There are situations in companies where dividend payments cannot be made at the moment, and then it is called dividends in arrears. In such situations, they speak of dividends in arrears, which are dividends overdue by the date of payment.
When a firm has dividends in arrears, it means that the firm has certain debts to shareholders. Overdue profits may accumulate for several months until the company’s management collects the necessary amount of finance. Once the money has been gathered, the arrears in arrears dividends are paid to shareholders, primarily those with preferred shares.
Dividends are a part of the company’s profit to be distributed among its shareholders. Dividends may include both net profit of the current period and retained earnings of previous years, but in simple words, they are fixed payments, which are accrued on shares of the company in equal proportions.
Dividends in arrears are related to the financial policy of the organization: they arise when the company does not have sufficient profit to pay the dividends guaranteed to its preferred shareholders. In other words, dividend debt is defined as the amount of the company’s debt on the outstanding dividends on its shares or interest on income from equity participation. As of the reporting date, these declared dividends have not yet been paid, and therefore, they are the company’s debt.
The reason why the cash has not yet been paid to shareholders, and therefore the dividends are called past due, is that the Board of Directors has decided to suspend the payment. This is usually because the issuer does not have the necessary amount of cash. And in practice, there is a situation when the overdue dividend payments last for several months, i.e., there is an accumulation of debt. As soon as the company has the funds, the Board of Directors may authorize debt payments. In this case, any dividends owed by preferred shareholders must be paid first.
It is essential to clarify that payments on overdue dividends cannot be made to legal entities or individuals who own the shares at the time of debt repayment. Ordinary shareholders are usually not interested in having dividend arrears because they must wait until the company pays the preferred shareholders to receive their proceeds.