Arrearage

Definition of Arrearage

An amount on a loan, cumulative preferred stock or any credit instrument that is late. Arrearage is additionally alluded to as "arrears".

Breaking Down Arrearage

On account of a preferred dividend, on the off chance that the company doesn't pay the dividend to its shareholders, that dividend income gathers. This means that later on, arrearage must be paid to preferred shareholder before any dividends can be paid on common stock.

Dividends financially past due will in general happen when a company neglects to turn a sufficiently critical profit with which to pay their preferred shareholders the dividends guaranteed to them. These unpaid dividends are habitually alluded to as "overlooked preferred dividends".

To qualify as dividends financially past due when unpaid, the dividends must be for the sort of preferred stock that has the alleged "cumulative" feature. Cumulative preferred stock considers the accumulation of any undeclared preferred dividends from prior periods and the particular distribution in later periods, before any new dividends and common dividends.

Take the case of a telecom corporation that has a cumulative preferred stock with an annual dividend amount of $20,000. In the event that this company has discarded the dividends for the past five years, there is $100,000 of dividends falling behind financially. Subsequently, to pay any dividend income out to common stockholders, the corporation must initially pay its preferred stockholders $120,000 falling behind financially, which is calculated by joining the $100,000 in past dividends actually owed, plus the current year preferred dividend amount of $20,000.

One point of note: not at all like preferred stock, any missed common stock dividends are just declared to be "lost" and along these lines considered unrecoverable. In any case, common shareholders enjoy benefits that preferred shareholders don't get to appreciate. For instance, on the off chance that common shareholders arrive at a certain threshold of ownership percentage of a public company, they gain voting rights, and are qualified for partake in major business choices, for example, choosing board individuals, impacting mergers and acquisition activity and saying something regarding new product rollouts.

Then again, while preferred shareholders don't have voting rights — regardless of whether they accomplish an ownership stake in the responsible company, they appreciate different advantages, like higher claims on company assets then common shareholders, in the event of bankruptcy circumstances. Besides, the dividend payouts to preferred shareholder act like bonds, in that they are locked in at fixed rates — a trademark alluring to more gamble disinclined investors.