Difference between Calls in Arrear and Calls in Advance
Investing in a company can involve calls for payment on your shares. Understanding the difference between calls in arrears and calls in advance can help you manage your financial obligations and avoid any surprises. Let’s study what these terms mean and how they impact you as a shareholder.
What is Calls in Arrear?
Calls in arrears refer to a situation when a shareholder fails to pay the entire amount owed on their shares by the due date. Imagine you invest in a company that issues stock at $10 per share, with a commitment to pay half upfront and the remaining half later. If you don’t pay that second half by the deadline, the unpaid amount becomes “calls in arrears.” This can lead to penalties, loss of voting rights, or even forfeiture of your shares in extreme cases.
Features of Call in Arrears
- Missed Payment: Calls in arrears occur when a shareholder fails to pay the full amount owed on their shares by the due date. Imagine you buy stock at $20 per share with a 50% down payment, but miss the deadline to pay the remaining $10. That unpaid amount becomes a call in arrears.
- Negative Impact: Calls in arrears can hurt your shareholder rights. Companies may charge penalty fees or interest on the unpaid amount. In severe cases, they can even restrict your voting rights or force you to forfeit your shares.
- Financial Strain: For the company, calls in arrears can create cash flow problems. They might have planned their operations based on receiving the full amount from shareholders, and delays can disrupt those plans.
- Resolution Options: There are usually ways to address calls in arrears. You can contact the company to discuss a payment plan or potentially sell some of your shares to cover the owed amount.
- Timely Action: It’s crucial to deal with calls in arrears promptly to avoid escalating penalties and potential loss of your investment.
What is Call in Advance?
Call in advance is the opposite of calls in arrears. It happens when a shareholder pays for some or all of their shares before the company officially requests the payment. Think of it like paying off your investment early. For instance, if you invest in a startup that allows staged payments for shares, you might choose to pay everything upfront to gain full ownership and voting rights sooner. The company benefits from immediate access to funds, while you potentially secure a better deal by locking in the share price early.
Features of Call in Advance
- Early Payment: It’s when a shareholder voluntarily chooses to pay for their shares, or a portion of them, before the official due date.
- Proactive Approach: This allows shareholders to get ahead of future calls and potentially benefit from early investment opportunities the company might offer.
- Company Flexibility: Calls in advance provide companies with a cash flow boost, helping them manage finances and potentially invest in growth initiatives sooner.
- Interest Potential: Some companies may offer interest on early payments, making it an attractive option for shareholders seeking additional returns.
- Authorization Required: Not all companies allow calls in advance. This option depends on the company’s articles of association.
Difference between Calls in Arrears and Calls in Advance
Basis |
Calls in Arrears |
Calls in Advance |
|---|---|---|
|
Timing |
When you miss paying the full amount owed on your shares by the due date, it becomes a call in arrears. |
This happens when you pay early, choosing to settle your share payment, or a portion of it, before the official due date. |
|
Impact on Accounts |
A negative mark. It shows as a debit balance on the company’s books, reducing their recorded capital. |
A positive sign. It appears as a credit balance, representing a liability for the company (money owed to you). |
|
Balance Sheet Placement |
Deducted from the called-up capital to arrive at the paid-up capital on the balance sheet. |
Shown on the liabilities side of the balance sheet, under “other current liabilities.” |
|
Interest |
The company can charge a penalty (up to 10%) on the unpaid amount. |
The company might offer interest (up to 12%) on your early payment (depending on their articles of association). |
|
Company Approval |
No company approval needed, it’s a consequence of missed payment. |
Not all companies allow this. They can only accept calls in advance if their articles of association permit it. |
|
Company Impact |
Creates a cash flow gap for the company, potentially disrupting their financial plans. |
Provides a cash flow boost to the company, allowing them to potentially invest in growth initiatives sooner. |
|
Shareholder Rights |
May lead to restrictions on your shareholder rights, like voting privileges. In severe cases, shares could be forfeited. |
No impact on your shareholder rights. |
Conclusion
Understanding the difference between calls in arrears and calls in advance is essential for any shareholder. Calls in arrears represent missed payments and can have negative consequences for both you and the company. Conversely, calls in advance allow you to potentially gain interest and get ahead on your investment, while also providing the company with a valuable cash flow boost. By staying informed and managing your share payments effectively, you can ensure a smooth and successful investment experience.
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