Calls in Arrears: Meaning, Examples and Journal Entries
Calls in arrears arise when shareholders do not fulfil their payment obligations for shares by the specified deadline. It impacts the company's financial planning and necessitates administrative action to resolve the shortfall.
Calls in Arrears arise when shareholders do not pay their entire share instalment requirement by the stipulated deadlines. Imagine a situation where Mahindra & Mahindra launches a new sustainable energy project and calls for share instalment payments.
Due to financial constraints, a shareholder misses the payment deadline for their 100 shares. The remaining unpaid amount will be considered a call-in-arrear, thus a part of the shareholder's liability yet to be fulfilled. This will affect the anticipated financial inflow for the company.
Understanding such scenarios is crucial in corporate finance; online finance courses integrate topics like Calls in Arrears to build practical knowledge and financial decision-making skills.
Scroll your screen down, and let's understand the meaning of Calls in Arrears and other related concepts.
Table of Content
What is Calls in Arrears?
Call in arrear relates to the time when the shareholder doesn't pay the remaining amount, as in the case of partly paid shares, in the stipulated time. In other words, it is an outstanding balance that remains unpaid by the investor to the company. If shareholders do not meet these payment obligations on time, the unpaid amount is termed 'calls in arrears.'
Companies may charge interest or penalties on calls in arrears. If the outstanding amount remains unpaid for an extended period, the company can forfeit the shares.
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Example of Calls in Arrears
Let's assume Tata Motors announces a new electric vehicle project and wants to collect money by issuing further shares to existing shareholders. The company has fixed a schedule, but a shareholder fails to pay the second instalment of ₹200 per share for 100 shares by the due date.
This unpaid amount, totalling ₹20,000, becomes a "call in arrears." Hence, it affects the project's immediate cash flow, while the shareholder might have to pay a penalty or lose ownership rights.
Journal Entry of Calls in Arrears
Let’s understand the journal entry for Calls in Arrear.
| Date |
Particulars |
JR |
Amount (Dr.) |
Amount (Cr.) |
|
|
Calls in Arrear To, Share Capital - Second Installment (Being unpaid second instalment is recorded as calls in arrear) |
|
20,000 |
20,000 |
Difference Between Calls in Arrears and Calls in Advance
Here's a tabular difference between Calls in Arrears and Calls in Advance:
| Feature |
Calls in Arrears |
Calls in Advance |
| Definition |
Amounts owed by shareholders for shares they have subscribed to but not yet paid for by the due date. |
Shareholders make payments for their shares before the company has requested them or before the due date. |
| Timing |
Occurs after the payment due date has passed without the shareholder fulfilling their payment obligation. |
Occurs before the scheduled payment date, with shareholders choosing to pay early. |
| Financial Impact on Company |
The unexpected shortfall can negatively affect the company's cash flow and financial planning. |
Positively impacts the company's cash flow by providing funds earlier than anticipated, potentially aiding in quicker project initiation or debt repayment. |
| Shareholder Consequences |
Shareholders may face penalties, loss of shareholder rights, or even forfeiture of shares for non-payment. |
Shareholders do not face penalties; instead, they might sometimes benefit from preferential treatment or rewards for early payment. |
| Legal and Administrative Aspects |
The company may need to undertake legal or administrative actions to collect the dues, adding to costs. |
Requires less administrative effort than calls in arrears and does not involve legal actions for collection. |
| Impact on Shareholder Relations |
The need for enforcement actions can strain relations between the company and its shareholders. |
Generally fosters positive relations as it reflects shareholder confidence and support for the company's initiatives. |
Consequences of Calls in Arrears
For the Company:
Reduced Cash Flow: Immediate financial resources are lower than expected, potentially delaying or impacting project funding and operations.
Administrative Burden: Managing and tracking calls in arrears requires additional administrative effort. It includes communication and legal actions against defaulting shareholders.
Investor Relations: Frequent calls in arrears might affect the company's market reputation. They may also reflect the company's poor financial health or investor confidence.
For the Shareholder:
Penalties: Shareholders in arrears may be subject to penalties or additional charges. The share subscription agreement or company policy will specify the details.
Loss of Rights: Shareholders who fail to clear their arrears might lose certain rights. These include voting rights in shareholder meetings until payments are made.
Forfeiture of Shares: In severe cases, the company may have the right to forfeit shares of those in arrears. This will result in a loss of investment for the shareholder.
Legal Action: The company might initiate legal proceedings to recover the unpaid amount. This process would add legal costs and potentially damage the shareholders' credit rating.
General Consequences:
Impact on Future Fundraising: Persistent issues with calls in arrears could make it more challenging for the company to raise funds.
Market Perception: The company's and the shareholders' market reputations could suffer, affecting future investment opportunities and partnerships.
Conclusion
Calls in arrears represent a critical financial situation where shareholders fail to meet their payment obligations for shares. This impacts a company's cash flow and project funding, necessitates administrative actions, and can strain shareholder relations. Addressing these arrears promptly is essential for maintaining financial stability and ensuring the company can execute its strategic plans effectively.
Top FAQs on Calls in Arrears
What is Calls in Arrears?
Calls in Arrears refer to the unpaid portion of share instalments that a shareholder fails to pay by the due date. This amount remains as a liability on the part of the shareholder and affects the company’s expected cash inflow during its capital-raising process.
Why do calls in arrear occur?
Calls in Arrears usually occur when shareholders face financial difficulties, forget the payment deadline, or intentionally delay payment. This results in the company not receiving the full amount it expected from the issued shares, which may disrupt its financial planning.
How are Calls in Arrears shown in a company’s books?
In accounting, Calls in Arrears are recorded on the liability side of the balance sheet, under the subscribed but not fully paid capital section. The unpaid amount is deducted from the total called-up capital to show the net amount actually received.
Can a shareholder be penalized for Calls in Arrears?
Yes, companies can charge interest on the unpaid amount as a penalty, based on the company’s Articles of Association. If the payment is not made within a specified period, the company may even forfeit the shares.
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