limited [2024] 1 BCLC 263, [2023] EWCA Civ 1142 ('DnaNudge'); and

(ii) looked at what was the natural and ordinary meaning of 'call', which was central to the determining what debts/liabilities the power of forfeiture could be exercised, in respect to. On this, Michael Green J said, at paragraph 50(1) 'The Judge was right to say that the word "call" in the context of articles of association would normally apply to a call on unpaid share capital. (See for example the definition of "called up share capital" in s.547 of the Companies Act 2006.)'. However, that meaning had to be judged in its wider context within the document being interpreted. Michael Green J continued, at paragraph 50(1) 'But as [the DJ] made clear this was but one part of the iterative process that he was embarked on.'

(iii) concluded (though through slightly different reasoning) that, in respect to the relevant provisions in KCFP Company's AoA (article 1, articles 24 to 32), the power of forfeiture only extended to calls in respect of unpaid capital on specific shares. It did not extend to all/any debts/liabilities owed to KCFP Company by a particular shareholder. To put this another way, both concluded that the power of forfeiture did not allow forfeit for debts, other than those which arose in relation to the shares. '...forfeiture under the Articles' was '...limited to shares "in respect of which a call has not been paid"' (paragraph 43)

This conclusion, for Michael Green J, was because 'call', given how it was used in other articles, had to be impliedly limited. He said, at paragraph 45: 

'...in the light of the way that the word "call" is used in the Articles following Article 25.1, including in Article 25.4, I have concluded that the definition of "call" in Article 25.1 of a "specified sum of money" must be impliedly limited to calls in respect of unpaid capital on specific shares.'

Later, at paragraph 49, he said:

'The commercially sensible outcome is one that fits with the wording of the Articles as a whole and limits the ability of [KCFP Company] to issuing call notices and exercising its right of forfeiture to sums outstanding in respect of specific shares.'

Lastly, it is noteworthy that Michael Green J said, at paragraph 48:

'Forfeiture is a severe and draconian remedy which the law leans against. I understand the point that the Judge was making in [24(4)] of the Judgment that because [KCFP Company] does not have to account to [Mr Evoy] for the value of his forfeited shares, this could amount to a penalty to him and a windfall to [KCFP Company].'

CONCLUSION 

It seems uncontroversial that a company AoA can contain power of forfeiture, which empowers the company to forfeit from a shareholder, shares held by that shareholder in the company, for failure by the shareholder, to pay for those share (call or instalments). Outside of this, the law is much less settled. Hopkinson is still good law, though: (1) Bundaberg; and (2) Michael Green J's encouragement in Key Choice, shows this area is ripe for review and rationalisation. At its heart, there needs to be greater clarify, amongst other things, about why a power of forfeiture, with wider scope, is objectionable, such that it would be invalid. The author suspects, part of this will entail a greater focus on what happens to the shares, after they have been forfeited. 

SIMON HILL © 2026*

BARRISTER 

33 BEDFORD ROW

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