Are shareholders liable for company debts? If you are the shareholder and/or director of a limited company that’s struggling to pay its outstanding debts, it’s only natural that you’ll be concerned about the prospect of those debts passing to you personally.
The good news is that in the majority of cases, the protection provided by private limited companies (LTDs), public limited companies (PLCs) and limited liability partnerships (LLPs), means that shareholders are not usually personally responsible for the debts of the company. However, there are some circumstances where they can be.
In this guide, we’ll explore if and when shareholders are liable for company debts to give you clarity, whatever situation you find yourself in.
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Why are Shareholders not Usually Liable for Company Debts?
Shareholders in private and public limited companies and partners in limited liability partnerships benefit from something called ‘limited liability’. Limited liability is a legal status that limits a person’s financial liability to a fixed sum. In the case of company debts, the shareholders are only personally liable for the debt to the value of the money they have invested in the company.
This is not the case with all business structures. In sole proprietorships and general partnerships, there is no limited liability protection. That means the business and its owners/shareholders are considered to be a single legal entity. The finances of the business and its shareholders are considered to be one and the same. Therefore, the shareholders are legally liable for the debts of the business.
What is the Liability of Company Shareholders?
If a company collapses with debts it cannot afford to repay, the only money the shareholders stand to lose is the value of their original investment in the company. This is extremely important, as it encourages people to own and invest in companies, safe in the knowledge that if the company were to fail, their homes and personal finances would not be at risk. Without the protection provided by limited liability, entrepreneurs would be wary of opening new businesses and investors would be reluctant to provide the money they need to grow.
Limited liability also provides certainty when it comes to determining the assets that can be sold to repay the debt to the company’s creditors. All property owned by the business, such as machinery, equipment, vehicles, stock and goods that have been produced by the company, will be sold and the proceeds will be paid to the company’s creditors. However, all the personally held assets of the company’s shareholders and directors, such as homes, vehicles and savings, will be off-limits.
When can Shareholders be Personally Liable for Company Debts?
There are certain circumstances where shareholders can be liable for company debts beyond the nominal value of their shares: That includes:
- If the shareholder gives a personal guarantee for company loans, leases or other financial agreements on behalf of the company.
- Where shareholders have acted improperly or fraudulently, for example, using company funds for personal use.
- If the shareholder is also a director of the company and they engage in certain actions that constitute an offence under the Insolvency Act 1986.
It’s common for shareholders and directors of companies to be one and the same, particularly in small companies that are set up and operated by one or just a few people. The issue of personal liability generally arises at the point of insolvency. If you are the shareholder and director of an insolvent limited company, then you could be made personally liable for company debts if you:
- Pay dividends to shareholders when the company is insolvent.
- Take payment from customers for goods and services that you know the business cannot deliver.
- Continue to trade without having any intention of repaying your creditors.
- Try to pay your debts through fraudulent means.
- Sell company assets to yourself or a third party at less than their market value.
- Make ’preferential payments’ to some creditors and not others.
- Have an overdrawn director’s loan account - when a director takes more money out of the company than they have put in (not including salary or dividends).
- Engage in fraudulent trading, such as providing inaccurate information on finance applications.
- Knowingly allow the company to act unlawfully - for example, by misusing sensitive data, breaching employee contracts and disregarding health and safety and environmental legislation.
How to Protect Yourself From Personal Liability as a Company Owner/Shareholder?
If you are a director and shareholder of a company, there are a few simple measures you can take to protect your limited liability status.
- Avoid acts of fraud and negligence and monitor other company shareholders and directors to make sure they do the same.
- Keep comprehensive records of meetings and decisions made by the board.
- Keep your business and personal funds separate. If you or any other shareholders take money out of the business, document the transaction properly and record it either as a disbursement or a loan.
- Put the interests of the creditors first as soon as you are aware of the company’s financial position.
- Maintain clear lines of communication with the company’s creditors.
What are the Consequences of a Shareholder Being Liable for Company Debts?
If you are found to be personally liable for the debts of a company, the consequences could be significant. Creditors, employees, liquidators and other directors can all take legal action against you to recover the money they are owed. If you do not have sufficient funds to repay the outstanding debts, it could lead to personal assets being seized and even personal bankruptcy.
Shareholders who are company directors also risk being disqualified from acting as the director of a company for up to 15 years. If fraudulent activity is proven, you could also be on the receiving end of a criminal conviction and a custodial sentence.
Are you Concerned About Shareholder Liability for Company Debts?
If you are concerned about personal liability for the debts of a company, please call 0800 24 24 51 or email info@businessexpert for free and confidential advice.