When a company reserves a portion of its uncalled capital to be called in the event of winding up, such uncalled capital is known as:

Question

Prepp Team · Accepted Answer

Understanding Uncalled Capital and Reserve Capital

Let's break down the concept of company capital and specifically look at the portion that might be called up only during winding up.

Companies issue shares, and the total value of these shares at their face value is the company's authorized capital. This authorized capital is often not fully called up from the shareholders immediately. The part of the capital that has been called up is known as called-up capital, and the part that shareholders have paid is paid-up capital. The remaining part, which has not been called up, is called uncalled capital.

A company has the option, by passing a special resolution, to set aside a portion of this uncalled capital. This specific portion is earmarked and can only be called upon if the company is being wound up. This provides an extra layer of security for the company's creditors in case of liquidation.

What is Reserve Capital?

Based on the description, the term for this reserved portion of uncalled capital that is callable only during winding up is known as Reserve capital. It's a statutory reserve created under the Companies Act.

Here's why this designation is important:

It acts as a security cushion for creditors during liquidation.
The company cannot call up this portion during its normal business operations.
It cannot be mortgaged or charged by the company.

Analyzing the Other Options

Let's look at why the other options are not correct:

Capital Reserve: Capital Reserve is a reserve created out of capital profits (e.g., profit on sale of fixed assets, premium on issue of shares or debentures). It is different from share capital itself and the uncalled portion of share capital. It represents accumulated capital profits, not a reserved part of the uncalled share capital.
Called or Capital: This option seems to combine "Called-up Capital" and "Capital". Called-up capital is the portion of the subscribed capital that the company has asked shareholders to pay. It does not specifically refer to capital reserved for winding up. "Capital" is a very broad term.
Subscribed Capital: Subscribed capital is the part of the authorized capital that shareholders have agreed to buy (subscribed for). This can include both called-up and uncalled capital. It's the total nominal value of shares that investors have committed to take, not just the part reserved for winding up.

Therefore, the specific term for the uncalled capital reserved exclusively for winding up is Reserve capital.

Comparison of Capital Types

To further clarify, here's a simple comparison of the related terms:

Term	Description	When Called/Used
Authorized Capital	Maximum capital a company can raise as per its memorandum.	N/A (Limit)
Issued Capital	Part of authorized capital offered to the public/members.	N/A (Offered)
Subscribed Capital	Part of issued capital subscribed by the public/members.	N/A (Subscribed)
Called-up Capital	Part of subscribed capital that the company has demanded payment for.	During company's operational life
Uncalled Capital	Part of subscribed capital not yet demanded by the company.	During company's operational life (can be called) or winding up (if reserved)
Reserve Capital	A portion of uncalled capital specifically reserved by special resolution.	Only during winding up of the company.
Paid-up Capital	Part of called-up capital actually paid by shareholders.	During company's operational life
Capital Reserve	Reserve created out of capital profits.	Used for specific capital purposes, not for calling share capital.

Revision Table: Key Capital Terms

Term	Purpose/Nature
Reserve Capital	Security for creditors, callable only during winding up.
Capital Reserve	Created from capital profits, not share capital.
Subscribed Capital	Capital committed by shareholders.
Called-up Capital	Capital demanded from shareholders.

Additional Information on Reserve Capital

Reserve capital provides an extra layer of financial strength, assuring creditors that there is a defined amount of capital that can be accessed if the company faces liquidation. It is different from 'Capital Reserve' which is a part of reserves and surplus, not the share capital structure itself.

Setting aside Reserve capital is optional for a company but, once created through a special resolution, this portion of uncalled capital cannot be called upon during the company's normal functioning. This distinction is crucial for understanding the different components of a company's capital structure and their specific purposes.