In finance, the term arrearage denotes the condition of an entity owing interest payments or dividends to another entity. In bond terms, the word arrearage refers to interest on redeemed coupons which is due but has not yet been paid. In the case of preferred shares, the issuing company is said to be in arrearage when dividends are not distributed to shareholders on the payable date.
Arrearage may occur when a company or other entity does not have sufficient cash to pay out coupons or dividends to bondholders or shareholders. When an entity is in arrearage, interest or dividend payments accrue until such a time when the entity is able to pay them out. In the case of preferred shares, companies are typically required to pay out dividends to preferred stock holders before the distribute dividends to common stock holders.
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