The portion of called up capital which is not paid by the shareholder within a specified time is known as calls-in-arrears. In other words, when a shareholder fails to pay the amount due on allotment or any subsequent calls, then it is termed as call-in-arrears.
Consequences of Calls in Arrears
(i) For the Company:
(a) Reduced Cash Flow: The company may face financial strain due to lower-than-expected funds, potentially delaying projects and affecting operations.
(b) Increased Administrative Workload: Additional efforts are required to track arrears, communicate with defaulting shareholders, and pursue legal actions if necessary.
(c) Negative Investor Perception: Frequent calls in arrears can damage the company’s reputation, signaling financial instability and reducing investor confidence.
(ii) For the Shareholder:
(a) Penalties and Additional Charges: Shareholders who fail to pay may incur fines or extra fees as per the company's policies.
(b) Loss of Rights: Shareholders in arrears may temporarily lose privileges such as voting rights until the dues are cleared.
(c) Forfeiture of Shares: In extreme cases, the company may forfeit shares of defaulting shareholders, leading to a loss of investment.
(d) Legal Consequences: The company may take legal action to recover unpaid amounts, potentially increasing costs and affecting the shareholder’s creditworthiness.
(iii) General Consequences:
(a) Challenges in Raising Future Funds: Persistent arrears can make it difficult for the company to attract new investors or secure funding.
(d) Negative Market Impact: Both the company and defaulting shareholders may suffer reputational damage, affecting future investment opportunities and partnerships.
