Calls in Arrears

The concept of share capital forms the backbone of a company’s financial structure. When a company issues shares, the amount payable on such shares is not always collected in one single instalment. Instead, companies often collect the amount in stages, such as application, allotment, and subsequent calls. These calls represent the unpaid portion of the share capital which the company demands from its shareholders as and when required.

However, situations may arise where shareholders fail to pay the call money within the prescribed time. Such unpaid amounts are referred to as calls in arrears. This concept is significant both from a legal and accounting perspective, as it affects the company’s financial position and the rights and obligations of shareholders.

Meaning of Calls in Arrears

Calls in arrears refer to the amount of call money which has been demanded by the company but remains unpaid by the shareholders on the due date. In simple terms, when a shareholder fails to pay the required amount after a valid call has been made, such unpaid amount is treated as calls in arrears.

These unpaid calls represent a liability on the part of the shareholder and a receivable for the company. The company expects to receive this amount in the future, and until it is paid, it remains outstanding.

Nature and Characteristics of Calls in Arrears

Calls in arrears possess certain distinctive features which help in understanding their legal and financial significance:

• Outstanding Share Capital: Calls in arrears form part of the unpaid share capital. Although the shares have been allotted, the full amount has not yet been realised by the company.
• Debt Due from Shareholders: The unpaid call amount creates a debt obligation on the shareholder. The company has the right to recover this amount in accordance with its governing documents.
• Temporary in Nature: Calls in arrears are generally temporary. The company expects the shareholders to pay the outstanding amount within a reasonable time.
• Impact on Shareholder Rights: Non-payment of calls may lead to certain consequences, including restrictions on shareholder rights or even forfeiture of shares, depending on the company’s rules.
• Disclosure Requirement: Calls in arrears must be disclosed properly in the financial statements to ensure transparency.

Legal Framework Governing Calls in Arrears

The legal treatment of calls in arrears is primarily governed by the provisions of the Companies Act, 2013 and the Articles of Association of the company.

Role of Articles of Association

The Articles of Association (AOA) play a crucial role in regulating calls in arrears. They typically provide:

• The procedure for making calls
• The time within which calls must be paid
• The consequences of non-payment
• The rate of interest that may be charged on unpaid calls

The directors derive their authority to act in such matters from the AOA. Therefore, any action taken with respect to calls in arrears must be consistent with the provisions contained in the Articles.

Authority of Directors in Case of Calls in Arrears

The Board of Directors holds the primary responsibility for managing calls on shares, including dealing with arrears.

• Power to Make Calls: The directors have the authority to demand unpaid share capital from shareholders through valid resolutions.
• Power to Charge Interest: If authorised by the Articles of Association, the directors may charge interest on calls in arrears.
• Discretionary Powers: Directors may exercise discretion in enforcing payment, granting extensions, or taking action against defaulting shareholders.

This authority ensures that the company can effectively manage its financial obligations and maintain discipline among its members.

Interest on Calls in Arrears

One of the key aspects of calls in arrears is the charging of interest on unpaid amounts.

Rate of Interest

The rate of interest on calls in arrears is generally determined by the Articles of Association. However, it must not exceed 5% per annum. This limitation ensures that shareholders are not subjected to excessive financial burden.

Purpose of Charging Interest

Charging interest serves multiple purposes:

• It compensates the company for the delay in receiving funds
• It discourages shareholders from delaying payments
• It promotes financial discipline among members

Applicability

Interest is payable only when:

• The Articles of Association authorise such a charge
• The shareholder has failed to pay the call amount within the due date

Accounting Treatment of Calls in Arrears

The accounting treatment of calls in arrears is important for accurate financial reporting and compliance.

Recognition in Books of Accounts

Calls in arrears are recorded as a debit balance, representing the amount due from shareholders. This reflects the company’s right to receive the unpaid amount.

Disclosure in Financial Statements

These amounts are disclosed in the notes to accounts in the balance sheet. Proper disclosure ensures that stakeholders are aware of the outstanding amounts and the company’s financial position.

Receipt of Call Money

When the shareholder eventually pays the outstanding call amount:

• The amount received is credited to the Calls in Arrears Account
• The outstanding balance is reduced accordingly

Accounting for Interest

If interest is charged and received:

• The interest amount is credited to the Interest Account
• This is treated separately from the principal amount

This clear separation helps in maintaining transparency and accuracy in accounting records.

Consequences of Calls in Arrears

Failure to pay calls on time can lead to several consequences for shareholders:

Financial Consequences

• Payment of interest on the outstanding amount
• Possible penalties if provided under the Articles

Legal Consequences

• The company may take action to recover the unpaid amount
• The shareholder may lose certain rights associated with the shares

Forfeiture of Shares

In extreme cases, continued non-payment may result in forfeiture of shares, if such a provision exists in the Articles of Association. Forfeiture means that the shareholder loses ownership of the shares and any amount already paid may also be forfeited.

Distinction Between Calls in Arrears and Calls in Advance

Understanding calls in arrears becomes clearer when compared with calls in advance.

• Calls in Arrears: Represents unpaid amounts which were due but not paid on time. It is a liability of the shareholder.
• Calls in Advance: Represents amounts paid by shareholders before they are actually called by the company. It is a liability of the company towards shareholders.

This distinction highlights the opposite nature of these two concepts in company accounting.

Conclusion

Calls in arrears represent an important aspect of share capital management in a company. They arise when shareholders fail to pay the amount due on calls within the prescribed time. Such unpaid amounts are treated as outstanding liabilities and are recorded and disclosed in the company’s financial statements.

The legal framework, primarily guided by the Companies Act, 2013 and the Articles of Association, provides the necessary structure for dealing with calls in arrears. Directors are empowered to manage such situations, including charging interest, which is generally capped at 5% per annum.