When a company incurs debts or becomes insolvent, there is often a question of who is responsible for paying them. In most cases, the responsibility falls solely on the company itself. However, there are also circumstances when the company’s shareholders are liable for those debts as well.
The answer is not always straightforward.
In this article, we will explore the concept of shareholder liability for company debts, including the legal protection of limited liability[1]Trusted Source – .GOV – Companies Act 2006 c. 46 Part 1 Types of company, exceptions to limited liability, and the circumstances in which the corporate veil may be pierced to hold shareholders liable. Read our full guide below.
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Are Shareholders Personally Liable for the Debts of a Company?
Shareholders only have ‘limited liability’ for the debts of the company. That means they are only responsible for company debts up to the value of any shares (assuming no personal guarantees have been signed).
This is all down to the principle of separate legal personality. When a business is incorporated, i.e. it becomes a private limited company (LTD), a public limited company (PLC), or a limited liability partnership), the company and its shareholders become two separate legal entities.
The company becomes responsible for its own finances and assets, which are not intertwined with its shareholders’ personal finances and assets.
Liability in Companies Limited by Shares
In a company limited by shares, the shareholders’ liability for company debts is limited to the capital originally invested in the business, i.e., the nominal value of the shares they own.
If a shareholder has not paid the full value of their shares, the company can require all of the remaining share capital contributions to be paid.
Liability in Companies Limited by Guarantee
Not-for-profit organisations such as charities, societies, and community projects are often set up as private companies limited by guarantee. These legal entities are responsible for their own income, assets, and debts, but instead of issuing shares, the company is owned by guarantors.
Their personal liability for company debts is limited to a fixed amount of money called a guarantee. This is a fixed sum that’s written into a company’s Memorandum of Association and is usually just £1.
Liability for Debts in LLPs
The partners in an LLP are personally liable for company debts only for the capital they have invested in the business[2]Trusted Source – Wikipedia – Salomon v A Salomon & Co Ltd.
So, if an LLP can’t pay its debts, the partners only have to pay out any money they’ve put into the company and nothing more.
key takeaways
– As a shareholder, you are only responsible for company debts up to the value of your shares
– In a company limited by shares, your liability is limited to the capital invested in the business
– In a company limited by guarantee, the contractually defined guarantee amount, usually £1, decides the extent of your liability
Is a Shareholder ever Personally Liable for Company Debts?
There are some circumstances when the shareholder of a limited company can become personally liable for its debts.
One example is when a business shareholder provides a personal guarantee on a loan that the company takes out. In that case, the shareholder(s) who gave the guarantee will be personally liable if the loan cannot be repaid.
Where a shareholder is also involved in the day-to-day operations as a director or officer of the company, they could also be made personally liable for company debts if they:
Know the company is insolvent but keep trading in the interests of the company shareholders;
Dispose of company assets below market value or for free during insolvency;
Overpay themselves from the company’s account creating an overdrawn director’s loan;
Have raised funds to repay creditors via fraudulent means.
Fraudulent behaviour
What are the Benefits of Shareholder Limited Liability?
The fact that a shareholder’s liability is limited is a very important aspect of the incorporation process. It encourages investment in the company and attracts new shareholders who can be confident that if the company does fail, they will only lose the value of their original stake.
There are also benefits when it comes to the transfer of shares, as other investors will be more willing to make an investment. There can also be more certainty and clarity when it comes to determining the assets available to the company’s creditors.
How can we help?
If you want confidential, no-obligation advice about your personal liability for company debts, or are concerned how your liability could be affected by an impending insolvency, please call us on 0800 074 6757, email info@companydebt.com.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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