Are Shareholders Liable for Company Debts?
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, exceptions to limited liability, and the circumstances in which the corporate veil may be pierced to hold shareholders liable.
Read our full guide below.
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 liability of the shareholders 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 up the whole value of their shares then the company can call for all or the remaining share capital contribution 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. They are separate legal entities 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 personal liability for company debts of the partners in an LLP is limited to the capital they have invested in the business. 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.
– 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 shareholder of the business 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
Read more about the circumstances when a company shareholder/director could be made personally liable for company debts.
What are the Benefits of Shareholder Limited Liability?
The fact that the liability of a shareholder is limited is a very important aspect of the incorporation process. It encourages investment into 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 firstname.lastname@example.org.
All of our insolvency content is written licensed insolvency practitioners. The primary sources are listed below. Learn more about the standards we follow in our editorial guidelines here.
- Concept of Limited Liability, Companies Act 2006, https://www.legislation.gov.uk/ukpga/2006/46/part/1/crossheading/types-of-company#:~:text=(1)A%20company%20is%20a,is%20%E2%80%9Climited%20by%20shares%E2%80%9D
- Salomon v A Salomon & Co Ltd – a landmark case in UK company law from 1896 where creditors were prevented from suing shareholders for corporate debt – https://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd