Calls in Advance under Company Law

Share capital forms the backbone of a company’s financial structure. When shares are issued, the amount payable on such shares is generally collected in stages, such as application money, allotment money, and subsequent calls. However, situations often arise where shareholders voluntarily pay the unpaid amount on their shares even before the company formally demands it. This concept is known as calls in advance.

Calls in advance play an important role in corporate finance, as they provide early liquidity to the company while also creating certain rights and obligations between the company and its shareholders. Understanding this concept is essential for law students, professionals, and those dealing with company accounts and governance.

This article provides a detailed and structured analysis of calls in advance, including its meaning, legal basis, features, accounting treatment, and its distinction from related concepts.

Meaning of Calls in Advance

Calls in advance refers to the amount paid by a shareholder on shares before the company has actually made a call for such amount. In simple terms, it is the payment made in anticipation of future calls.

A shareholder may choose to pay the entire remaining unpaid amount or a portion of it, even though the company has not yet issued a formal demand. Once such payment is accepted by the company, it is treated as calls in advance.

This advance payment is not considered as part of share capital immediately. Instead, it is treated as a liability of the company until the corresponding call becomes due.

Legal Basis and Authority

The acceptance of calls in advance is not automatic. It must be authorised by the Articles of Association (AOA) of the company.

The Articles of Association act as the internal rulebook governing the company’s operations. If the AOA contains provisions allowing the company to accept advance payments on shares, then the company can legally accept such payments from shareholders.

In the absence of such authorisation, the company does not have the power to accept calls in advance. Therefore, the AOA plays a crucial role in determining whether such payments can be accepted.

Nature of Calls in Advance

Calls in advance possess certain distinct characteristics that differentiate them from other forms of share payments.

Voluntary Payment

The payment is made voluntarily by the shareholder. There is no obligation on the shareholder to make such advance payment. It is purely based on the shareholder’s willingness.

Acceptance by Company

Even though the shareholder offers to pay in advance, the company has the discretion to accept or reject such payment. The acceptance must be in accordance with the provisions of the Articles of Association.

Payment Before Call

The defining feature of calls in advance is that the payment is made before the call is formally made by the company. This distinguishes it from regular calls, which are demanded by the company.

Amount of Calls in Advance

A company may accept either:

• The entire unpaid amount on shares, or
• A part of the unpaid amount, depending on the shareholder’s decision

There is no restriction that only full payment must be accepted. Partial payments are also permissible, provided they comply with the company’s internal rules.

This flexibility allows shareholders to manage their financial commitments efficiently while also enabling the company to receive funds earlier than expected.

Interest on Calls in Advance

One of the important features of calls in advance is the payment of interest by the company.

Right to Interest

A shareholder who pays calls in advance is entitled to receive interest on the amount paid. This is because the company gets the benefit of using the funds before they are due.

Rate of Interest

The rate of interest is:

• Determined by the Board of Directors and members, and
• Subject to a maximum limit of 12% per annum

This ensures that the company does not incur excessive financial burden while compensating shareholders fairly.

Nature of Interest

The interest paid on calls in advance is considered a charge against the profits of the company. It is not treated as a dividend and is payable even if the company does not make profits.

Non-Refundable Nature of Calls in Advance

An important aspect of calls in advance is that the amount received is not refundable.

Once the company accepts the advance payment:

• The shareholder cannot demand repayment of the amount, and
• The amount remains with the company until the call is actually made

When the call is eventually made, the advance amount is adjusted against the amount due on shares.

This feature ensures stability in the company’s financial planning and avoids uncertainty regarding fund utilisation.

Treatment in Accounts

From an accounting perspective, calls in advance are not treated as part of share capital until the call is actually made.

Liability of the Company

Until the call becomes due, the amount received as calls in advance is treated as a liability of the company. It is shown separately in the balance sheet.

Adjustment Against Calls

When the company makes a call:

• The amount already received is adjusted against the call, and
• The liability is reduced accordingly

Interest Accounting

Interest paid on calls in advance is recorded as an expense in the profit and loss account. It reflects the cost incurred by the company for using the funds earlier than required.

Rights of Shareholders Making Calls in Advance

Shareholders who pay calls in advance do not enjoy all the rights attached to share capital immediately.

No Voting Rights on Advance Amount

The amount paid in advance does not confer additional voting rights. Voting rights are determined based on the paid-up share capital, and calls in advance are not considered paid-up capital until the call is made.

Entitlement to Interest

The primary right available to such shareholders is the right to receive interest on the advance payment, subject to the agreed rate.

Adjustment Against Future Calls

The shareholder is entitled to have the advance amount adjusted against future calls as and when they are made.

Distinction Between Calls in Advance and Calls in Arrears

Calls in advance is often contrasted with calls in arrears, as both deal with the timing of payment.

Calls in Advance

• Payment is made before the due date
• Represents credit in favour of the company
• Company pays interest to shareholders
• Treated as a liability

Calls in Arrears

• Payment is not made on the due date
• Represents amount due from shareholders
• Company may charge interest from shareholders (generally up to 5% per annum)
• Treated as an asset or receivable

This distinction highlights the opposite nature of the two concepts and their different legal and accounting implications.

Distinction Between Calls in Advance and Calls on Shares

Calls in advance should also be distinguished from regular calls on shares.

Calls on Shares

Calls on shares refer to the demand made by the company for unpaid share capital. These calls are made in accordance with the terms of issue and are binding on shareholders.

Calls in Advance

Calls in advance arise when shareholders voluntarily pay before such demand is made.

The key difference lies in:

• Timing: Calls in advance occur before the call is made
• Initiation: Calls on shares are initiated by the company, whereas calls in advance are initiated by the shareholder

Regulatory and Governance Perspective

Calls in advance contribute to better financial discipline and transparency in corporate governance.

• The requirement of authorisation through Articles ensures that the company follows structured rules.
• The limitation on interest rate prevents misuse and protects the company’s financial stability.
• Proper disclosure in financial statements enhances transparency and accountability.

These aspects ensure that calls in advance are regulated in a manner that balances the interests of both the company and its shareholders.

Conclusion

Calls in advance is an important concept in company law that reflects the flexibility available in the management of share capital. It allows shareholders to make early payments and enables companies to access funds before they are formally due.

The concept is governed by the Articles of Association and involves key features such as voluntary payment, payment of interest, and non-refundable nature of the amount. While it offers advantages like improved liquidity and financial flexibility, it also imposes certain obligations on the company, particularly in relation to interest payments.