Reviewed by Jun 11, 2021| Updated on
Forfeiture refers to a loss of any property, money, or assets without consideration or compensation in return. A forfeiture generally occurs due to default in complying with repayment obligations under a contract. It can also be used as a penalty for an illegal way of conducting business. The party suffering a forfeiture should surrender the ownership of the property forfeited.
Forfeiture is compensation for breach of the terms of a contract. The party who fails to perform their obligations or breach their duty under a contract forfeits their assets or rights under the contract. The purpose of forfeiture is to compensate the party adversely affected by the non-performance of the contract.
A general example of forfeiture is a failure to make payment under a contract for the sale of immovable property. The advance for purchase of property is likely to be forfeited under the contract. The proceedings for forfeiture are civil in nature. However, in the case of illegal activities, the forfeiture proceedings may be criminal in nature.
A company which receives a subscription for shares calls upon to pay the call money on the shares. In case the shareholders fail to pay the call money, the company can forfeit the shares. In case of forfeiture of shares, the company retains the subscription already paid by the shareholder. Thus, the shareholder loses ownership in the shares and the money paid.
In the case of Employee Stock Options (ESO) Plan of many companies, the employees get entitlement to the shares of the company as a performance incentive. There are certain limitations and conditions for the issue of the ESOP, such as the number of years of service. In case the employee subscribing for the shares terminates the employment before the term, the ESOP could be forfeited by the company.
In most legal agreements, there is a clause on forfeiture of assets and rights in the event of failure to perform the obligations under a contract. The legal authorities or the department of justice in each country prosecute illegal activities under various laws. The authorities can also forfeit the money used or earned from illegal activities.